Hooker Furnishings Corp (HOFT) 2012 Q2 法說會逐字稿

Greetings ladies and gentlemen and welcome to Hooker Furniture's quarterly investor conference call reporting its operating results for the fiscal second quarter. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Paul Huckfeldt, Vice President of Finance and Accounting and CFO. Mr. Huckfeldt, you may begin.

Thank you, Ben. Good morning and welcome to our quarterly call to review the results of our fiscal 2012 second quarter which ended on July 31, 2011. We appreciate your participation this morning. Joining me today are Paul Toms, our Chairman and CEO and Alan Cole, President of Hooker Furniture. 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 filings and in the press release announcing our second quarter 2012 results. Any forward-looking statement speaks only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

On Tuesday, we reported net sales of over $55 million for the fiscal 2012 second quarter, which represents an increase of over $2 million, compared to net sales of around $53 million in the comparable period last year. That makes the fifth consecutive quarter of year-over-year sales growth for Hooker Furniture. Net income for the quarter increased $468,000, to slightly over $1.6 million from $1.2 million last year. Lower selling and administrative expenses drove the increase in income primarily due to lower bad debt expense, lower salary expense due to a realignment in our Officer group, and lower depreciation and amortization expense. These cost savings were partially offset by increased product discounting due to a focused effort to reduce our overstock inventory and to higher sales, returns and allowances. Now Paul Toms will comment a little further on our second quarter results.

Thanks Paul and good morning everybody. We are quite pleased with the sustained trend line of growth we have achieved in our Company for the last 5 quarters. Prior to experiencing a slight sales dip in July, we posted 15 consecutive months of increased sales year-over-year through June of this year. Given the environment we are operating in and the softer sales we typically experience during the summer months, we are gratified at the sustained increases, even though that the growth pace moderated compared to last quarter's double digits sales gain. Business has definitely been more challenging since April, yet we have continued to post positive comps in 2 of our 3 businesses. Hooker Casegoods, and Sam Moore Fabric Upholstery. We believe our efforts to reposition and update these product lines have paid dividends in the form of market share gains and new retail floor placements.

Casegoods, which represent approximately 70% of our total revenues, and all of our operating profit, are recovering from a significant loss of volume experienced during the recession, are growing at a rate well above industry average. Our product line is prospering through fresh designs in our Melange Accent collection, strong Whole Home collections like Sanctuary and Abbott Place and continued leadership position in the home office and home entertainment categories. We are especially pleased at both our international sales and sales of youth furniture, at more than double this year, although both of these businesses still represent a relatively small portion of our total revenues. Sam Moore Fabric Upholstery also has shown consistent improvement with positive comparisons to a year ago in both sales and reduced operating losses during the second quarter. At Bradington-Young, our Leather division, we have struggled with a combination of reduced demand for Leather and motion furniture and significant increases in raw materials costs. In spite of both, we were able to reduce operating losses in that division as well. Alan Cole will comment in more detail about both Sam Moore and Bradington-Young later in the call.

In regards to our profitability performance this quarter, discounting continued to impact profit margins. Discounting remained heavier than usual through most of the quarter, but moderated slightly towards the end of the quarter. While we expect discounting to be heavier in the third quarter compared to the prior year period, it should have diminishing impact compared to the first and second quarters of this fiscal year. We believe the worst of the discounting is behind us, and that we should work through most of our excess inventory by the end of this fiscal year. We also believe we have turned the corner this quarter by shipping the last of our inventory that reflected higher freight cost experienced in the second half of last year. Profits this quarter were adversely impacted by both quality-related and healthcare costs that continued to remain elevated over both prior years and expected amounts. Although they also moderated slightly in July. For the first half of fiscal 2012, returns and allowances rose to 2.1% from 1.6% of gross sales. In response to this increased cost, we have exited the Chinese factory that was our worst performing supplier in terms of quality, and shipped up our quality auditing process at our other Asian supplier's operations.

