Hooker Furnishings Corp (HOFT) 2012 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Hooker Furniture's' fiscal year 2012 first quarter conference call, reporting its operating results for January 31, 2011 through May 1, 2011. 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 Accounting and CFO. Mr. Huckfeldt, you may begin.

Thank you, Mary. Good morning and welcome to our quarterly conference call to review sales and earnings for our fiscal 2012 first quarter, which ended on May 1, 2011. We certainly appreciate your participation this morning. Joining me today is Paul Toms, our Chairman, President and CEO; and Alan Cole, President 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 2012 first-quarter results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update, revise any forward-looking statement to reflect events or circumstances after today's call.

On Monday, we reported improved year over year net sales of just over $58 million for the fiscal first quarter. Our net sales for the quarter increased $7 million, or about 14%, over the same period last year, which is the fourth consecutive quarter we have grown sales in year-over-year comparison. Net income for the quarter declined about $0.5 million to $523,000, from $1.1 million last year. Major factors in this decline are decreased -- increased product discounting, which we have undertaken in order to reduce slow-moving inventory. The continuing impact of higher freight costs on our imported case goods inventory that was shipped during the quarter, higher returns and allowances, and increased healthcare costs. Now, I will ask Paul Toms to comment on the results.

Thanks, Paul and good morning, everyone. We were pleased to build on the positive sales comps for the previous 3 quarters, and reported double-digit revenue gain for the Company in the first quarter of this fiscal year. Case goods unit volume led the way with nearly a 26% increase, which was particularly gratifying. Over the past 6 months, we have begun to see the kind of solid, significant growth in our case goods business that is vital for achieving the high profitability performance goals we have set for ourselves.

The strong sales gains this quarter are somewhat tempered by the fact that we are comparing to a quarter last year when shipments were stifled by production and shipping bottlenecks out of Asia. However, we are also seeing increased demand in virtually every wood and upholstered product category, with consolidated orders up almost 14%, and healthy backlogs heading into a traditionally slow time of year for our industry. We believe our strategic effort to strengthen our partnerships with the healthiest retailers, expand our customer base, and refresh our product line is reaping dividends.

We've been able to capitalize on successful product launches over the last several years by delivering in a timely manner and getting good sell-through on most of the new product at retail. The Melange Accent Collection, which we introduced over a year ago, has reinvigorated our accent furniture business and helped re-establish our leadership in this competitive accent furniture category. In addition to gaining strength in this important item business, we've also grown our complete home collections business at the same time.

In addition, our [cross stock] warehouse program, which allows smaller retailers the price advantage of ordering container loads of furniture mixed from several different factories, also began to contribute to the top line this quarter. We're finding that this program is allowing us to expand our container direct business to a new tier of retailers, and is a value-added benefit for these customers.

Given the sales growth we had for the quarter, we are disappointed in our ability to generate higher profits. Our decreased profitability was the result of an unfortunate combination of several factors, most notably the product discounting Paul Huckfeldt mentioned earlier. Other aspects that converged to subdue profits included higher freight costs on imported inventory, both case goods and upholstery, that was shipped during the quarter compared to the prior year; continuing but smaller operating losses into domestically produced upholstery; higher returns and allowances expense; and elevated healthcare costs.

While we believe most of these factors are short-term in their impact, we expect the discounting to impact profitability over the next 2 quarters. We're moving a lot of slow-selling excess inventory, but still have additional work to do. It's difficult to say how much of a factor the discounting will be going forward. Due to other unknown variables, such as retail demand and the amount of full price furniture, we will be able to ship to offset the discounting of slower selling items.

In regards to the smaller operating losses in upholstery, we are making progress through the consolidation of Bradington-Young's manufacturing operations, management realignment, and other right sizing to match cost structure to demand. While the achievement of break-even levels in our upholstery division has been slower than except expected, we believe that the steps we've taken over the last several months, along with healthy orders and backlogs will help us get our upholstery companies back on the right track. At this time, I would like to call on Alan Cole, our President of Hooker Furniture Upholstery to elaborate.

