Hooker Furnishings Corp (HOFT) 2010 Q4 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Hooker Furniture's quarterly investor conference call, reporting its operating results for the fiscal fourth quarter and year-end 2010 results. (Operator Instructions). A brief question-and-answer session will follow the formal presentation. 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, Allie. Good morning and welcome to our quarterly conference call to review our sales and earnings for the 2010 fiscal year and fourth quarter, which both ended on January 31st, 2010. We certainly 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 operations. 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 filing and press release announcing the 2010 annual and fourth quarter results. Any forward-looking statements 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.

Yesterday we reported a net income of $3 million, or $0.28 per share, on net sales of $203.3 million for a 52 week fiscal year that ended January 31st. Net sales for the year decreased $57.8 million, or approximately 22%, compared to the $261.2 million for fiscal 2009. Net income for the year decreased $3.9 million, or 56.5%, compared to net income of $6.9 million, or $0.62 per share for fiscal 2009. Net sales for fiscal 2010 fourth quarter decreased $3.8 million, or 6.7%, compared to net sales of $56.5 million recorded in the fourth quarter of last year. Net income for the fourth quarter was $3 million, or $0.28 per share. Profitability was impacted by lower net sales compared to the same period a year ago, and $661,000 in intangible asset charges, which is $412,000 after tax, or $0.04 per share recorded during the quarter, during the -- related to the write down of our Opus Designs trade name. Now, Paul will comment on our 2010 results.

Thanks, Larry and good morning, everyone. All things considered, I believe we have performed admirably this year in a number of ways, despite our disappointment with decreased sales and earnings for a second consecutive year. Given the inconsistent demand in retail, and spotty economic recovery, we are pleased to have been able to post a respectable profit in the fourth quarter. We are also pleased at gross profit increase in both absolute terms and as a percentage of net sales in the fourth quarter, and, once again we are beginning to generate cash from operations. Throughout the year, we have done a good job of reducing our cost structure without compromising either product quality or service. We have simplified our balance sheet, paid off all long-term debt and are well capitalized to invest in initiatives to help improve service, expand product offerings and grow sales again. Sales seem to have stabilized somewhat, at 6.7% sales decrease in the fourth quarter was our smallest year-over-year decrease in the past ten quarters. Our upholstery division is leading the way on top-line performance, consistent with overall industry trends, our upholstery shipments rebounded earlier and stronger than wood furniture shipments with both Bradington Young and Sam Moore experiencing sales increases for the fourth quarter compared to the prior year.

Profitability this quarter was positively impacted by reductions made in our cost structure over the past 18 months, improved work schedules and capacity utilization in our upholstery division and lower warehousing and distribution expenses primarily in the wood division. Over the past few quarters, incoming order rates for wood furniture have been trending slightly better than shipments. We are seeing delivery times lengthen somewhat from most of our suppliers. We are addressing the situation by adjusting orders and working with our Asian staff and those same suppliers to bring lead times down. In order to return to our historical patterns of year-over-year increases in sales and profitability, we know that we must grow sales on the wood side as we have begun to do in upholstery. We have specific strategies underway to do just that and are encouraged by early results in several areas. We are still bullish about our future, and in fact, are as aggressive and proactive as we ever have been in investing in the people, systems, inventory, and product-line extensions we need to grow profitably in both the short and the long term. I would like the briefly highlight a few of those initiatives underway that seem to be gaining traction.

First, as we have reported throughout the year, our new Envision product line, catering to the needs of a younger consumer, has exceeded expectations, contributing approximately $9 million in overall sales in just three quarters. Now that Envision products are established at retail, we believe Envision will have a significant impact on our ability to increase revenues. We are also excited about the direction of our higher-end collections business, based on the excellent placements we received on our new 140 piece Sanctuary collection introduced in October 2009. Sanctuary gives a fresh spin to classic European styles, updating them with more casual finishes. The response was so positive that we are introducing 100 additional pieces for Sanctuary at the Spring Furniture Market opening this Saturday.