For the near term we expect our margins may also be negatively impacted by higher prices for imported goods from Asia, primarily due to wage inflation in China and the strengthening Chinese currency, and higher prices on raw materials used in Domestic Upholstery manufacturing such as Leather hides, petroleum-based products and commodities such as cotton and steel. We have recently implemented price increases to our customers to mitigate the effects of these increased costs. As we head into the historically strong fall selling season, we believe we are well positioned to take full advantage of any up-tick in retail business. We are in stock on our best sellers and the products we introduce to enthusiastic dealer reception at the April, Spring High Point Market are now in the pipeline. As we enter the early part of the second half of our fiscal year, demand has remained relatively strong versus last year, particularly in Casegoods. Consolidated incoming orders are up over 9% year-to-date.

Casegoods incoming orders were up approximately 12% in the second quarter compared to the prior year. Although our domestic Upholstery sales led the Company's recovery last year, recovery in our Upholstery division has slowed somewhat due to a softening of demand. Year-to-date incoming orders for Upholstery are down just over 2%. For the second quarter Upholstery orders were down over 12%. However, there is a divergence between Leather and Fabric demand, with Fabric Upholstery comps still positive for both the year and the quarter. At this time I would like to call on Alan Cole, our President of Hooker Furniture to give more details about both the progress we are making and the challenges we are facing in our Upholstery division.

Thank you, Paul, and good morning to everyone. As Paul alluded earlier, Sam Moore's comparisons to a year ago were positive in both sales and reduced operating losses during the second quarter. In fact, Sam Moore sales grew in the low double digits for both the second quarter and the entire first half, which we think is pretty outstanding, considering the business environment and the seasonal slow down that typically occurs during the summer months. As Paul said, Sam Moore's made a lot of progress recently in reducing operating losses and was actually profitable in May and June. As expected we reported a loss in July due to the factory's vacation week in conjunction with July 4. The remerchandising and strengthening of our core assortment of Decorative Chairs at Sam Moore along with incremental sales growth from new modular seating and Fabric Reclining Chair product lines have helped us achieve this good, steady growth trend at Sam Moore. And while profitability is not yet at the level we desire or we believe to be achievable at Sam Moore, it is trending in the right direction.

Operationally, we have made considerable strides in integrating our product development and manufacturing processes, simplifying our production and finding ways to operate more efficiently at our current sales levels. We believe that this combination of healthy growth and operational efficiencies will keep us on solid ground and trending upward for the foreseeable future at Sam Moore. At Bradington-Young, our Leather Company, we have struggled with many of the challenges facing the Leather Upholstery category in general over the last 9 months. During that time period we have seen Leather raw material costs spiral upward dramatically with multiple price increases as high as 15% to 20% in each occasion. In recent months we have also seen a shift in consumer demand towards Fabric Upholstery versus Leather and Stationary Upholstery and Stationary Upholstery versus Reclining Chairs as consumers gravitated towards more moderately priced goods. Our upper end domestically produced Reclining Chair line has taken the biggest hit and we have seen a drop in shipments in the 20% to 25% range in this portion of our product line.

Our domestically produced Stationary Leather Upholstery line on the other hand has held up relatively well with shipments down only about 3% and orders actually up 4% year-to-date. Also performing well is our lower priced Seven Seas Imported Leather seating line. Shipments were up 14% in Imported Leather for the first half of our fiscal year. While we consider this solid growth and are encouraged by the continued strength of our Imported product line, I do want to point out that the rate of growth has decelerated from the 25% to 30% growth range we were experiencing a year ago. Now we realize that moderation in growth is to be expected when you cycle year-over-year and we are pleased that Seven Seas line has remained profitable although operating profits were down somewhat for the first half compared to a year ago due to additional discounting to move excess inventory. With our domestically produced Bradington-Young product line we are seeing some positive impact on margins now from the changes we made in the fourth quarter of last year and the first quarter of this year. These changes included the consolidation of our manufacturing operations in Hickory, North Carolina a modest work force reduction and realignment of our Executive Management team.

