Hooker Furnishings Corp (HOFT) 2010 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Hooker Furniture second quarter earnings conference call, reporting its operating results for May 4, 2009 through August 2, 2009. 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, 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 Dana. Good morning and welcome to our quarterly conference call to review our sales and earnings performance for the fiscal 2010 second quarter and first half which both ended on August 2, 2009. We appreciate your participation this morning. Joining me today is Paul Toms, our Chairman, President and CEO, and Alan Cole, President and CEO of Hooker Furniture 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 second quarter results. Any forward-looking statement speaks only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

As we reported yesterday, net sales for the second quarter were $46 million and we had a net loss of $463,000 or $0.04 per share. Net sales for the second quarter decreased $18.7 million or 28.9% while the net loss for the quarter represented a $2.5 million decrease compared to our net income of $2.1 million or $0.18 a share in the same period a year ago. Net sales for the first half declined $37.6 million or 27.7% to $98 million. We reported a net loss for the first half of the current year of $919,000 or $0.09 per share compared with net income of $47 million or $0.41 per share in the fiscal 2009 six month period.

Now Paul will comment on our results.

Thanks, Larry, and good morning everyone. Unfortunately this quarter's results were all too similar to last quarter with a small net loss and double digit sales decrease. Actually, the revenue decline was worse than we expected sequentially as we weathered the weakest seasonal period for furniture sales, compounded by the most severe economic downturn since the 1930s. However, immediately after the close of the second quarter, we began to see positive trends in our incoming order rates across all three companies. Incoming order rates for August increased to our highest level in the last ten months.

During our first quarter conference call in June, we said that we felt we'd hit the bottom of the economic recession and we'd begin to see modest improvement in business by late summer or early fall. That has indeed materialized, not only with the increase in incoming orders but also with a pickup in traffic at retail stores across the country, along with more confidence among merchants, prompting retailers to restock lean inventories to prepare for the expected seasonal uptick in business this fall.

In order to return to profitability we know we have to do two things -- further reduce costs and grow the top line. In regards to revenue growth, we are optimistic about the sales opportunities of our new Envision wood furniture product line that will debut on many retail floors during the current quarter. Our introduction of this more moderately priced, smaller scale and casually styled line, appealing to younger consumers, has proven to be quite timely. Even during this economic downturn, our orders of Envision have been somewhat above projections and we are bullish on the long term prospects for this product line. Overall we had the best new product placements from the spring high point furniture market that we've had in a couple of years as we expanded into new styles and price points. Shipments of those new products should positively impact the next two quarters.

In recent months, we've also made additional progress in growing placements with key targeted national accounts. In another key move to address revenue growth, we brought a seasoned executive on board at the end of July in the new position of Vice President of International Sales. We now have the foundation in place to expand sales internationally, which is a significant part of our long-term growth strategy. That executive, Brad Miller, has 20 years of local furniture sales and marketing and new business development experience.

On the cost reduction side, selling and administrative expenses decreased by $1 million to $10.3 million in the second quarter compared to $11.3 million in the 2009 fiscal year second quarter. Lower selling expenses and commissions on lower selling volume were the primary drivers of this decrease. Also playing a part in the decrease were lower compensation and benefits expense from the workforce reductions implemented last year to better align our staffing to the smaller scale of our business. Overall, we are diligently curtailing all non-essential spending without compromising quality or service in response to the economic downturn. We also continued to refined the management of our supply chain, warehousing and distribution areas and drive costs out of these operations.

In addition to lowering expenses through consolidation of warehouse space and reduced work hours, we plan to close our distribution center in Carson, California, by the end of this month. Closing the California warehouse should result in savings of approximately $100,000 per month beginning in October.

As we reported in yesterday's press release, our domestic upholstery manufacturing operations have been particularly impacted by the prolonged sales downturn due to high overhead cost as a percentage of reduced net sales. To mitigate the impact of these sales declines, we are pursuing additional distribution channels and offering an array of new products and designs that we believe will generate additional sales growth. At the most recent international furniture market in April we expanded into more casual and transitional styles and lower price points in our Bradington-Young division and introduced a new collection concept and more affordable prices at our Sam Moore division, along with opening new and renovated showrooms for each company. Our market attendance was up almost 40% for the upholstery companies and our expanded product lines were well received by those dealers attending.