Thank you, Paul, and good morning. As Paul suggested, the most recent quarter was an important transitional period for the upholstery division and especially for Bradington-Young. Once we completed the physical consolidation of Bradington-Young's manufacturing and distribution operations early in the quarter, it became apparent that we needed to further match our capacity and our cost structure with demand. Consequently, we implemented an executive-level reorganization, eliminating 2 officer positions during early May. More recently, in fact this week, we eliminated an additional 20 manufacturing positions, all of which is intended to improve our cost position.

Now that we've taken these difficult but necessary steps, we believe that Bradington-Young is positioned where we need it to be for optimum profitability performance. We believe the Company is in the right place from an employee count perspective, from an efficiency standpoint, as we improve, and in the alignment of our capacity with the anticipated demand in all the critical measures for profitability performance.

That being said, it's important to note that the upcoming summer months, particularly in the leather business, present a temporary seasonal challenge from a sales and order momentum standpoint. However, as we look out into the future, we are confident the Company's current operating position is a good match for the business that we anticipate this fall and beyond.

As Paul alluded to, our backlogs at Bradington-Young are healthy, with our domestic backlog up 16% at the end of the quarter, over the same period a year ago, and our import backlog was up 42% over last year. Even though our import shipments for the first-quarter were up 24%, we still fell behind the order pace, resulting in a larger backlog.

One of the reasons we fell behind on shipments was the ramp-up of our consolidated manufacturing operations in Hickory. We believe we have largely worked through these delays. Another factor was some significant shortfalls on the import supply side, as worldwide demand for leather is currently outpacing supply, particularly for leather hides. Unfortunately, this supply shortage is also causing significant hikes in leather prices, as much as 20% and more in some cases. As a result, Bradington-Young has had to raise its dealer prices, as have most other in leather upholstery. These high price increases may continue over the months ahead.

Overall, demand a solid for Bradington-Young domestic products and quite strong for imported products for the foreseeable future.

At Sam Moore, the picture was brighter during the quarter, with orders up over 6.5% and shipments up almost 10%. We believe this is a great indicator of many things coming together in a positive manner at Sam Moore. In addition, our backlog was up approximately 26% as of the end of the first quarter. At Sam Moore, we are seeing the fruits of a lot of hard work that's going on, both in operation and with product development and merchandising. We continue to realize strong incremental sales from our accommodations modular program and the strengthening of our Sam Moore moderately priced fabric recliner program. After the modest growth we have seen at Sam Moore for the last year, the more significant growth we are now seeing puts us on track for financial profitability for the near and the long-term.

Thank you, Alan. At this point I would like to call Paul Huckfeldt back to discuss factors that drove our sales and earnings performance for the quarter.

Thanks, Paul. Quarterly results were driven by several factors. I will review them by income statement line item. Sales volume increased due to significantly higher incoming order levels compared to last year, especially in our case goods division, which drove unit volume increases that more than offset the effects of higher discounting on net sales.

Consolidated unit volume increased nearly 20% with all divisions showing increased volume compared to the prior year quarter. Case goods led the way with a 26% increase in unit volume. In the upholstery division, unit volume increased for leather upholstery about 4% and 7% for fabric upholstery. That was tempered by average selling prices decreasing about 4% during the quarter compared to last year, due primarily to discounting.

Case goods average selling prices decreased slightly, as did upholstery leather, as a result of the discounting on slow-moving portions of our inventory. Fabric upholstery furniture posted a small increase in average selling price for the quarter, due to price increases implemented late last year. Margin lines, the margin for the quarter decreased to 18.9% of net sales, compared to 23% a year ago, due to discounting we mentioned, as well as higher cost of goods sold due to the lingering effects of high freight costs way last year, compared to comparably low freight costs in the prior-year quarter. To a lesser degree, we also face higher returns and allowances this year compared to very low returns and allowances the same quarter last year. Margins in domestic upholstery remain essentially flat compared to the prior-year quarter, while imported upholstery faced some of the same discounting and elevated shipping costs that our case goods division faced.