We were approaching break-even levels in the second quarter, however our greatest concern for maintaining that break-even level is the noticeable drop off in orders we saw during August. Usually, August is a month of improving orders when compared to May through July. But this August, orders are running below last year at both Bradington-Young and Sam Moore. Achieving break-even performance for our Bradington-Young domestically produced line is contingent upon maintaining shipment levels of the first half and further reducing costs. Right now our hope is that we will experience the seasonal up-tick in furniture sales that typically occurs after Labor Day. We are well positioned for such an up-tick at both Bradington-Young and Sam Moore as we already have in place fresh, new products that we introduced at the Spring High Point Market at retail. We have good floor placements and exposures for both lines as we head into the fall selling season. Now I would like to call on Paul Huckfeldt to discuss factors that drove our sales and earnings performance this quarter.

Thanks Alan. Consolidated unit volume increased over 6% as all divisions showed increased volume compared to the prior year quarter. Casegoods led the way showing an almost 8% increase in unit volume. In the Upholstery divisions, unit volume increased for Leather Upholstery by about 2.5% and a little over 3.5% for Upholstered Fabric seat. Overall average selling prices decreased about 1% during the second quarter, compared to the prior year quarter, primarily due to increased product discounting. Casegoods average selling prices decreased slightly as did Upholstered Leather furniture as a result of higher discounting to dispose of our slower moving inventory. Fabric Upholstered furniture posted a modest increase in average selling price for the quarter, due to price increases implemented during the fiscal 2011 fourth quarter and the 2012 first quarter.

Gross profit margin for the quarter decreased to 21.9% of net sales, compared to almost 22.5% a year ago. Gross margins for our Casegoods divisions declined to about 25% in the second quarter compared to roughly 27% in the prior year quarter, primarily due to higher discounting and higher returns and allowances. Gross profit percentage for Upholstered furniture increased to 16.5% from just under 14% in the prior year second quarter as a result of cost reduction initiatives, selling price increases and the increasing volume of higher margin Imported products. Our selling and administrative expenses decreased both in absolute dollars and as a percentage of net sales. Selling and administrative expenses were $9.7 million in the 2012 second quarter compared to $10.4 million in the previous year quarter. And as a percent of sales decreased from nearly 19.5% to slightly less than 17.5% for the 2012 second quarter.

The decrease in spending was due principally to lower bad debt expense as we adjusted our AR reserves to reflect favorable collection trends. Lower salary expense due to realignment in our Officer group, lower depreciation and amortization expense primarily due to increased information system spending on legacy system as we prepare to migrate to a new ERP system. Decreases were partially offset by higher sales commission on higher volumes and higher advertising supplies expense to support our sales growth. The net decrease in selling and administrative expenses in spending and we also leveraged our selling and administrative costs over increased sales, which contributed to the lower percent of net sales. We saw operating margin increase somewhat in the second quarter compared to the same quarter a year ago. The improvement mainly reflects lower selling and administrative expenses and to a lesser extent increase in sales volume, which helped offset the impact of cost increases and higher discounting. Operating margin for our Casegoods division increased slightly for the quarter and Upholstery operating margins improved as well but remained [negative].

Our balance sheet remains strong and continues to help cushion us from the impact of the difficult sales environment and lower profitability. At quarter end we had cash and cash equivalents of over $30 million, up almost $14 million from year end. We remain debt free and have over $13 million available on our revolving line of credit, which remains in place until July of 2013. We also have about $15.5 million available to borrow against the cash surrender value of the Company-owned life insurance if needed. Our efforts to bring inventories to more appropriate levels have reduced inventory by over $15 million since the end of fiscal 2011 without adversely impacting our ability to service our customers. We continue to maintain our quarterly dividend at $0.10 a share thanks to our cash position and our belief that our product and business model position us to take advantage of economic recovery as it develops. Now I'll turn the discussion back to Paul Toms for his outlook.

