Hooker Furnishings Corp (HOFT) 2011 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 fourth quarter 2011 earnings. 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. Paul Huckfeldt, Vice President of Finance and Chief Financial Officer. Please begin, sir.

Thanks, Tyrone. Good morning everyone, and welcome to our quarterly conference call to review our sales and earnings for the 2011 fiscal year and the fourth quarter, both of which ended on January 30, 2011. We appreciate your participation this morning. Joining me today is Paul Toms, our Chairman, President and CEO, and Alan Cole, President of the Hooker Furniture Upholstery Division.

During our call 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 our press release announcing our 2011 annual and fourth 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.

Yesterday we reported net sales of $215.4 million and net income of $3.2 million or $0.30 a share for our fiscal 52 week period ended January 30, 2011. Net sales for the year increased $12.1 million, or nearly 6%, compared to $203 million for the 2010 fiscal year, thanks to unit volume growth across all divisions. Net income for the year increased 7.7% to $3.2 million compared to $3 million in fiscal 2010. Earnings per share were $0.30 this year compared to $0.28 in the prior year.

For the 2011 fourth quarter, sales increased $2.3 million to $55 million, a 4.3% increase compared to $52.7 million in the fourth quarter of last year, marking the third consecutive quarter of year-over-year sales increases. We reported a net loss of $182,000 in the fourth quarter of fiscal 2011 compared to net income of $3 million in the fourth quarter of 2010. We'll discuss some of the reasons for this loss later in the call.

Now I'd like to turn the conversation over to Paul Toms who will comment on the results.

Thanks, Paul and good morning, everyone. First, I'd like to start by saying I'm very proud of the way our employees performed this past year, enabling us to grow sales across all divisions in a business environment that was still very challenging. We finished the year with nine consecutive months of year-over-year sales increases. Most of all it is gratifying to see the Company growing again after three years of sales declines. Several of the areas of the business grew significantly. The upholstery division led the way with a nearly 15% overall increase in net sales, including a 47% increase in imported leather upholstery unit volume compared to the prior year.

While the case goods overall net sales increase was in the low single digits, we ended the year with a more robust pace of sales increases. The low start, down approximately 14% in the first quarter of 2011, subdued our overall sales gain for the year. In addition, we had two important areas of the wood business that roughly doubled in sales for the year. Those two areas were our Envision line of casual affordable furnishings targeted at younger consumers and international sales to customers outside the US and Canada. These areas are particularly promising in their potential to expand our customer base. Considering the fact that we launched Envision only two years ago in the middle of a recession, we're pleased to be approaching $20 million in sales of this product. This included $14 million in wood furniture and just under $4 million for our Envision leather seating line by Braddington-Young. The Braddington-Young line actually launched almost a year later than the Envision case goods line so the $4 million represented the first full year of sales for Envision leather. We believe Envision is helping us achieve our strategic objective of expanding the age and income of our consumer base while our international sales are helping us achieve our objective to expand the cultural range of our customer base.

During the year, we forged promising partnerships with numerous international retailers, including a Chinese distributer, and we re-entered the Korean market. We made progress this year in another area with great potential for expanding our consumer base and that is our Opus Designs youth bedroom furniture line. As much as we struggled with youth furniture in recent years, we persevered because of the potential we see for growth in this important consumer demographic, targeted at children age preschool to college. In the last year, we have pre merchandised the Opus Designs line, had back to back successful product introductions. The result was a 50% increase in orders from November 2010 through the end of the fiscal year compared to the prior year. And orders for Opus Designs by Hooker Furniture have been trending up at an even higher rate in the first quarter of the current year.

Also during the first quarter which began January 31, 2011, we've seen consumer demand improve, especially in case goods with significant double digit percentage increases for incoming orders for the first two months. We believe these increases are a result of our strategy to broaden our product line and our customer base. We've expanded our product line with new style and price points in most of our current product niches. The broadening of the product line has given us access to more channels of distribution and increased our floor space with existing customers. So while we still have a lot of work to do, and are not at a level of financial performance that we and our stakeholders desire, we are making progress. This progress, and important accomplishments in many areas during the past year, position us to grow both the top and the bottom lines going forward.