In addition, our strategic goal to grow international sales to a significant portion of our business is off to a very good start under the direction of Brad Miller, the seasoned international furniture sales executive who joined us last summer. While we fully expect this to be a five-year process, we are encouraged by the early results. Another one of our long-range goals is to achieve best-in-class sourcing and supply chain excellence in order to optimize service to our customers. In late January of this year, we were pleased to announce that Art Raymond, a well-known consultant to the furniture and wood products industries for over 40 years, has joined us in the position of Senior Vice President of Operations. Art brings extensive international experience to our forecasting, supply chain management, warehousing and distribution, product quality, process improvement, and customer service areas.

Finally, we are also fortunate early last year to attract Mike Delgatti, a well-respected upholstery executive to the position of Executive Vice President of Merchandising at Bradington Young. Mike repositioned the Bradington Young line to make it more current to today's marketplace, and develop the Envision line of mid-priced leather seating in casual contemporary styling. His efforts have been a key contributor to the growth we are now experiencing at Bradington Young. Mike's role was recently expanded to Executive Vice President of Hooker Furniture upholstery to more fully realized sales, marketing and merchandising synergy between Bradington Young and Sam Moore and to enhance our cross merchandising efforts. To give us more details on our progress at both Bradington Young and Sam Moore, at this time I would like to call on Alan Cole our President and Chief Executive Officer of Hooker Furniture Upholstery. Alan.

Thank you, Paul, and good morning. We spent most of the last fiscal year at Hooker Furniture Upholstery reorganizing the business for the future. As we look back over the year, what stands out to me, is that we made a lot of courageous decisions that we knew would not pay off in the short term but in the long term. With the help of an improving economy and good execution on the part of both organizations at Sam Moore and Bradington Young, perhaps those decisions are bearing fruit a bit sooner than we expected. During the fourth quarter, both Sam Moore and Bradington Young had increases in shipments compared to the same period a year ago. We have been very careful to observe opportunities in the marketplace for product line extensions and growth areas, and we believe that our sales increase is primarily coming from gains in market share. For the first time in over two years we have begun hiring people at the plant level at Bradington Young and running our plants overtime. Since we have been able to ramp up production, we are beginning to service our domestically produced line with delivery in 30 days or less giving us an additional competitive advantage.

As Paul has already mentioned, Mike Delgatti's contribution in remerchandising the Bradington Young product line has made a big difference. We've had some great success stories from retail about how well the new Envision mid-priced line is performing. Now that Mike is overseeing merchandising and marketing for both upholstery Companies, Sam Moore and Bradington Young, we will be better able to execute our cross merchandising programs. For example beginning with the high point market that starts this coming Saturday, we will showing Bradington Young leather seating with correlating fabric accent pillows and chairs from Sam Moore. We will encourage retailers to floor the products in the same way, which will greatly expand Sam Moore's presence on retail floors, since Bradington Young is larger and has more distribution.

At the same time, this cross-merchandising will help set Bradington Young apart from other leather lines by adding an element of fashion, color and softness from the fabric chairs and pillows from Sam Moore to engage the home furnishings consumer. In addition, our retail account base has grown at both Companies, including major national accounts, and we are poised for a solid year. So with improved volume and capacity utilization, upholstery performance is trending in the right direction. We expect both Companies to be profitable this year, Bradington Young more so than Sam Moore. While the typical seasonal slow down is expected this summer and may adversely affect profits in upholstery during that time period, we expect fall will bring continued solid growth and enable us to end the year profitability at both Sam Moore and Bradington Young.

Thanks, Alan. At this time I would like to call on Larry to discuss several factors that drove our sales and earnings performance for the year.

Thank you, Paul. The net sales decline for the year was driven by the economic recession, and continued weak demand at retail, partially offset by sales of our new Envision product line and the increased shipments of upholstery during the fourth quarter. Net sales of our wood and metal furniture decreased $47.9 million, or approximately 25%, to $140.4 million during the fiscal 2010, compared with net sales of $188.2 million in fiscal 2009, principally due to lower unit volume. Unit volume decreased for Hooker wood and metal furniture, Bradington Young domestically produced leather upholstery, and Sam Moore upholstered furniture compared to last year.

Unit volume increased for Bradington Young imported leather upholstery. Sales of imported upholstery increased less than 1% from the prior year, while domestic upholstery sales declined approximately 15.7% in the same period. Overall, average selling prices decreased less than 2% in the fiscal year compared to the previous year. Selling price increases implemented in September 2008 in response to higher costs for imported finished goods and raw materials for domestic-produced upholstery were offset by aggressive discounting. For the year, gross profit declined $11.9 million to $48.4 million, compared to $60.3 million in the same period a year ago. However, as a percent of sales, gross profit margin increased to 23.8% compared to 23.1% of net sales in fiscal 2009.