Right, thank you, Paul. We expect the fall to be better than the summer. We believe we are in for a prolonged period of economic challenges. The issues currently impacting consumer confidence, such as stock market volatility, continuing depressed real estate values, a sluggish economy, and ongoing high unemployment are not likely to be quickly resolved. However, I'm confident we have the right business model, the right product line, the right people, and the right distribution to be as successful as possible, given this environment. While we know we are in for tough times, we expect to do better than most, and I'm bullish on our overall prospects versus the industry prospects. That concludes our formal remarks. At this time I'll turn the call back over to our operator, Ben. Thank you.

(Operator Instructions) Matt McCall, BB&T.

This is actually Jack [Stimac] filling in for Matt today. So kind of going to the demand commentary you had with Upholstered furniture actually seeing a decline in orders in August. How confident are you in that with the overall business you'll be able to see kind of normal seasonality in Q3? Is the slow down affecting Casegoods and Upholstered furniture or is it primarily just Upholstered furniture so far?

I'll tell you what I'll take the Casegoods part and maybe let Alan speak to both demand at Sam Moore and Bradington-Young. Because I think, it's really different for each one of the 3 divisions. But in Casegoods, we have seen a slow down in demand. It is still ahead of last year. But where we were seeing increases -- double digit increases in demand through the first quarter and the end of last year and the fourth quarter of fiscal year 2011 for us. Those comparisons have dropped down maybe into the mid-single digits recently. It just seems from talking with our retailers that, that is a reflection of what they are seeing across the country. We have pockets maybe that are doing better, but generally I think business has been very challenging since the spring -- April for us and I think for most of our customers and I don't think anything has happened in the summer that would have improved consumer confidence at all. To the contrary, I think things seem to be getting worse and consumer confidence reflects that and our incoming order rates do as well.

Insofar as Upholstery is concerned, it is similar to what Paul just expressed, except in the case of Bradington-Young. And specifically Bradington-Young Domestic. But all 3, we have seen ordered decreases across all 3 categories for us. Those 3 categories for us are the Seven Seas Imported Leather line. Sam Moore Decorative Chairs and Fabric products, and Bradington-Young Domestic Leather. The Seven Seas Imported Leather line, we expect, will probably fare okay in the fall, with the possibility being that our increases continue to decelerate because we grew so fast last year. But it's priced toward the middle of the market where we think is a good place to be. Sam Moore Fabric Upholstery has great placements. We have fortunately been operating from a good backlog position there but our backlogs now need to be built back from what we hopefully will see as an up-tick.

The Bradington-Young Domestic Leather, frankly we are concerned about, we think we'll continue to see decreases in demand there year-over-year. And we are looking at further possible moves we can make to continue to match our cost of operating to what our sales level is. So, and let me summarize it all by saying Labor Day, I have heard several reports already that Labor Day was very good. But if it follows some of the trends we have seen in the past, we'll see a spike because of the heavy retailer promotions over a holiday like Labor Day. The question is, will that demand continue to be at a higher level? Or will it be just a spike? And then we'll see a return to lower levels? So that we don't know at this point Jack.

Okay that is helpful. Thank you. I guess from a margin perspective, kind of trying to put everything together. So the incremental discounting this quarter was about $800,000 versus $2.5 million last quarter so that kind of follows the scheme of things getting better. You said it is going to get a little better next quarter and then I think freight -- the incremental impact was $2 million last quarter, what was that impact this quarter?

I don't have the exact number, but I would say probably $500,000 or $600,000.

So that should essentially get better as well. So, I guess kind of putting it all together, maybe layering in some higher Import costs from China. But further reduction and price discounting less freight expense, how should we look at margins going into next quarter? What is kind of the net effect of all the puts and takes there?

I would expect that our margins would continue to improve over what we've seen the last couple of quarters. I think the reason -- freight was a huge impact late last year and first quarter this year, less of an impact this quarter. But I think that freight rates are pretty stable. They are actually a little bit less than what we had costed into our products right now. I think the inventory we are holding, we don't have unfavorable freight variances in much of that inventory. So freight will be either no factor or maybe a little bit of a bump in profitability. Discounting, we still have a fair amount of excess inventory. But I think the largest amounts that we have by group we have moved through. The products that we are going to have to take the biggest discounts on we have already flushed out of the system. So I think -- we continue to work at it, but it will have as we said less of an impact each quarter going forward than it has had. And I think we have got better controls in place and better communication between our marketing folks and our operations folks so that hopefully we don't end up with that much excess inventory going forward.