On the operations side, we're doing a much better job in supply chain management, including forecasting, inventory availability, and flowing product than a year ago. Currently, we believe we're in excellent inventory position on our best-selling products. In the cost containment arena, we continue to do a good job of whittling away at costs, deferring non-essential spending and managing our cost structure. We made significant strides with product and packaging quality, resulting in a reduction of quality related costs of over $1 million compared to the prior year. In addition to progress in these foundational areas, we're also focusing on long range initiatives such as developing our next generation of leaders and integrating our companies through a common operating platform. We've strengthened our management team with the addition of several key executives and by offering growth opportunities to a new generation of leaders, many of whom rose through the ranks of the Company and were mentored by our previous generation of leaders. We've given important product development assignments to our up-and-coming managers which has already resulted in a younger, fresher product line. We refocused our commitment to employ development, offering training and educational opportunities throughout the Company. We're taking a big step forward in our efforts to integrate Hooker Furniture, Braddington-Young and Sam Moore, embarking on a multi-million dollar project involving personnel throughout the Company collaborating to develop a single comprehensive operating platform.

During the year, we selected a software vendor and implementation partner for an Enterprise Resource Planning system. In addition to business integration, the ERP will help us implement best practices across the Company, provide us with world class information management tools, and present a consistent customer interface.

Late in the year, we launched our Asian cross dock program to a favorable response. This program allows retail customers to order container loads of furniture while mixing product from five different factories, which opens the container direct option and its lower prices to many of our dealers previously unable to invest in larger quantities from individual factories. While the program started too late in the fourth quarter to impact sales for fiscal year 2011, we do expect incremental sales from the cross dock program going forward. Half of our sales from this program to date are from customers who had not previously purchased containers or product from us. Also late in the year, we completed the consolidation of Braddington-Young's operations in Hickory, North Carolina. We expect this move, along with others we have made to improve efficiencies and stimulate sales in our upholstery division, to yield improved profitability and operating efficiency in this division in the current year.

At this point, I'd like to call on Alan Cole, our President of Upholstery, to give us more details on our upholstery operations.

Thank you, Paul, and good morning. Overall, the consolidation from Cherryville to Hickory went very smoothly, as did the ramp up of production in the Hickory facility. During each week of February, production increased, and by the end of February, we felt that most of the impact of the consolidation had been absorbed. If we took a snapshot of Braddington-Young's manufacturing capacity today versus one year ago, we have reduced square footage from 320,000 square feet to 178,000 square feet, representing a 44% reduction in our manufacturing footprint. This includes taking our Woodleaf frame manufacturing plant off line about a year ago. I believe this really positions us well from a capacity utilization standpoint. The consolidation puts us into the 90% utilization range, which is ideal.

On the sales side, we really had a banner year at Braddington-Young, not only in the near 50% unit sales growth for our Seven Seas imported leather seating line, but also because we achieved the first year-over-year sales increase for domestically produced leather seating since 2005. Our domestically produced Braddington-Young products, led by the Envision line, a reclining chair line and the BY Classics upscale leather collection, grew 12% this year. We made the decision 18 months ago to aggressively expand our imported leather line in every product category and that strategy has paid off beyond expectations. But what is even more gratifying is that the growth was not at the expense of our domestic leather products. We believe our ability to grow both domestic and imported leather validates our strategy. Going forward, we expect to see double digit growth in the 15% range for Seven Seas leather. And for the Braddington-Young line we expect to continue to see growth this year but at a moderated single digit rate.

At Sam Moore we had a record April market last year in attendance and orders, and accordingly geared up production for the fall in anticipation of significant order and shipments increases. We were disappointed that the anticipated and seasonal uptick did not materialize in the fourth quarter. However, the good news is that since January we have seen very nice increases in the 14% to 15% range even with the weather disruptions we had in January. We believe this affirms that we gained retail floor space from introductions we made at the April market a year ago. But the business environment was not strong enough for this benefit to materialize until January. We're very pleased to see orders at this pace at Sam Moore. Our product line extension with our accommodations modular seating collection has been a key area of growth for us. The modular sectional line is completely incremental to our chair business and is performing well at retail.

Another area of expansion has been our new Hooker Upholstery Collections line which is fabric upholstery with correlating wood trim to coordinate with major Hooker case goods collections. The upholstery and wood collections are designed together and shown together which makes a complete easy-to-buy room package for the retailer. We introduced this program last October and added three new Hooker Upholstery Groups at the just concluded April market.