We are also taking actions to streamline our domestic upholstery operations, improve efficiency and reduce overhead through a comprehensive lean manufacturing initiative. Finally, we are continuing to evaluate our manufacturing capacity utilization, work schedules and operating costs to better match capacity and cost to the current sales volume levels.

Despite our disappointing performance over the last six months, our financial position remains strong. We believe our strategy, business model and product line provide a compelling competitive advantage and our long term outlook remains bright. With only modest increases in revenues, and continued attention to expense control, we believe we can see profitability improve in the third and fourth quarters.

Now I'd like to call on Larry to discuss factors driving our sales and earnings performance this quarter.

Thanks Paul. The steepening year-over-year declines in net sales continuing through the quarter and resulting in our revenue decline for the first half of our fiscal year was the primary driver of our financial performance. The net sales decline of $18.7 million or $46 million in the second quarter was principally due to unit volume attributed to the unprecedented decline for home furnishings that we've seen since last year. Almost every product line and category reported lower unit sales in the second quarter compared with the same period a year ago. One bright spot was the incremental sales from the introduction of our new Envision line which partially offset these declines, as Paul discussed earlier.

Unit volume decrease for Hooker wood and metal furniture for Bradington-Young, domestic leather upholstered furniture, and Sam Moore's domestic and imported upholstered furniture compared to the fiscal 2009 second quarter. Sales of imported wood and metal furniture and upholstery declined about 32% from the prior year quarter while domestic upholstery sales declined around 21% in the same period. Sales of Bradington-Young imported leather upholstery increased slightly during the quarter.

Overall, average selling prices were virtually unchanged during the quarter compared to the prior year quarter as heavy discounted largely offset price increases implemented in September 2009 in response to cost increases for imported finished goods and raw materials.

Gross profit declined $4.4 million to $9.7 million compared to $14.1 million in the same period a year ago. Gross profit margin decreased modestly to 21.1% of net sales in the current quarter compared to 21.9% of net sales in the same period last year. Principally due to a higher production cost as a percentage of sales at our domestic upholstery manufacturing operations. For the first six months this year our consolidated gross profit was 21.3% compared to 22.7% for the first six months of the 2009 fiscal year. Gross margins have been relatively stable and actually improved year-over-year for our wood furniture division in both 2010 three and six month periods, primarily due to declining freight costs, but also helped by the relatively low fixed costs associated with divisions world sourcing business model.

The operating loss for the second quarter was $499,000 or 1% of net sales compared to operating income of $3.1 million or 4.8% of net sales. Principally due to lower net sales, higher fixed operating and domestic upholstery overhead cost as a percentage of net sales. For the first half of the year operating loss was $1.1 million or 1.2% of net sales compared to operating income of $7.1 million in the first half of fiscal year 2009 primarily because of lower net sales, higher fixed operating and domestic upholstery manufacturing overhead cost as a percentage of net sales, as well as impairment charge of $613,000 for the value of the Bradington-Young trade name incurred during the first quarter.

On the positive side, our balance sheet remains strong. Our balance sheet has helped cushion us from the impact of the difficult sales environment and our lower profitability. As we've managed our inventory down to more appropriate levels and collected our accounts receivable, we've been able to generate almost $26 million in cash from operations. At August 2, we had cash and cash equivalents of $35.3 million, up from $11.8 million at the end of the fiscal year 2009. Accounts receivable levels have declined generally in line with our decline in sales from $30.3 million at year end to $23.1 million at the end of the second quarter.

Inventory levels are down from $60.2 million at the end of last year to $41.5 million at August 2, which is our target for the expected sales volume. We don't expect to reduce inventories much more and we'll probably see a slight increase during the third quarter as we ramp-up for slightly higher forecasted sales in the second half of the year. As part of our reaction to lower sales volumes and profitability, we continue to keep capital spending low at $1.1 million for the year-to-date, generally limiting our spending to necessary replacements and upgrades or projects we believe will have a high pay back.