For the fiscal 2010 fourth quarter, gross profit increased in both absolute terms, and as a percentage of net sales, the $14.8 million or approximately 28% of net sales, compared to $13.7 million, or approximately 24% of net sales for the prior year. The gross profit increases in both annual and quarterly periods were mainly due to lower freight costs on imported wood and metal furniture. Other factors contributing to the improved gross profit included a price increase that affected the entire year, and positive LIFO adjustments in the fourth quarter. In addition, greater manufacturing efficiencies in upholstery division due to fuller work schedules also had a positive impact on gross margins late in the year. Operating income decreased for the year, primarily due to lower net sales, higher fixed operating and domestic upholstery overhead costs as a percentage of net sales, and impairment charges of $1.3 million related to the write down of the Bradington Young and the Opus Designs trade names. For the year, we reported operating income of $5.2 million, or 2.6% of net sales, a decline of $5.1 million from $10.3 million, or 4% of net sales in fiscal 2009.

For the fourth quarter, we reported operating income of $4.5 million, or 8.6% of net sales, as compared to operating loss of $1.4 million or a negative 2.5% of net sales in the comparable prior period. Excluding the effects of intangible asset impairment and restructuring charges, operating income increased in the 2010 fiscal fourth quarter, to 9.9% of net sales as compared to 6% of net sales in the comparable prior year period. For the 2010 year, operating income decreased to 3.2% of net sales as compared to 5.5% of net sales last year, excluding the impairment and restructuring charges.

Selling and administrative expenses decreased in absolute terms compared to fiscal 2009, but increased as a percent of net sales due to the effects of the fixed nature of certain selling and administrative costs as a percentage of the lower net sales reported during the year. Selling and administrative expenses decreased $4 million to $42 million, or 20.6% of net sales in the 2010 annual period, and decreased $772,000 to $9.6 million, or approximately 18% of net sales in the 2010 fourth quarter. In comparison, selling and administrative expenses were $46 million, or 17.6% of net sales in the 2009 annual period, and $10.4 million or 18.4% of net sales in the 2009 fourth quarter. The decrease in selling and administrative expenses was mainly due to lower selling expenses on lower sales volume, lower compensation benefits and other expenses as a result of work force reductions implemented during fiscal 2009, and other actions to curtail spending in reaction to lower sales volume.

Our balance sheet remains strong and continues to help cushion us from some of the impact of the difficult sales environment and our lower profitability. At year end, we had cash and cash equivalents of $38 million, up from about $12 million at the end of fiscal 2009. We remain debt free, and have over $13 million available under our revolving credit facility, which remains in place until March 2011. As we have managed our inventory down to more appropriate levels and decreased our accounts receivable due to lower sales volume, we have been able to generate over $37 million in cash from operations. Year-over-year, accounts receivable levels have declined to $26 million from about $30 million. Inventory levels are down from $60 million at the end of last year, to $36 million at January 31st, which is near our target for our expected sales volume, and slightly higher than our third quarter levels due to the slightly higher sales forecast. Other items that impacted our reported cash flows compared to last year include lower income taxes paid due to lower profitability, which accounts for nearly $6 million in favorable comparison to last year, and the absence of a stock repurchase program in the current year.

Last year, we used over $14 million to repurchase stock. We believe it is wise to conserve cash in this environment, and may consider additional stock repurchases at a later time. While many companies have cut their dividends due to the economic downturn, we have been able to maintain our quarterly dividend at $0.10 a share, thanks to our strong balance sheet and belief that our product and business model uniquely position us to take advantage of any upturn in the economy. Our strong financial position gives us the ability to take advantage of opportunities that may present themselves in this still troubling financial environment. Now I will turn the discussion back over to Paul for his outlook.

Thanks, Larry. During our conference call last quarter, we stated that we believe the worst is behind us, and that we have turned the corner. However, we have projected that progress could be slow, irregular and easily derailed due to the still fragile economy. That has proven to be the case early into this year. Although orders picked up in late summer and fall, most retailers we talk with report continued sporadic store traffic and sales. The uptick in wood furniture orders last fall was as much a function of retailers' restocking lean inventories as it was increased demand Because consumers have not yet returned to retail stores in large numbers or gone back to historical spending patterns, the uptick in orders hasn't sustained itself as much as we would have hoped, and we have seen a slight flattening of orders recently.