Speaking of the April market, we were very pleased that our traffic was up 10% above our previous record market for the Hooker Upholstery division. It was a strategically important market for us as we made headway with retail placements for our newest categories across the board. At Sam Moore, the new categories that did well included the accommodations modular program, our reclining chair program, and swivel chair lines. And at Braddington-Young, we did well with a new fabric recliner program and high-end domestically produced BY Classic sofas and correlating chairs. We were especially gratified at how well the Sam Moore upholstery sold that correlates with new ADPs Harbor Point Collection from Hooker. Even more exciting is that this upholstery is domestically produced.

Thanks, Alan. At this time I'd like to call on Paul Huckfeldt, our CFO, to discuss several factors which drove our sales and earnings performance for the year.

Thanks, Paul. Sales for the year were up in both businesses, with increases in incoming order rates throughout the year. First in our upholstery divisions, which started the year strong, averaging a 37% increase for the first half of 2011 compared to 2010. During the summer, upholstery orders were lower than the prior year but ended the year on an upward trend of about 10%. Case goods orders started the year much slower and didn't gain traction until the fourth quarter. However then incoming orders averaged 10% to 15% higher than last year. Case goods unit volume increased compared to both the prior year quarter and the fiscal year. Upholstery unit volume continues to be encouraging as we realized significant unit volume increases at Braddington-Young and modest gains at Sam Moore for the year. Overall, average selling prices declined nearly 2% in the fourth quarter and declined 2.4% for the full fiscal year, primarily due to increased sales of lower priced products.

Gross margins for the fiscal 2011 fourth quarter declined, primarily due to higher freight costs on imported product in our case goods division and higher upholstery raw materials and manufacturing costs as a percentage of sales due to changes in product mix and lower domestic sales volume during that quarter. The swing from extremely favorable freight costs in Q4 2010 to unfavorable rates experienced at the end of this year resulted in a 10 percentage point difference in case goods margins for the quarter. Margins for fiscal 2011 declined slightly over 3% primarily due to higher freight costs as a percentage of sales in case goods and the $500,000 charge related to a fire at one of our distribution centers during the first quarter of fiscal 2011. These charges were partially offset by lower product discounting and lower returns and allowances, savings from the closure of our California warehouse, and better efficiencies from increased upholstery sales and the cost reduction initiatives, which slightly improved our upholstery margins.

Selling and administrative expenses decreased both in absolute terms and as a percentage of net sales during the 2011 fiscal year. This was a result of having lower quality related costs and lower bad debt expense, partially offset by increased commissions and design fees due to increased sales. Fourth quarter selling and administrative expenses remained flat as a percentage of net sales but were $335,000 higher than Q4 last year, primarily due to lower compensation expense in fiscal 2010 fourth quarter due to favorable adjustments in our Workers Compensation accruals in the prior period.

The operating loss for the fiscal 2011 fourth quarter was $879,000 or 1.6% of net sales compared to income of $4.5 million or 8.6% of net sales in the fiscal 2010 fourth quarter, due mainly to the impact of higher freight costs, restructuring, and asset impairment charges in Q4 2011. For the fiscal year operating income was $4.1 million, or 1.9% of net sales in 2011, compared to $5.2 million or 2.6% of net sales in fiscal 2010. The decrease was mainly due to higher freight costs, impairment and restructuring charges recorded in Q4 and the $500,000 casualty loss from the warehouse fire. These expenses were partially offset by the improved upholstery margins.

Our balance sheet remains strong and continues to help cushion us from the impact of the still difficult sales environment and lower profitability. At quarter end, we had cash and cash equivalents of $16.6 million. We remain debt free and have over $13 million available under our recently renegotiated revolving credit facility which remains in place until July 31, 2013. In addition, we have over $15 million available to borrow on the cash surrender value of Company owned life insurance policies, if needed. We continue to maintain a quarterly dividend of $0.10 per share thanks to our cash position and our belief that our product and business model position us for the long term.

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

Thanks, Paul. In virtually every area of our business and in the overall economic environment we see both improvement and progress. That's reflected in the double digit increases for incoming orders since November. The momentum we've had for the last 11 months received another boost last week at the April High Point Furniture market where we introduced three major collections and numerous other wood and upholstery products that were very well received. Strategically, we did the best job we've done to date in integrating our upholstery and wood furniture and room settings and in collections, which mutually benefited both the wood and upholstery companies. We found retailers to be generally upbeat and eager to freshen their floors to prepare for improving business. The remerchandising and updating of our line over the last couple of years has helped us grow share of market and share of customer as we've aligned with some of the largest and healthiest retailers who have also gained market share during the downturn.