On the liability side of the balance sheet, our accounts payable and accruals have generally behaved as you might expect in this continuing slow environment but there are two items I'd like to draw your attention to. At the end of the quarter we are reporting short-term borrowing which is somewhat unusual. We borrowed $2.7 million against factored invoices from our factor when we believe that there was a significant risk that the factor would be forced to seek bankruptcy protection. The factor seems to have addressed its near-term liquidity issues, and although there are still risks we intend to repay this loan as the underlying invoices fall due and do not expect to continue borrowing against our factored invoices. We've also modified our factoring agreement to give us additional protection from similar risks in the future.

Just before the end of the quarter we negotiated amended financial covenants and agreed to pay off our term loan. The payment occurred shortly after the end of the quarter and resulted in in the reclassification of all of our term debt to current. This change resulted in moving about $800,000 from long term to current liabilities. Our revolving credit facility remains in place until March of 2011.

Other items that impacted our reported cash flows compared to last year include lower income taxes paid due to lower profitability which accounts for $3.4 million favorable comparison to last year in the absence of a stock repurchase program in the current year. Last year we used $14 million to repurchase stock.

While we are not happy with our results, we are pleased that our balance sheet remains solid and has given us the flexibility to repay debt which will result in lower borrowing costs for the year and strength to make decisions about inventories and facilities which we believe are the best for our long term plans without the pressure to generate short-term cash flow just to remain liquid.

Now I'll turn the discussion back over to Paul for an outlook.

Thanks Larry. As we stated yesterday in our press release, we believe the worst global recession since the 1930s may be over. The housing market is improving. Job losses are slowing. Consumer confidence is gradually returning and most economists expect output to expand. The question remains as to what kind of recovery we are going to experience. We expect that growth will be slow and choppy and we enter this period with cautious minimum.

While we expect general retail conditions and consumer spending to remain weak, we are already seeing the seasonal improvement in business that typically occurs around the fall. We are optimistic about the sales opportunities of newly placed product we introduced at the April furniture market which will be debuting on retail floors during the third and fourth quarters. We believe we are well positioned with our product, inventory availability and business model to take advantage of any upturn in the economy.

This concludes our formal remarks, and I will now turn the call back over to our Operator, Dana, for questions. Thank you.

(Operator Instructions) We'll go first to Budd Bugatch from Raymond James.

Hi Paul, hi Larry, how are you all? My question really, you said that orders were improving sequentially and I think the order book was the highest in ten months. Can you give us a feel of where you are year-over-year, what's the differential now and when might you think it would turn positive year-over-year?

This is Paul. Orders were the strongest they've been since last September. They are still negative compared to last August. If you think back August was still reasonably good before we entered the financial melt down last fall. And I would think on a total company basis, orders are probably down about 15% from where they were same month last year. It bounced up and down, but again we are encouraged because I think in all three companies orders were positive compared to the last nine or ten months. So I feel some of that is seasonal, but I also think a lot of it is our customers are a little more bullish about the future than they have been. In spite of increased traffic, I don't think business at retail has necessarily improved yet, but I think dealers are restocking very lean inventories and are more optimistic about the fall than they have been, and I'm hoping that folks had a good Labor Day and initially it looks like maybe they did.

I've heard similar situations on Labor Day. Of course we don't know. We'll have to see if that has any follow through. Can you parse those orders maybe for us by the three companies, the upholstery side versus the case good side or the wood side, and maybe the collection side versus the occasional side?

Beyond telling you I think they were across Bradington-Young, Sam Moore and Hooker the best that we have seen in the last nine to ten months, I don't know that I can give you much more detail than that.

No difference between Bradington-Young year-over-year and Hooker year-over-year or Sam Moore year-over-year? Sam Moore's much smaller, but --

Budd, let's look at upholstery combined maybe, we were down 10% versus prior year where case goods were down 15%.

Got you. That's very helpful. Thank you very much. Good luck on the season.

Thank you.

We'll go next to Matt McCall with BB&T Capital Markets.

Good morning. This is Sean Connor for Matt McCall. I wanted to get clarity on what the Envision product line is going to mean to the top line the next couple of quarters. I don't know if you guys have quantified how much you are expecting to get in those initial orders, but excluding Envision, do the current order and demand trends suggest that normal seasonality could hold without that initial stocking?