While there is still positive economic indicators, such as the stabilization of home values, improving trends in employment, and the stock market, we expect that large ticket deferrable purchases like furniture will be the last to benefit from an improved economy. Despite these challenges, as I mentioned earlier, we are still aggressively moving forward to invest in people, systems, inventory, and product line extensions that we believe will help us grow profitably in the short and long term. This concludes our formal remarks. At this time, we'll turn the call back over to Allie, our operator, for questions. Thank you.

(Operator Instructions). Our first question comes from Todd Schwartzman of Sidoti & Company. Please go ahead.

Good morning, guys.

Good morning.

First on the gross margin, just trying to get a feel for how best to think about the margin sequentially, going into first quarter from the fourth. You can just maybe go over, if you would, just some of the puts and takes, what reoccurs, what doesn't.

Todd, I think it is important to understand the two different business models, that we have got for the listeners. As you know, case goods is completely an import profit model where most of that, the costs are variable costs and it fluctuates very well with a fluctuating economy. Upholstery on the other hand, of course, is mostly domestic production, and it is subject to efficiencies, and inefficiencies of the give and take of the market. So when you look at our gross margin for the year of 23.8%, it is important to look at the two Companies separately, I believe. Gross profit margin for the year of, on the case goods side was 29%. For the quarter, in case goods, it was up to 35% from the 28.4% a year ago. On upholstery, the gross profit margin was 12.2% driven down primarily because of inefficiencies in capacity during most of the year. Although that was improved in the fourth quarter, and rose slightly in the fourth quarter to 13.5%.

So I guess what it comes down to is we believe that the gross profit margin that we are seeing in case goods in the upper 20%, we believe with continued improvement in top line growth is, it is somewhat sustainable during the year. On upholstery, obviously, it is driven again by top line. We believe that, as Alan pointed out earlier, that we can be profitable this year, and of course we have not been profitable in this past year in the upholstery side. But, we think that is certainly a possibility. Most of the costs, we believe, have been taken out of the case goods business, in the restructuring that we went through earlier in this decade. There is some cost yet to be taken out of the upholstery side. I think particularly in Sam Moore, as we move the lean manufacturing into that area, as we have in one of the plants in Bradington Young. So I think there's a little bit of improvement possible in the, in the upholstery side, but I think most of it is going to be driven by revenues.

Now, the, the business Larry is, is seasonally slower in Q1 than it is in the fourth quarter. I understand that. I am just wondering if there's any inordinant impact on either business, the case goods or the upholstery side, or are they pretty much equally affected by that seasonal drop that I am assuming you would expect in terms of the margins.

This is Paul, and it is seasonal. However, upholstery right now, as we said in our remarks, is outperforming wood on an order side. Their business has been growing for year-over-year for the last five months. Wood hasn't reached that level yet. So I think business will slow down, but I feel like upholstery, we have got a good backlog of orders still. And as we are able to continue to ramp production up and start to receive some of the imported product, that we have a backlog of orders for, I think they should be pretty good in the next quarter. The wood business also has a backlog that's not quite double what it was a year ago, but it's maybe up 70% to 80% from where it was a year ago. So for us, deliveries will drive shipments in the first quarter of fiscal 2011, and that may offset some of the decline in incoming orders from the fourth quarter.

Got it. And also looking sequentially from fourth quarter to the first, what do you anticipate in terms of freight and transport costs?

Freight and transport costs are going up. And to put it in perspective, I think at the low point in the past year, our rates from Hong Kong to our Virginia distribution centers were $2,200. And we are looking now at freight costs that are maybe a $1,000 more than that. We have built those costs into our pricing. I think we are covered, but we certainly got a boost from rates being as low as they were in the middle of this past year. A lot of the inventory we own was landed at those lower freight rates. So that as that works its way through, we may enjoy another little while of a positive impact from freight. But I think as the year progresses, we are going to see the impact of freight rates rising late last year and continuing to rise this year.

And on the metal side, Paul, I know you are probably not a big buyer of steel, but have you started to feel the impact of the recent change in steel prices?