Freight rates have stabilized and are having less of an impact each month. We should work through the inventory that reflects higher freight costs by the end of the first quarter, resulting in a favorable impact on profit margins going forward. We are experiencing additional inflationary pressure with significant cost increases from both wood and upholstery suppliers which we will offset with price increases to our customers. We're relatively optimistic, expecting modest improvements throughout the year, obviously with some bumps but overall a positive trend.

This concludes our formal remarks and at this point, I'll turn the call back over to our Operator, Tyrone, for questions. Thank you.

(Operator Instructions) Our first question is from Todd Schwartzman of Sidoti & Company. Your line is open.

What was the amount in dollars of freight inflation year-over-year in the quarter?

About a $2.5 million swing.

I'd like to double check that but that's ballpark.

Todd, we're probably going to need to check that and we'll try to get back by the end of the call with that. And specifically the question was the swing from fourth quarter 2010 and the positive impact that the adjustment had in that quarter versus the negative impact that it had in fourth quarter 2011? Is that correct, Todd?

Yes, that's correct. Or as reported, whichever is easier.

Okay.

Can you quantify also the level of increase in case goods sales for the fourth quarter? I know you'd mentioned low single digits but is there a number you're willing to put to that?

Let me check on that also. I know that in shipments of case goods in November, which was the first month of the fourth quarter, we actually had the biggest shipping month in two years. But it was against a relatively strong shipping month in November of the prior year, so we didn't have a lot of growth in November. We had better growth in December and in January. And I'm thinking that the overall gain was probably in the mid single digits.

Okay. I know also you put in some price increases a number of months back, but given your outlook for input inflation, are you planning another ASP increase for the summer?

Let me address what we've done and Alan may want to chime in on this too. On the wood side of our business, we increased prices in September of last year. And we typically don't increase prices on products that have not been out at retail for at least a year but we increase them on products that have been out longer. Our overall increase in September on wood averaged about 4% across all the products. We're going to take another price increase in wood July 1 and that will be a little bit larger than the previous one, maybe in the 5% to 5.5% range overall. We think that the price increase in July will not only counter what we've already seen from our suppliers overseas in wood but it will also, we're anticipating some additional inflation later in the year and we'll try to get out ahead of that. So I think we're more than offsetting what we've seen from our suppliers with the price increases that we've taken last September and anticipating in July. Alan, would you like to speak to price increases at both Sam Moore and Braddington-Young?

Sure, Paul. We didn't dwell on this specifically during the script but the materials increases about the middle of last year began to force the need for price increases. Fabric which we'll use at Sam Moore, our fabrics were beginning to increase above 10%. And leathers have been now increasing on a constant basis since probably last fall, probably third quarter of last fall. As a result, we took a small increase at Braddington-Young at the October market of about 2% to 3%. And then at the April market just concluded, we took an increase probably in the 6%-plus range, which is a larger increase than you would normally take, but the increases in the leather hide market have dictated that.

In the case of Sam Moore we took about a 4% increase at the October market. And then again at the April market a similar increase. So in both cases, the two increases combined probably will net out in the 7% to 8% range, which are healthy increases but we think the market has been affected broadly enough that virtually everybody we compete with has taken similar increases.

And all the products for which those hikes will apply have been implemented?

Yes. Well, I should say, excuse me, the April increases will become effective later this month on orders received. And, of course, in the upholstery business, you have a backlog to work through at old prices so we would see the impact on an increasing basis over the next 90 days as far as our margins are concerned.

Todd, this is Paul Toms, and I want to get back to you on the previous two questions. Our wood furniture shipments in the fourth quarter were up $3.5 million, and that represents 9.9% increase over the fourth quarter 2010. And then Paul Huckfeldt has the answer on the inflation that was freight related.

It looks like about $3.5 million is attributable to the big swing between last year's low freight cost and this year's higher freight cost in the quarter.

$3.5 million? Okay. And back in December, Paul Toms, you'd talked about bottlenecks, ocean transit bottlenecks. Is that as much of a factor in Q4 as earlier in the year?