Selling and administrative expenses are about $200,000 higher than the prior-year quarter, but they declined as a percentage of net sales from nearly 20% to slightly less than 18%. The absolute increase in spending was driven by higher commissions on the higher sales and higher health insurance costs. And also related to our quality issues, we increased donations to certain qualified charities to move additional inventory. The increases were partially offset by reductions in salary expense by realignment in our officer group, a gain on Company-owned life insurance policy and adjustments to some bonus accruals for long-term performance grants. All these factors together contributed to an operating margin decline for the first quarter, compared to the same quarter a year ago, most of which was in our case goods division.

On the balance sheet side, our balance sheet remains strong and continues to help cushion us from the impact of challenges like this to our profitability. We made progress in right-sizing our inventory, which is now $49.4 million, down from $57 million at year-end, and continue to improve our inventory position with some discounting related to that, as Paul mentioned earlier. At quarter end, we had cash of $20 million up about $3.5 million from year-end, thanks to the inventory reductions, even with the higher accounts receivable based on our increased sales. And I point out that we remain debt free, and we have $13 million available unused on our revolving line of credit, which remains in place until July 3, 2013. We have continued to maintain our quarterly dividend, which we announced yesterday at $0.10 per share per quarter thanks to the strong cash position and our long-term belief in our business model. Now I will turn the discussion back to Paul to comment on the outlook.

Thank you, Paul. Since early April, business has slowed for most of our retail customers. Recent negative news on housing, employment, and consumer confidence gives us reason for concern as we enter a traditionally weak season for furniture purchases. Having said that, we have seen relatively strong orders since November. While business isn't robust, we are holding our own and faring better than retail in general.

As I mentioned earlier, we expect margins to be impacted through the fiscal 2012 third-quarter by additional discounting as we rationalize our product line and work to ship excess inventory. As we move out of the excess inventory, we remain focused on improving our inventory management with better demand planning to maintain and even improve our current service levels. Our greatest opportunity for improving profitability is improved efficiency in all areas of our business. Additionally, we expect inflation on imported goods from China over the remainder of the fiscal year, which we believe will be mitigated by price increases to our customers. We are encouraged by our current sales momentum, and expect to grow through continued market share gains, even if the environment remains less than optimum. That concludes our formal remarks at this point, I will turn the call back over to Mary, our operator for questions. Thank you.

(Operator Instructions). Matt McCall from BB&T Capital Markets.

Thanks. Good morning, everybody.

Good morning, Matt.

So talk about the discounting a little bit. You gave some numbers in the Q, and it sounds like it's up pretty dramatically, and you cited it as the first source of pressure. What is the product? When did the issues arise? And you have given an outlook so I won't ask that part.

Matt, the discounting in the first quarter was some on Hooker case goods, a little bit on the -- actually, a significant amount also in our imported leather, Seven Seas and then Envision products. I think in the second quarter, it's probably more of the same, but probably a little less on the Hooker portion of our line, and maybe a little bit more weighted towards Envision.

We have couple of Envision groups that we placed extremely well at market, and we ordered aggressively based on those placements. And quite honestly, those groups just didn't perform that well at retail. One of them not well at all, and the other one just much weaker than our expectations. We're looking at lead times, typically of about 5 months, from order to receipt of goods on imported case goods. And so when we do place something well, we tend to order more aggressively to try to maintain service levels once it hits retail floors. And on those groups, we got surprised with the lack of retail activity.

And was this pretty consistent throughout the quarter? Did it show up late? I'm trying to do the math with that 5 months. So, I guess it was last fall's market you are talking about. Did you start to see the weakness and understand that you had to discount early in the quarter? Was it late in the quarter that it showed up? How did it progress?