All of that would be on our upholstery division, so I am going to defer to Alan on that question.

We have seen some impact on the steel side. We have seen increases in our steel components in the range of probably 2.5% to 5%. I would say as an average though, we have been able to manage those in the 2% to 3% range. But definitely metal prices are increasing.

The 2.5% to 5% is not problematic as far as passing on?

It is not. It is not highly problematic. Of course in a competitive market as this, increases are more difficult to manage, but we are going into this market with a 2.5% increase overall on the upholstery side.

And Alan, as far as the combination or cross selling and leveraging both of your brands on the upholstery side, when you mention encouraging retailers to display the Sam Moore items along with BY, just so I can be clear,do you incentivize dealers in any way, or what is that encouragement actually entail?

It is that. There are programs to add marketing incentives for cross merchandising product lines. Sam Moore is a somewhat unique product line in that it, in almost all situations at retail is displayed with somebody else's product within the grid or within the room setting. So our thought is, why not incentivize it to be displayed with our product at Bradington Young, which actually makes both product lines look better and work better. So yes, there are some incentives to do that.

Great. And I also wanted to ask about the Envision line. Are there any signs of cannibalization that you are seeing or maybe that you saw in the fourth quarter, cannibalizing the higher end Hooker products? And also what do you expect going forward, perhaps more importantly in the way of cannibalization, both while the economy is still a bit unsteady here, as well as when a full-blown recovery actually gets here.

Let me address the wood side of that because we have had Envision as part of the wood business for a little longer than upholstery, and then I will let Alan respond to the questions for Bradington Young. I think on the wood side, there probably is some cannibalization, but it is really hard to measure that. I think if you look at the economy we have been in for last 18 months, higher priced product, like our traditional Hooker product, has been impacted, and I would argue more impacted than more moderate price points. So, what would that impact have been would Envision versus with Envision? It is really hard to spell that out. But I know from the people that we're selling, the placements that we've gotten with large national accounts that weren't carrying our case goods before, that most of the Envision business has been incremental.

And I think beyond just the growing into some accounts we weren't previously selling, if you look at the demographic, the core consumer for Hooker products has been baby boomers. And although that has been a great place to be the last decade, I think baby boomers, as they get closer to retirement, are going to spend less money on most everything, including furniture. And we need to be reaching a younger consumer, and that is what Envision is really designed to do. It is smaller scale, it's cleaner styles, it's less price. And the main reason for doing that was just to expand into an additional demographic. Alan, how about in upholstery?

Paul, I think upholstery is very, very similar. The Bradington Young line, historically has been very traditional in styling. A bit more formal, as leather lines go. And the Envision introduction last October was very casual, very transitional, very colorful, and there probably was a minor overlap, but nothing that we can really discern of significance at this point. So, we think the Envision products have been very much a plus to our business.

And that overlap, I would think, gets better as we see real tangible signs of recovery.

I would think so, yes.

Last question, Larry. Payables are up at $2 million, $2.5 million from 3Q sequentially. What was responsible there?

I think it is completely inventory that drove that. Obviously inventory's decreasing as business slowed during the year, and we think now that inventories are pretty much in place for the expected sales that we've got. I think we can expect a little bit of additional growth in inventories as we go through the first part of the year as we anticipate better sales. But inventory was the primary driver there.

Great. Thanks a lot, guys.

(Operator Instructions). Our next question comes from Matt Mccall of BB&T Capital Markets. Please go ahead.

Thanks. Good morning, everybody.

Morning.

Larry, you gave some good details about the trends. I wrote as fast as I could, but I didn't catch all those. On the top line, you started with wood, down 25%. I think that was for the full year. Can you give us, that was helpful color. Can you give us some more color, or maybe review that? What I'm specifically getting at is the fourth quarter. What were the fourth quarter trends? You broke down some more detail than I have in my model. But whatever you have there, can you just review that?

Yes. You're talking primarily about sales?

Yes, sales to start, yes.

In case goods, sales for the year were $140 million, down about 25% over the previous year $48 million dollars. For the quarter, in case goods, sales were $35.9 million, down about 12% over the year-ago quarter. In upholstery, sales were $63 million, down $10 million from the previous year or about 13.7%. And for the quarter in upholstery, sales were at $16.8 million, actually up $1.3 million or 8%.