Sean, this is Paul, good morning. Envision was about 30% of our case goods market in April. It didn't represent 30% of our product offering but it represented 30% of the business we wrote on new products at market and in the two to three months following market. I think that the remaining part of the line we are going to see negative comps I think in the current quarter versus the third quarter of last year on orders and shipments of the Hooker product, as we are, I think, in all of our companies. Last year the third quarter was the strongest quarter of the year by a pretty good margin. And although I think the current quarter this year is going to be certainly better than the second quarter and hopefully positive to the first quarter, I don't think that we are at a point where we are going to compare positively to last year's third quarter. Does that answer your question?

Yes. It does. What I was trying to get to in the next question is, I was trying to verify my seasonal, my normal seasonality. Everything has been so volatile recently, we lost track of what normal seasonality is. But, yes, I was looking at the back half, averaging somewhere in that mid $50 million range which would be fairly consistent with Q4 this year, somewhere in between Q4 and Q1. And I was trying to see if there is anything that would suggest that that 5%-ish margin isn't possible when you get that seasonal uptick, you get the new product line and you have the cost savings from the California DC coming out. Is there anything else in there? As you are exiting California, what type of drag on any sort of inventory discounting to move that inventory out of the way or is there something there that might be pressuring margins other than just normal volume weakness?

You are right. There are a lot of moving parts here internally as well as externally. Internally, I think closing California obviously is going to have an impact although it would really just impact October and this quarter. So one month out of three. Our business in the upholstery companies is strong enough that we've been able to run better schedules in August than we have been in the last probably six months. That should help our margins somewhat in the upholstery side. Wood margins have stayed pretty stable, primarily because of the decrease in container costs coming out of Asia versus last year.

I think business is going -- I think the third quarter will probably be consistent with the type of uptick we've seen historically. Last year the third quarter, although the meltdown started in September, we didn't really feel it until November. We had a backlog of orders already, and as we shipped those orders, we still had a very strong shipping quarter in the third quarter last year. It really hit our sales in the fourth quarter. So last year we were going into it, but we weren't really feeling it on the shipment side. This year I hope we are coming out of it. We have definitely seen an uptick in orders. I hope it's not just a blip but it's maybe the start of a modest positive trend sequentially. And a lot of it is really still up to anybody's best guess.

Okay. You talked about, you paid off the term loan, got $35 million in cash. Right now it seems like you believe the worse is behind us, seeing some uptick in sequential demand, seasonal demand possibly. Where is your comfort level with your cash balance right now? And with the debt gone, what are your plans for future cash usage?

First of all, I want to point out that the debt was actually paid off after the end of the second quarter and right at the beginning of the third quarter. But, yes, we do have substantial cash balance, and as I said earlier, we don't have a lot of CapEx projects in the works right now. But of course a lot of those CapEx projects that were on the table and were taken off the table may be put back on the table as we go into the latter part of the year and into the first part of next year. So there is some pent up demand there, and there's a possibility we may have a little bit more in that respect. Of course, yesterday the Board held on to the dividend rate that we've been paying for several quarters now. So we still have that to contend with.

I think management and the Board has looked at stock repurchase from time to time. That will probably at some point in time be resurrected and we'll take a look at that as a possibility. But as business hopefully improves, we expect that we'll be building inventories again. That will be a cash drain, to some extent, on the business. And I think, Sean, that overall we are just going to take a very cautious attitude. We feel pretty comfortable with that cash right now, and don't feel compelled to utilize it until we feel comfortable that we've come out of this downturn and we are definitely starting on the way up.

Okay. Thank you very much.

Okay. Thank you.

(Operator Instructions) We'll go next to Todd Schwartzman with Sidoti & Company.

Hi. Good morning, folks. First, I want to ask you about Envision. I'm pretty sure you mentioned that Envision has thus far surpassed your expectations. Is that correct, in terms of orders?

That is correct.

Now, in terms of that, you mentioned that it was 30% of the written business post market and for the following two to three months. Is it a percentage of the mix that is beating your expectations or is it absolute dollars in terms of volume? Or both?

Todd, this is Paul. Let me clarify. Envision was 30% of the business we wrote on new product introductions at market and for the three months after market. So we track how we do with new products to try to gauge the impact they are going to have on our business, and Envision, although it was probably only about 15% of the SKUs that we introduced at the market, it was twice that amount of the business that was generated by new product introductions. So it certainly wasn't 30% of our written business over the last three months but it was a significant part of our business on new product introductions coming out of April.

I do realize you were referring to the new products. The question is, is it the absolute dollar volume that has surprised positively?