I would say it's probably mid-quarter, but I think it's also, on our part, just taking an attitude that we are going to be more aggressive in moving excess inventory. I think traditionally, we have maybe discounted a little less and been willing to sit with it a little bit longer to move it. And we made a conscious decision that we were going to be more aggressive. And in couple of instances we have been able to move all of the group, every stick of it, to a single customer, but at a higher discount than we would have typically taken in the past to move portions of a collection. But then you get to the end of trying to close out something, and your hung with pieces that literally have no value.

So we made the decision that we would take a bigger hit, but get it all out of the system, and get it out at once. And I think long-term it really is -- there's not much difference in the impact, but it just comes all at one time. So we've done that. And just trying to reduce our inventory levels to become more efficient in the way we turn our inventories, and also try to eliminate some of the cost of excess inventory with a warehousing footprint and personal and all that.

Okay, and on the retail commentary, Paul, I'm trying to reconcile some of the comments we got out of market from basically every competitor or company we've met with, and then the comments even around the April quarter. It seems like the retail trends were a little bit of a better, definitely, the retailer commentary appeared a little bit healthier at market. I'm trying to reconcile the trends you apparently started to see in, I think you said early mid-April in the commentary that it seemed like was coming out of market from those same retailers. Can you talk about what caused that divergence?

At market, and I may have said this to you, if not, I certainly said it to plenty of other people. We didn't have a single retailer come in complaining about business. Some people it was okay, others it was very good. But nobody really was complaining about business, which is unusual over the last 2 or 3 years. I think coming into market, things were pretty good. I can say from really mid-April up Memorial Day, I haven't heard very much positive about business. I think business slowed down pretty significantly for most retailers.

I was out a couple of times traveling, and people were having a tough April. A lot of times they do, and I don't know if that's tied to taxes or what. But it just seems like business turned down pretty significantly for most of our customers in April and stayed challenging in May.

I read some reports in our trade magazine that indicated Memorial Day was pretty good, but most of the people that commented in the article said that business hadn't been that strong leading into Memorial Day. Given all the news that's out there right now, I feel like the summer is going to be challenging for most furniture retailers. We may have business driven around Memorial Day, Fourth of July, and Labor Day, but I just don't see a lot of things that make me believe we are going to be in a strong retail environment for the next couple of months.

Okay, thanks. And this might be for Paul Huckfeldt. Some of the items you called out, higher freight, higher returns and allowances, higher healthcare costs, and some inefficiencies in domestic upholstery, what's the outlook there? You've given the outlook I think in the Q for your discounting pressures, but what about those? I don't know if you want to give them item by item or just directionally in nature on what the pressures going to be as we progress through the year?

We are working our way out of the inventory. We should be at the end of the inventory, the price spike due to freight costs. It was the same timing in both years. In 2009, we had really favorable freight rates that carried through inventory on into the first-quarter the following year. Last year, freight rates spiked about the same amount in the other direction. We had a couple million dollar swing, half of which was the comparison to the favorable, and the other half was the unfavorable from this year. We should be on our way out of those.

Returns and allowances, we would expect will continue to be somewhat higher. We had some quality challenges that we are working through. And again, we had a really low experience in the prior year. So the comp, it's probably half and half, half good comparison or negative comparison to the budget and half negative comparison to the prior year.

Okay.

Healthcare costs, we got hit with a really big spike early in the year. They are still elevated, but they have settled down a little. Healthcare is a really long-term problem to solve. There aren't a lot of short-term actions you can take to resolve that. It's about trying to manage your program and trying to help your employees become as healthy as possible, which is a long-term commitment.

I think those that have settled down. We hope we don't see the spikes we saw early in the year, but our experience has been so far that they are going be elevated from pretty good experience last year. We had a modest health insurance cost increase, so I expect that those are going to be elevated the rest of the year to some degree. We will keep you updated on that.