So I feel like the discounts will have a diminishing negative impact on our business as well. I guess the unknowns are healthcare, that's not totally out of our control, but in some ways it is. So who knows what that's going to do? We have kind of seen a little bit of a moderation in healthcare costs over the last several months and we hope that, that will continue. And then quality I think we are doing the right things in quality. We are aligned with the best factories and we've got procedures in place to audit products. We had an unusually good year last year. With our quality experience and we've trimmed costs by almost $1 million. This year it's kind of back more towards historical levels and so I don't know if the aberration was last year or this year but we are seeing some increased costs over what we experienced last year.

Also on the pricing, we are seeing increases although I think Alan can confirm this. But I think Leather has moderated a little bit recently. We have also implemented price increases to our customers. I know on the Casegoods side it was July 1, I think was our date. And then maybe a little bit earlier than that in the Upholstery division. So I believe that with relatively small backlogs, the effect of our price increases to our customers should be fairly short. It shouldn't be very long before we feel that. So hopefully that will have a positive impact as well.

What was the magnitude of those price increases?

For Casegoods, across our entire line, it probably averaged 5% or 6%. Upholstery, we actually took maybe a couple of increases of smaller magnitude.

We did and it was smaller magnitude in the Fabric Upholstery area at Sam Moore. Probably maybe to the tune of 4% to 5%. At Bradington-Young it was more significant because of the magnitude of the Leather increases, it was probably 8% at Bradington-Young. We think that's overall in the -- particularly in the upper end Leather business that, that has had some impact. When you go to the marketplace where the consumers look for extreme value.

Okay and if I can ask one more quick one. From a liquidity standpoint, you guys have as much cash you have had in over a year. You've got available, about -- call it $60 million between the available end revolver and the cash value you can borrow against from the insurance policy, so what kind of -- what amount of liquidity are you looking to maintain? And maybe what is the outlook for uses of the cash you have on your balance sheet now?

Well you are right. We are in a very strong financial position and really since the fall of 2008 we've felt that a strong balance sheet is probably as important as the income statement. We have continued to pay a dividend that pretty much equals all of our earnings through this downturn. We haven't cut the dividend. I think the yield now is almost 4% against the price of the stock. At this point we are just kind of keeping our powder dry. We have probably got some excess cash, but no -- like to have it if opportunities arose. And I think until we can generate more cash from operations, than we have the last few years, we are going to sit on the cash just a little bit. And have it if things were to deteriorate further in the economy from where they are now, I think it would help us. We don't have any other immediate needs. We discuss routinely, at our Board meetings, what is the proper amount of cash and consider share repurchases and things like that. But I think at this point, we are just going to kind of hold tight.

Todd Schwartzman, Sidoti & Company.

On inventory, what is the appropriate level to maintain for the back half of the year?

I think we are about there, Todd. We probably could flush out some more of the slower selling excess inventories and replenish with some of the new products that we are introducing. And we had really good placements in April on about 3 different major Casegoods collections, and will want to build inventory on those as we see how they are retailed. But I think in total, inventories are about at the appropriate level.

Okay. On the Casegoods side, is there -- have you seen any evidence of the consumer migrating from the Hooker brand to, in particular your own Envision?

Actually not. Even in the downturn the products that perform best for us, were at the Hooker price points. Not so much -- Envision we placed really well. I can't say that Envision in general retail does well as some of our higher price points like Sanctuary, which is really positioned at the best part of our lines. So I think although we are interested in trying to expand the breadth of our line and attract the younger consumer and the slightly less affluent consumer, the products that seem to retail best at this point are the things that are great looks, still good value but at higher price points. We are in the process of refreshing Envision, we have moved away from the factory in China where we had some quality problems and produced a lot of our Envision product and we have now moved into several other factories in Vietnam and bringing 3 new Envision groups to market. Next week pre-market and High Point and then the larger fall market in October.