No. It really hasn't been a factor since probably April, May, June and maybe a month or so before April. But it seemed like it happened after Chinese New Year and about the time that all of the freight companies are negotiating contracts for the current year which is typically May. But we haven't had problems since summer, say June, July. The rates were significantly higher, we were paying a lot more to get containers here but we were able to get all we wanted, all the space we wanted at the much higher rate. We're not seeing anything currently. We're going into another contract negotiating and it looks a lot better this year. I don't know whether there's additional vessels that have been brought online or whether there's less demand for space coming out of China but for whatever reason, we're not seeing pressure on freight rates this year that we did this time last year.

And what's been the trend in delivery times to the consumer?

Let me address that in two ways. One is our lead times with our vendors have actually contracted back closer to traditional lead times, which is about 100 days from date of order to shipment of goods, and about another 35 to 40 days on the water to Virginia. But that really is a separate discussion from what our delivery is to our customers because we're carrying significant amounts of finished goods inventory. And we've really focused over the last year on our best-selling products that are driving about 70% of our volume. And we're in stock on those products about 90% in the US in Virginia where we warehouse and where about 80% of our shipments originate. And then in China, we've focused on our best sellers to enhance service from the specific warehouses, as well as through the cross dock. We're 97% in stock on products for our cross dock assortment, and that's about 500 or 600 SKUs. So delivery to our customers has improved significantly over the last six, seven, eight months, and we're really getting no negative comments at all about delivery.

You've got a number of new lines coming out now. You've introduced a number of new products, Envision among them, in the past 12 or 18 months. Do you target any percentage of total sales that you'd like to see products introduced within a set number of years represent?

Actually, no, we don't. We're not quite that scientific in our approach. We probably should be. The average product has a life cycle of about three years. And products that were introduced in April will typically ship late summer, early fall. Some of them a little bit longer than that but typically about four to five months. And so they will have a chance to impact this year for maybe the last four or five months of the year. But no, we haven't sat down. Our forecasting people are actually encouraging us to try to do a better job of forecasting demand on all of our introductions but it's a process we're involved in.

You spoke to the refresh, if you will, of the product line up, and tied that into the relative youth of a number of your new managers. I'm guessing that somewhere in there you've been paring some of the lesser performing products. Can you talk a little bit about what's happening, what ultimately the SKU count, the total SKU count will look like at the end of this fiscal year let's say?

I can tell you that currently we have about 2,200 SKUs in the wood part of our business. That's been fairly stable for the last year or two. They are a lot different SKUs than we had two years ago because of the amount of new product we've brought out with Envision and Opus and some of our higher priced lines. But we still believe that the key to successfully operating our business and being more efficient is to whittle away at the overall SKU count. And the target would be somewhere in the 1,800 to 2,000 SKUs as we work through this year. So drive another 10% to 15% reduction in SKU count and try to grow the business at the same time.

Great. And as far as the commentary that you've been hearing from the retailers, the customers, things are generally more upbeat, I get that. Are they telling you, with respect to price points, are we seeing an acceleration of the relative strength in the higher end?

I can't say that I've heard that from the customers. I'm drawing that conclusion myself based on what I see in our business versus the last few years, and what I see in our business versus other publicly traded companies that may be positioned in slightly different price points. I feel like we've grown sales at a significantly higher pace the last four or five months than the other companies I see reporting. And just looking at Christmas and the relative strength of retail at Christmas, and specifically in the better stores, the more affluent consumers seem to have bounced back. And then intuitively, if you look at what the market's done over the last few years, I would think that higher demographic customers probably benefited disproportionately by the rebound in the market. Also, I think our demographic at typically baby boomers and $100,000 household income and up is probably a little more secure in their jobs, and employment is probably better in that demographic and a higher education demographic than it is in some other demographics.

And in terms of the international opportunity, where are you now with the penetration of Russia?

Our account, we have a single large account that's based in Moscow that has about seven or eight retail stores but they also distribute our products to other stores throughout Russia. And last year, they were our 12th largest customer. They represented -- I'd rather not give the volume, but they were, again, our 12th largest customer, so good progress there. They've been a customer for a while but they have grown significantly and feel like this year they can grow maybe 30% on top of what they did with us last year. We also opened a distributer in China that we set targets together and structured a program around those targets. Based on achieving that target this year, they would be one of our top 10 accounts.