Okay, and then the final part was the inefficiencies. Upholstery, Alan, it may be more of an Alan question. But it sounds like that is getting better?

It certainly has improved. When we consolidated, we took a position in our consolidation that we were going to consolidate our larger plant into our smaller plant in Hickory. You may recall the logic behind that, because there's a better and a larger labor force available in Hickory. Our Hickory plant was modern and 1 level.

When we consolidated the larger plant into the smaller plant, what we also found was it changed the dynamics in the plant of what you need from a labor standpoint. And our latest elimination of about 20 positions was a pretty major position -- or pretty major elimination in a plant with about 130 some-odd employees. But we found we needed less pushers on pullers, if you will, what we call indirect labor. So we went ahead and made that decision. And we also made the decision we didn't need the executive coverage that we had, so we eliminated 2 major executive positions.

We see going forward, a much better scenario in that now, our production is beginning to settle down and become more efficient. And we've been able to eliminate even more labor than we had initially anticipated. So we feel pretty positive now that we have bridged most of the transitional issues in the first quarter, and feel much more positive about our outlook domestically.

Okay, thank you, all.

Thanks.

(Operator Instructions). Todd Schwartzman from Sidoti & Co.

Hello. Good morning, gentlemen. First on the -- follow-up on Paul Huckfelt's comment, in the first quarter of fiscal 2011, returns and allowances were a lot lower. Obviously, that was a very low volume quarter for you, one of your lowest in quite some time. So, I assume you're talking on a percent of sales basis. If that's the case, what went particularly right for you, in terms of the low allowances last year?

Todd, this is Paul Toms, and I don't know that I can really give you a great answer to that. It's just -- our experience was unusually low last year. And typically, the first quarter, we see costs spike a little bit because it seems like at year-end, our retail customers maybe do a lot of house cleaning and really catch up claims that they maybe have been slow in filing. We didn't see that in the beginning of last year. We definitely have seen it this year. We have had some issues this year too that would've created additional returns and allowances, a couple of quality problems out of one factory in particular in Asia. But I think this year is probably more typical than last year was.

Got it. Can you quantify for us the remaining slow-moving excess inventory?

Well, I think what we've said, and I believe this is in the Q, but if not, that for the first quarter, we had about $2 million in additional discounts for that slow-moving inventory than what we had in our first quarter last year. First quarter last year, if you think about it, we were very low in inventory. We were having problems getting production in, so it makes sense to you would've had less excess and less discounting. But, it was about $2 million additional discounting this year versus first quarter last year. That's probably not too different than what I would expect in the second quarter, and I think the third quarter hopefully less than that. I would say probably pretty comparable to what we saw this quarter.

So, total discounting effect remaining something of the magnitude of $4 million, perhaps a little less?

$4 million for the (multiple speakers)?

In other words, you flush it out by the end of 3Q, correct?

Yes, I think we will always have some, but the excess is probably going to be more significant in the second quarter than it will in the third quarter. I would say the second quarter impact would be probably similar to what the first quarter impact was.

And what is the mix here of case goods versus upholstery?

In the first quarter, probably not too different than our overall business. About one-third would have been, probably a little more skewed towards case goods, actually. We did have some discounting, additional excess inventory in our imported leather in the first quarter. We will have some in the second quarter as well. I would say probably 3 quarters of the impact would be in our case goods division.

That's helpful. What about the mix of discontinued merchandise, close outs? Is that the [line] share?

A mix of what, to regular priced products?

Of the slow-moving merchandise. What portion of that has already been discontinued or is expected to be discontinued?