So stripping out the quality issues, I know there is a collection or two, recent collections that didn't perform up to your expectations at Envision. If you were to normalize for all of that, Hooker is still performing better?

Yes, although, we are hopeful that with better sourcing, a little bit sharper price points, and better design, that we can grow Envision again. We believe that's a viable segment of the market for us. Our retailers have been willing to support us, but to date, we haven't had that many groups that really performed well at retail. Overall, we believe that Envision's important and we can continue to grow Hooker as well and even in a down economy we have done a really good job of maintaining our market share and our volume in home office and home entertainment. People have moved towards smaller ticket purchases like buying a console entertainment center versus a large pocket door entertainment center or a wall system and in home office we may be selling them smaller desks and not as many complimentary pieces but in total we have been able to maintain the size of those businesses.

Paul that guidance -- margin guidance for the next couple of quarters was helpful. Thank you for that. Did you quantify your expectations for freight costs in the back half of the year?

I think we believe freight is going to hold fairly stable. Right now, we are seeing great rates that are a little bit less than what we built into our cost and probably $1,000 less per container than what we saw last fall. So based on all of our conversations with different steamship lines and freight forwarders, we feel like things will be pretty stable through the end of the year.

It looks like surcharges are either not sticking or only sticking partially, which suggests that supply and demand is maybe leaning a little bit more to the -- little bit more to our favor at this point. But it is pretty volatile, too.

Understood. On the Upholstery side, what are B-Y's plans, if any? I realize you are reviewing that operation constantly. But what are the plans for the B-Y to offer Upholstery -- Fabric Upholstered offerings?

Well, that is definitely a consideration. Because we see what we think is some fundamental shift in the marketplace, as far as demand patterns. And we have always had a belief that Fabric Upholstery should be a part of our broader collections, particularly at the Hooker level and we have actually introduced a number of Upholstered groups, most of which we've Imported. And what we have found, Todd, is that we are getting more demand for groups that can be special ordered in a variety of Fabrics which obviously implies Domestic production. So I can't say that we have completely planned exactly how we would go forward on that, but that certainly is -- if this shift in Leather demand is a longer-term issue, which it possibly could be. Then we've got to pay attention to that and adjust to that. So that would imply, at least, that Fabric Upholstery should be a bigger part of our thought process going forward.

Alan, do you think the Bradington-Young brand has the value for you to successfully pull that off?

It has some value, Todd. I think in the end result the product has got to be right. And it's got to be priced and position appropriately for what we would consider to be the mid, upper middle market. And then if it is Bradington-Young or if we would call it Hooker, I believe the product would be successful. So Bradington-Young helps, but Bradington-Young is such a specific name associated with Leather, I'm not so sure that it would necessarily swing the balance in Fabric Upholstery to make it successful by and large.

I think the other thing worth pointing out is that we do have merchandising talent already in the Company that has a lot of background in Fabric Upholstery, both Mike Delgatti and Alan and a lady named Sandy Teague that's involved in our merchandising, all have strong Upholstery, Fabric Upholstery backgrounds. And we have got, I think 2 really nice facilities in Hickory, both the manufacturing location and our corporate offices but also some space that we use for product development, and warehousing. And Hickory obviously is a great labor market for Upholstery.

Got it. Just to lend my two cents if I may, I realize the macro situation is what it is. And your dividend certainly is nice. Very solid, at this point. With the stock continuing to languish, 20%, 25% potentially plus below tangible book value, I think a share buy back would be nice to see.

We'll certainly weigh that into our thinking.

(Operator instructions) Thank you, I would like to now turn the call back over to Management for any closing remarks.

Okay, we really don't have any additional remarks to make at this time. But we appreciate everybody joining us for the call and we'll look forward to the call about 3 months from now to hopefully report good results for the third quarter. Thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.