That's helpful. That 8% is kind of the crux of my question. You have seen some eye popping numbers out of this industry over that last few months. And I guess that 8% number maybe is more in line with the trends we are seeing. But Paul it sounds like, I guess I got some mixed signals, it sounds like you are pretty cautious about traffic patterns, and you are pretty cautious about the willingness of the consumer to spend. Yet you are seeing some pretty decent backlog recovery, you talked about 70% to 80%. I know we're off [depressed] numbers. But are you just not seeing the absolute sign that things are improving? Just kind of summarize all of those thoughts. Cautious optimism, maybe is that the way to talk about it?

That term is used so much, but that's probably a pretty good qualifier for the way things are today. We have a chance to interact with customers frequently, both visiting them in their stores as we travel around the country, and also this coming week at market, and a month ago at pre-market, we saw about 60 of our larger customers. And I can say from conversations with most of those, nobody is experiencing robust business.

Okay.

Some people it's a little better than others, but I don't think anybody feels like business has returned to the prerecession levels. Store traffic maybe is starting to increase, but they talk about how consumers are very measured. They will come in, they have a specific item in mind, a very price sensitive, and don't tend to buy more than what they came in for, which is maybe a little bit different than has been the case historically. I think the indicators are there that consumer confidence will improve as people are more secure in their jobs, and investments are looking better and the home values are stabilized. I think there's a lot of things that should turn consumer confidence more positive. But I don't think we have seen it yet. In our wood business, we're probably a little more cautious than we are in upholstery right now, because we are still not seeing positive comps year-over-year. We are getting closer, but also the comps are getting easier. And our backlog is up. In the fall, I think we saw a good uptick in orders. Looking back, I think a lot of that was driven by retailers restocking depleted inventories more than it was by a real uptick in business at retail.

The other thing that's impacting our backlogs has been that deliveries from our suppliers have slowed a little bit. They're trying to ramp back up. They probably bore more of the brunt last year when people just quit ordering to try to get inventories in line. And the suppliers are having to rehire workers and train them. And it takes a lot longer to ramp a business up than it does to slow it down, and we're seeing that right now. So, not a huge problem, but it's just something that has had some impact on our backlogs, our shipments. And we're expecting it to improve as we progress through this year.

Was there any impact on the quarter? So how much of that growing backlog should have maybe been shipped in Q4?

I don't know that I can really answer that question. If we had gotten deliveries that were closer to the delivery times, maybe we would have squeezed an additional $3 million, $4 million, $5 million out in sales.

Paul, you talked about the 60 larger customers, and I assume it is large regionals, maybe some larger local market customers. Was that pretty much, you said nobody is experiencing robust business. Are there any differences you can talk about between some of those larger regionals versus the smaller mom and pops? Or pretty much everybody is saying the same thing.

This downturn, the larger regional accounts have done better than the small independents have. That hasn't always been the case in the past, but this time I think people that could afford to continue to promote, advertise, try to drive whatever traffic it was into their stores did better than the smaller retailers, and maybe just tended to hunker down and quit spending anything they didn't have to spend. They didn't freshen their floors, they didn't bring in inventory, they didn't advertise. And it's kind of a self-fulfilling prophecy when that happens. Where a larger retailer can't afford to do that. They have too much overhead to cover; they have to go out and be aggressive.

Okay. And then Larry, moving to the gross margin again, you gave some good detail about gross margins by segment, year-over-year. Can you talk about, can you give some of that detail Q4 versus Q3, and getting back to kind of what drove that pretty impressive level of improvement? I think you said Q4 gross margin and case goods 35% and upholstery 13.5%. Is that right, what were those numbers in Q3?

Todd, I don't have those in front of me right now, but obviously it was an improvement in the fourth quarter for both Companies, for both the case goods side and the upholstery side. But, if you look at the gross margin for the year was 29% in case goods, 35%, in the final quarter. So, you can interpolate somewhat to see what that might look like. Gross margin actually for the year and the quarter were fairly close in upholstery at 12.2% and 13.5%. So not as much impact there. Although orders were coming in quite well in the fourth quarter, gearing up and getting that production out, as we have talked about earlier, wasn't immediate. So we've seen some of the improvement, and I think some of that will carry over into the first quarter.