Probably what has already been discontinued is a relatively smaller portion of that. I would say the bigger portion is product that we have identified to be discontinued, but we haven't discontinued it yet. It is product that we're -- every day we are bringing out 2 to 3 new products. And if we are managing the line, we are dropping about a comparable number. A lot of them we will be able to get out of over the next 6 months with not a lot of discounting, but there is several groups, Envision groups in particular that we just over bought and didn't perform at retail. And those will take a bigger discount to move.

But it's probably just semantics, but we have not classified them as discontinued or inactive yet. They are still on the line. They are still in the catalog. They are still on the price list. But we know we are not going to reorder them, and we know we've got more inventory than we can sell out at a normal price. So we are having to be more aggressive with those groups to move them. But they are not technically discontinued yet.

Okay. And in these next 2 quarters, do expect those particular sales to be concentrated among a very small handful of retailers? Or how many customers in total should we expect?

Actually, we've got a group of retailers that deal in that type of inventory. Some of our good regular customers do, but then there's also people like Tuesday Morning, HomeGoods, Harold Hart in Eastern North Carolina. Their whole business model is buying excess, overstock, or closeout inventory. So we do a pretty good business with those folks, but we also offer it to our existing dealers. And as you enter a time of year like the summer, they are looking for things that they can buy right and promote to drive their business in a slow time of year. So we try to offer it up to our regular customers as well.

Got it. Finally, could you offer an update to your gross margin goals by case goods and upholstery and what the time table might be for those?

I think gross margins were impacted this quarter, obviously by the increased discounting, increased returns and allowances. But typically, our gross margin goals in wood are in the 25%, 26% range, and upholstery would be less than that. Probably low 20%s.

Okay, thank you very much.

Thank you.

Budd Bugatch from Raymond James.

Good morning, Paul Good morning, second Paul. Could you help -- I have read the Q, and I'm trying to make sure I can walk from last year's $11.8 million of gross profit to $11 million this year. I think you've identified something on the order of a $3.8 million worth of decreases, but with the additional volume, what's the offset? And I don't think I saw the quantification of the freight costs in that as well. Can you help me on that?

The swing from last year on freight cost is about $2 million. Again, it's maybe skewed a little bit more towards this year being a little bit higher, but it 60-40ish difference between favorable last year and unfavorable this share.

That would get you down almost $6 million, if I add those numbers up. So you've got to have offsets to that to get you only down $800,000 in gross profit. Is that right, or am I missing something here? Volume, mix, what's the --?

Volume.

I understand, and so is the volume -- you were up $7 million or so in volume. What's the flow through for the additional volume and pricing that you may have taken and mix? The offsets to get you only down $800,000 in gross profit year over year?

Budd, I don't know that we are prepared to answer that today, but I think you have hit on things. We have generated additional gross volume with the 13% increase in sales. But $2 million impact from additional discounting, a $2 million swing from last year to this year related to freight costs. Abnormally low in last year's inventory; I think abnormally high in this year's inventory. Probably about $600,000 in returns and allowances, increased cost over the quarter last year. Healthcare is maybe another $300,000. And then there were some things going the other way. I think we identified a life insurance proceeds and some reversal of compensation costs related to long-term incentives. Those were about $750,000 positive.

Okay, that's helpful. I'm just trying to be able to walk from one to the other, because you're not getting credit, I don't think for the additional volume and that flow through in the conversation so far.

We have had some price increases, but the big quantifiable impacts were some of these negatives that we talked about, and then the few one-time positives that we had.

And mix, did that help at all Paul?

I think when we are skewed more towards case goods right now that helps, because case goods are more profitable than upholstery for us. So, yes.

And we also -- we've leveraged our SG&A costs too, on the higher volume. Pretty significant decline as a percent of net sales.

I see. No question about that. Okay. Very good. Thank you very much.

Thanks, Budd.

Thank you. There are no further questions. I will now turn the conference back over to the speakers for any additional remarks.

We actually don't have any additional remarks. We appreciate everybody's interest and participation today, and we will look forward to delivering a better quarter 3 months from now. Thank you for joining us.

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.