Yes. That's correct.

I wonder if you could talk to, with respect to the domestic upholstery operations, quantify if you could the down time that you have taken of late, any plan changes in work schedules and maybe quantifying that over the next several months?

Good morning. This is Alan Cole and let me address that. We knew going into the spring and summer that the upholstery trends we were seeing were going to lead to short time. We chose to work short time rather than to make a more extensive layoff of our labor so that we could keep it intact and gauge what we would see during the fall season. Our summer schedules were basically three and a half and four-day work weeks and occasionally we would take a week off completely for the month. So generally our work schedules were about 75% of the full work week during the summer months.

So any pickup that you do expect ex-seasonal factors, what are the plans at this point?

There are several things that we are doing to generate more domestic business. First of all, Bradington-Young and Sam Moore positioned a bit differently. Sam Moore is more mid market and Bradington-Young domestic has been more high end leather, particularly in a market that's being dominated by imported leather products. So we are in the process of repositioning the Bradington-Young domestic products to what I would call upper middle. We've significantly increased, beginning at the April market but more so for October, our domestic offerings in reclining chairs, for example. And also we are introducing both at Sam Moore and at Bradington-Young complementary Envision products that will work with, in some cases, our Envision wood products, but are also intended to be more youthful products that strike a more moderate price range for who we see as the emerging consumer base today. And those are domestically produced.

Alan, are there any plans to consolidate upholstery operations maybe between BY and Sam Moore or otherwise?

Not so much that. We are constantly looking at ways to improve, though, our processes, and there are two that I should point out. First of all, we announced earlier that we would be closing our frame facility at Bradington-Young. We call it wood leaf. It's a separate freestanding frame producing operation and we are integrating that process now into our upholstery plant by way of what we call C&C. It's a computerized technology. So that takes a separate plan offline for example.

And the other thing that we are doing is we are heavily focused on lean production techniques, and in fact, we are probably moving ahead of schedule. Our lean process is speeding up our delivery times and also increasing our labor efficiencies and taking out work in process. So we are not looking to combine the operations per se, but we are definitely focused on improving our efficiencies and our cost structure both at Sam Moore and Bradington-Young.

Thanks. And Paul, if you could, breaking out the customer base by geographic market, in the second quarter did you see any pockets of strength regionally?

Not really different than we've seen over the last nine or ten months. The areas that are the hardest hit as far as loss of property values -- Southern California, Arizona, Las Vegas, Florida -- are still the areas that are hardest hit for our business. And areas that maybe didn't see quite the fall off in property values to the same degree are the Midwest and Texas and maybe parts of the Mid Atlantic have held up a little bit better.

And for Larry, the SG&A is about 22.3% of sales for the quarter. Is this, do you think, about as bad as it gets for the balance of the year?

Todd, I think if you look at actual dollars in SG&A for the quarter, and actually for the first half of the year, compared to SG&A last year, you'll see that the dollars are pretty stable. I think basically what it shows is we have hit really a baseline in spending in SG&A. However, we have got another project underway right now to look at additional possible spending cuts, and we'll be instituting them. Some will take place right away and impact the latter months of this year. All of them, of course, will affect next year. So I think in the total dollar environment, we've pretty much hit bottom until we make these changes, but I expect there's going to be some improvement in SG&A dollars spent and hopefully as we see top line revenue growth we'll start to see that come back in more normal line.

Okay. And finally, any change in doubtful accounts during the quarter?

As you might imagine, our watch list is a little bit longer than it has been in the past, but we've been encouraged by the days in accounts receivable. It hasn't deteriorated substantially. Not a lot of large charge-offs. Reserves are a little bit higher than we've had before. As a percentage of sales, of course, the number is pretty high but so is every expense line that we've got because of the decrease in revenue. So on a dollar expense basis, it hasn't impacted us very heavily at all.

The most meaningful of those accounts that you deem the riskiest is I'm assuming not all that meaningful in dollars?

Yes. That's true.

Great. Thank you.

With no further questions in the queue, I'll turn the conference back over for any additional or closing remarks.

I don't think we have any additional remarks. We just appreciate everybody spending 30 minutes with us and look forward to updating you in about three months. Thank you for joining us.

That does conclude today's presentation. We thank you for your participation.