And finally, if cash is going to continue to build, looking at the acquisition landscape, for many years, Hooker, of course, was purely a case goods, regardless of where the product was produced, as you view candidates for possible acquisition, how do you think about tuck-in versus building on your strength or just from one room in the home to the next? How do you view what your vision of Hooker as a furniture source?

I think we're a relatively complete whole home source today. We're lacking fully upholstered fabric sofas and bedding, which we have no interest in doing. I really think we can grow organically. We've got the merchandising talent already onboard. We have manufacturing capacity. And, honestly, we're much more focused on trying to make the companies we have more successful than we are going out and looking for another acquisition. I think we can grow internally organically as much as we need to in the near term.

And a dividend increase, is that likely in the next year?

I'd like to see earnings do a little better. I think this past year we earned $0.30 and paid out $0.40. So we certainly are in a cash position that we can do that and we don't have a lot of other CapEx needs outside of the ERP system which is really going to fit within the same sort of CapEx budget we've had for the last three or four years. But I think as a Board we probably would like to see earnings increase before we increase the dividend.

And just to refresh my memory, when was the last meaningful share repurchase?

Probably two years ago, we completed a $50 million share repurchase.

That lasted about 18 months.

Spread over a year and a half.

Right. Thanks gentlemen.

Thank you. Our next question is from Matt McCall of BB&T. Your line is open.

Good morning, everybody. I'm trying to connect some dots here. So double digit order growth since November, yet we're down a little bit sequentially in revenue. And it sounds like from that clarification in one of the previous questions you were up about $3.5 million from case goods. By my simple math that means you were down in upholstery. But year-over-year and sequentially, the sequential decline was about 18%. And this might be for Alan. But you spoke about material delays, you spoke about the consolidation. What was the impact on sales there? Will that help explain how orders have been so strong and yet the upholstery shipments were down so substantially?

I don't think we are down, Matt. I'm not sure how you're getting that sequential sales are down 18%.

I took the $54.9 million that you reported, and I think you just said you were up $3.5 million. In the past few quarters you've given the actual. I had to back into this because you didn't give the data. But the last couple quarters you've given segment data so why don't you give us the segment data for case goods and upholstery and compare that year-over-year since you didn't include it?

On sales?

Right.

In case goods we were up about 2.2%. I think that was $3 million.

What was the dollar number?

I've got the upholstery number right here. Let me give you upholstery first. $15.6 million for Q4 '11.

Okay. And then last quarter it was $19 million, correct? In Q3 of '11?

Okay, let us dig around while you ask any additional questions. But our business has grown in both upholstery and wood in 2011 versus 2010.

I see that. What I'm trying to get at is you stated that since November, and that would be reflected in the Q4 results, since November your orders are up double digits, right?

Right.

And yet if you look at Q3, you reported $55.7 million top line, in Q4 you reported $54.9 million top line. Now, I understand there was weather. I understand there was holidays. What I'm trying to get at is were there any -- and by my data you went from $19 million down to about $15 million or $15.5 million sequentially so that's a sequential decline, yet orders were supposedly up 15% or so. That's what I'm trying to connect.

Honestly, there's a lag time between orders and shipments.

Paul, this is Alan. If I could just interject. We right now are sitting on near record backlogs at both Sam Moore and particularly at Braddington-Young. And Matt is correct. Because of the consolidation at Braddington-Young, we actually went around $2.5 million below in the fourth quarter at Braddington-Young, the same quarter a year earlier. So we did have a sales shipments decline at Braddington-Young. But at the same time we had a pretty major increase in backlog, and most of that was due to the consolidation as well as some of the other things we talked -- weather delays, material delays and so forth. So the thing that's always hard to balance between orders and shipments is that backlog factor in your domestic production. But we are currently sitting on large, probably the best backlogs at both Sam Moore and Braddington-Young that we've seen in over three years.

Okay. But the $2.5 million increase in backlog -- I'm sorry, I think you referenced the consolidation impacted revenue by about $2.5 million, is that what you said?

Right.

So that was just the consolidation. What about the material delays, any of those items, weather? Or is that all encompassed in that $2.5 million? And what about Sam Moore?

Yes, that would be all encompassed in the $2 million. Sam Moore, being a much smaller business Sam Moore was about level year-over-year. So there wasn't an increase in shipments in the fourth quarter at Sam Moore nor was there a meaningful decrease either way. Most of the change in that quarter shipments were from Braddington-Young. And most of that, a good portion of that was domestic, but we also did have, with the growth in Seven Seas, we also had some backlog issues there to clear up.