Thank you, guys.

Our next question comes from Ethan Steinberg of Friess Associates. Please go ahead.

Hi, guys. Thanks for the call. Can you help us understand a little better the upholstery business sounds like it is ramping. I think you said it was 13.5% in the January ended quarter. Was that ramping quite a bit through the quarter, like was the exit rate higher or more importantly, can you give us a sense of what sort of gross margin that business should operate when it's at a reasonable operating rate or utilization rate?

I don't think we said 13.5%. I think it was maybe 8% growth in upholstery.

I'm sorry, gross margin in some --

This is Alan. Let me explain that the gross margins in upholstery were greatly impacted by some operational decisions that we made last year. Among those, one was to close a wood frame supply plant, which was ramped down and finally closed at the end of the fiscal year. So, we're just now in the new year reaping the benefits of that. Also, we implemented lean manufacturing which has a very significant effect on your labor costs in the early going. And that was implemented in our largest plant at Bradington Young. But there were decisions along those lines. Also, we have two major upholstery plants in Bradington Young, throughout the year -- at last year's order rates, we actually only needed one. But we made a decision to keep both plants open because we felt with the strategic direction of Bradington Young that we would need this second plant to be operational. And, in fact, that has turned out to be the correct decision.

Now the second half of your question is the right question. And that is, what should we expect under a more normalized environment. And your gross margins in upholstery should ideally be in the 22%-25% range. We'd like to think 25% is a healthy target, and above that, of course, is certainly where we want to get to. So, the gross margins in upholstery typically would be lower than wood, but in that 22% to 25% range is where you should expect.

Now that we are out of last year and you have made a lot of those changes, do you think we are in a somewhat normalized environment, at least for the utilization of that business? Or can you give us a sense of how much more volume you have to be doing to be in that range?

We are certainly approaching a more normalized environment. I think some of the comments we made were the fact that we were hiring plant level labor I think that some of the comments made were the level labor, to young plants, and working and ramping process is still in progress there. I am not sure how to quite answer the question. We're not there, but we're certainly much closer to ramping up to our eventual capacity at both of the Bradington Young plants. We still have got a ways to go at Sam Moore. It hasn't had the growth that Bradington Young has.

Okay, well that bodes very well if you can grow the gross margin by that much, and that short amount of time going forward. The case goods margin of 35%, that looked pretty healthy to me. I don't know what that is historically, but it was a lot better than the average for the year. Is that a more reasonable gross margin, the 35% in this kind of environment? Or where do you think that can go if things do continue to get a little bit better.

35% is exceptional, and I don't think it is sustainable. Historical gross margins for wood have been probably in the high 20s to low right around 30%, and with what we are seeing with freight costs increasing, we're getting pressure from most of our suppliers in Asia to raise their prices to us. We'll have a price increase to our retailers later in the year. But in the short term, I don't expect that we're going to continue to see that gross margin in wood.

And the other thing, Ethan, I think is during the fourth quarter, some of the contributors there, a big pickup in LIFO adjustment in the fourth quarter as well as the insurance -- workers comp insurance from the captive that was a revenued item in the fourth quarter. . But Paul is right, the upper 20% is probably a reasonable target for us in case goods.

Okay. And then, I wasn't sure I understood what you guys were intimating on the backlogs being up so much year-over-year, and coming into this fiscal year. Based on what you can see and the end demand and your backlogs, do you think that the quarter we are in now that ends in a few weeks is up or down sequentially?

I would be uncomfortable projecting what top line is going to be for the fourth quarter. I think the backlogs are up. Business, as we said, has actually incoming orders are down a little bit from what they were in the fourth quarter, and our ability to ship in the current quarter is going to be driven as much by the deliveries we receive from our suppliers as from increased demand from our customers. So I can't give you guidance on what the top line is going to be for the fourth quarter --- I mean for the current quarter versus the fourth.

Okay. But it sounds like demand is better. It is just a matter if you can fulfill it?

No, we actually said demand for wood has dropped a little bit from what we saw in the fall of last year.

Okay. Great. Thanks. Great quarter.

I am showing no further questions at this time, sir.

All right. We appreciate everybody joining us today, and we look forward to presenting the next quarter in two or three months. Thank you.

Ladies and gentlemen, this conference you may disconnect and have a wonderful day.