Okay. So without that $2.5 million impact you'd have been roughly at the $18 million mark in the quarter. The pattern this year was $18.7 million, $18.9 million, $19 million, and $18 million. So as we look out into next year, first, do you expect to see the rebound from those delayed or the building backlog and the impact you had in the near term from consolidation? And is that $18 million, $19 million number still a reasonable number even though you're seeing orders up more?

It's a reasonable number. It appears, just as we move through the first quarter, that we won't recoup all of that backlog build in the first quarter. I'm anticipating, actually, that the second quarter relatively will be stronger than normally it is from a seasonality standpoint because of the backlog that we're sitting on. So the first quarter we've rebounded to what I would consider more normal levels at Sam Moore and Braddington-Young as far as our shipments. But as far as the backlog indicators are concerned, it looks to me like the second quarter will be stronger from a shipment standpoint than is normal.

Okay. And can we use Q1 through Q3 this year as a guide for what is normal?

I think so. I think that's fair.

Okay. And you mentioned your backlog. I think the last couple quarters you've mentioned -- maybe you can answer the upholstery and, Paul, you can reference the case goods -- but you talked about weeks in backlog. How many weeks in backlog do you have in upholstery?

Let's see. Let me just think of it in those terms. We've got between six and eight weeks in backlog at Braddington-Young, and I would say probably about six weeks in backlog at Sam Moore. And that doesn't sound like a huge backlog but in more recent years in upholstery, because it turns faster, your backlog typically runs about four weeks of shipment. So I'd say our backlog is up a good 40% to 50% above what would be typical given our business level.

Okay. And then, Paul, what about in case goods?

On the wood side, Matt, backlogs are probably around five weeks. And a lot of that would be new product. And that's less than it was a year ago. I think we were closer to maybe seven or eight weeks this time last year when we were having production delays.

This is when the backlogs were building.

Right. So while down, it's more because you're flowing the product better?

Right.

Okay. So, equally as important, on the gross margin front, how should we look at -- Alan, let's start with case goods. You did a 13% to 15% gross margin and then it looks like that fell off pretty dramatically. And, again, I don't have perfect data here, we're calculating a lot of it, but what's the outlook look like for FY12 for upholstery gross margin?

Matt, I'd have to give you maybe a bit of an anecdotal but in our backlog our gross margins are up both at Sam Moore and Braddington-Young. And particularly at Sam Moore, our backlogs in gross margin are up probably in the range of 500 basis points. Braddington-Young may be a touch less than that. But certainly trending in the right direction. Part of that's the price increases we took at both companies, two of them sequentially. And part of it, by the way, is improvement in the operations. In other words, reductions in our manufacturing cost by way of consolidation of the Braddington-Young plants. And also at Sam Moore, a continual focus on reengineering our manufacturing processes. So we feel that our margins in upholstery are trending significantly in the right direction.

And so just to make sure, that 500 basis points is versus what? The numbers through the first three quarters or the numbers in Q4?

Actually the numbers in the first several quarters. Q4 was, I think, particularly, again, at Braddington-Young, was dramatically impacted because of the delays and because of the cost of consolidation for all efficiencies and also the delays in just getting goods out to the customers.

Okay. So from that 13% to 15% range you're talking about in the first three quarters, you're seeing 500 basis points improvement?

That's at Sam Moore. I think it would probably be not quite as dramatic at Braddington-Young but my guess is that it would still be in the 200 to 300 basis point range, at a minimum, and probably even a bit north of that. That's a tough one to pin down because there's so many things that impact it.

Got it. And then Paul, the same question on the case goods side. It sounds like you're going to see some relief beginning in Q1. And then we were 29% case goods gross margin a year ago. We're down 200 or 300 basis points or a little more this year. What's the outlook like there?

I think in the fourth quarter we were 24% gross margin on case goods. And that's related to the freight cost. We think it's probably 200 to 300 basis points improvement after we flush out the last of the higher freight cost inventory. I think still a lingering effect through the first quarter but it will be less each month in the first quarter, and I think by second quarter we should have all of that higher priced, higher freight cost inventory out. So you're probably looking at a 27%, 28% maybe.

Thank you all.

(Operator Instructions) Our next question is from Budd Bugatch of Raymond James. Your line is open.

Good morning. I have two questions and I think you just touched on one of them. One is a mechanical question. On the increased freight, if I understand it right, that goes into inventory and then it has to bleed out through inventory and through cost of goods sold. Is that the way you account for it?

That's correct.

And you said, I think, $3.5 million was the impact on the P&L in the fourth quarter?

Right.

What do you think the impact of that incremental freight will be then in the first quarter if you're going to bleed it all out by then?

I don't know that we really have an idea of what that is. I think it will be less than the fourth quarter but whether it's half the effect or two-thirds I couldn't tell you.

I would say it would be less than half, but our inventory turns--

The other thing that plays into it, Budd, is how much of our product is container direct shipments versus out of the warehouse. The container direct, obviously whatever the freight rate is today is reflected in the margins on the container direct product. So if we increase our percentage of shipments then it would have less freight impact.

So on the container direct program, Paul, does that mean the customer pays the freight, whatever it is, at the time of shipment, or do you quote them a price and you absorb the difference?

Actually, we offer it several different ways. We can handle all the freight and we give them a landed price. And we have freight rates built in that are slightly higher than what current freight rates are. And we pay current freight rates so we don't have the impact of higher freight costs. There are other customers that prefer to handle their own logistics.

To handle their own paperwork, and so you either provide a paperwork function at a rate that you've quoted them or they provide it all and they handle it?

That's correct.

Got you. Your inventories are up, obviously, for I'm sure lots of good business reasons. Where do you want them to be?

They're up a little bit more than we would have preferred and they actually peaked in December and have come down about 10% since then. But that's not all reflected in the fourth quarter results. And I think we still have probably another 10% to 15% that we can reduce.

And some of that inventory is now positioned offshore. How many different places or pools of inventory do you have?

We have inventory at warehouse locations attached to our four largest plants in China. And then we have warehousing here in Virginia to handle people that order one at a time out of our warehouses.

So you're thinking about a $50 million inventory is where you'd like to be?

Probably from the end of the fourth quarter we're probably looking at a little bit less than that. I would say maybe in the $47-ish million range.

And you'd like to be there by when?

We think we can be there by probably June.

Okay. And my last question is more philosophical. The industry as a whole gets buffeted by these freight rate changes over which nobody has control in the industry because of supply and demand of containers and issues between Asia and their demand. Philosophically, how do you as a company plan for that? Or is it just something that you're going to constantly get whipsawed by depending on demand of containers and the shipping companies' whims?

I agree it's largely out of our control. We do try to forecast. We're working with multiple shipping lines and freight forwarders so I think we do have competition. But I think there's a lot of, I don't know what's the proper way to say it, but I think there's a lot of coordination between the shipping lines as they--

That's not a good way to say it. That's a good way to say it but not sure that's quite what they would like to hear.

Anyhow, we do try to project. We look at what's going on with fuel costs, the price of oil and what we think that will play out in, the fuel bunker surcharge. And we talk with freight carriers and they give us their best guess. And obviously, nobody planned for what happened last year, and it had a very negative impact on our business. But we foresee some inflation in freight costs for the year going forward, the contracts that will renew over the next month. But we're probably looking at 5% to 10%, mostly related to fuel surcharges. And we'll build in a little bit of a cushion as we price product.

So they give you a fuel surcharge as well as rate changes periodically. And I guess they have force majeure, and can do that. What can you do to your customers? I'm old enough to remember price prevailing and issues like that in the industry. You're probably not old enough to remember that.

I'm familiar with surcharges that some of the trucking companies have charged their customers. But we haven't put a surcharge on in the last 10 years that I can remember. Our customers look to us to give them some price stability, and as much as we can we'll do that. And I think when freight rates were down in 2009, we benefited by the freight rates we had factored into our products. And when they hit the highs of the middle of last year, we were negatively impacted.

I agree with all of that. It's the volatility that's, I think, the issue that you try and like to remove from the equation, whether it's a windfall or a terrible excessive charge. It was just a philosophical. I'm not quite sure I know how the industry can do that, but I thank you for at least addressing it.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to Paul Toms, CEO, for any closing remarks.

Okay, really don't have any additional remarks. We appreciate everybody's participation in the call today. Paul Huckfeldt and Alan and myself are available if you have questions going forward. Thanks for participating. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.