Hooker Furnishings Corp (HOFT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hooker Furniture Corporation third-quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn your conference over to your host for today, CFO Paul Huckfeldt. Sir, you may begin.

Thank you, Ben. Good morning and welcome to our quarterly call to review our results for the 2012 fiscal year third quarter, and the first nine months, both of which ended on October 30, 2011. We appreciate your participation this morning. Joining me today is Paul Toms, our Chairman and CEO, Alan Cole, President of Hooker Furniture, and Michael Delgatti, President of Hooker Upholstery.

During our call, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our results to differ materially from management's expectations is contained in our SEC filings, and in the press release announcing our 2012 third-quarter results. Any forward-looking statements speaks only as of today, and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

Now then, on Tuesday we reported net sales of over $54 million and net income of $2.3 million, or $0.21 a share for the fiscal 2012 third quarter. Sales decreased approximately $1.6 million compared to sales of around $56 million during the third quarter a year ago. This was the first sales decrease we've had after five consecutive quarters of year-over-year sales growth. For the first nine months of the year, net sales still exceed the prior year, up almost 5% year-to-date compared to last year. Net income for the quarter increased by over $1 million to approximately $2.3 million, or $0.21 a share from $1.2 million or $0.11 a share last year. Lower freight costs for imported furniture, as well as lower selling and administrative costs, drove the increase in income. Now, Paul Toms will comment further on our third-quarter results.

Thanks, Paul, and good morning, everybody. While we are disappointed that the year-over-year sales growth achieved in each of the previous five quarters wasn't sustained this quarter. We are pleased at our efficiency in leveraging nearly twice the profits from slightly reduced sales. Year-to-date, net sales trend is still positive, as Paul mentioned. Unit volume for the first nine months is just as favorable, with nearly a 5% increase in consolidated unit sales. Although some of that unit volume came at the cost of higher discounting, which we incurred to clear out some slow-moving imported inventory, case goods unit volume led the way with a 7% increase, Sam Moore achieved slightly over a 5% increase in unit volume year-to-date, and at Bradington-Young, unit shipments of our imported leather seating are up 8.4% year-to-date. Our unit shipments are down about 19%, in our domestically produced leather line.

We believe the strong reception to our new product introductions at both the recent fall High Point market and the spring market in High Point eight months ago, will positively impact shipments during the remainder of our fiscal fourth quarter and into next year. Several of the collections we introduced in April are now on retail floors and showing promise. The major wood and upholstered furniture collection we introduced six weeks ago at October market, Primrose Hill, is already shipping from Asia. Primrose Hill is the pilot collection and the new strategy to target one collection each market for early dealer commitments and early production, and to ship that collection within a couple of months after the market. This is a significant reduction of the time to retail compared to the typical six to seven month time frame between introduction and shipments in the furniture industry. While the fall market was slightly above average for case goods, it was more robust for our Sam Moore fabric upholstery division, with their second-best market in the last four years.

We had another excellent market in our international sales division as well in October, as we achieved placements with retailers and new countries, including Saudi Arabia, Thailand, Barbados, the Cayman Islands, and the Netherlands, which is our first foothold into Europe. So far this fiscal year, we're tracking at almost a 60% year-over-year increase in international sales, exporting to 34 countries. With international revenues now representing approximately 6.5% of our consolidated sales.

As we enter the final quarter of our fiscal year, demand has remained relatively strong, consolidated incoming orders are up approximately 7% year-to-date, with case goods incoming orders up more than 12%, and Sam Moore's incoming orders up nearly 6.5% year-to-date. Bradington-Young's order rate is down 6.9% compared to this time last year. However, their incoming order rate has picked up since the October market. We have healthy backlogs and expect continued year-over-year consolidated sales increases going forward, through both market share gains and slight improvements in consumer demand and business at retail.

Our overall profitability performance this quarter was the best in the last seven quarters. While lower freight costs contributed to our increased profitability, the improvement in our operating profitability by almost 200 basis points to $2.7 million or 5% of net sales, was also driven by slightly lower selling and administrative expenses. Hooker Furniture is a more efficient organization today than in the past several years. We've done an incredible job of bringing down selling and administrative expenses and other costs, which we can control. However, there is still plenty of room for improvement in numerous areas. At this time, I'd like to call on Alan Cole, our President of Hooker Furniture, to discuss the progress in the upholstery division, both this quarter and year-to-date.

Thank you, Paul, and good morning to everyone. As Paul mentioned earlier, there are bright or bright spot at both Sam Moore and Bradington-Young, and let me also interrupt and say I'm sitting at the Greensboro airport, on my way to Asia, so I apologize if there's background noise. Sam Moore really blossomed at the recent market as retailers fully appreciated its transformation from a conservative traditional line to a fashion-forward line with exciting cover to frame marriages. As consumers have responded enthusiastically to Sam Moore product at retail, merchants have shown a willingness to expand their assortments and give us additional floor space.

In addition to the revitalization of the product line as a whole at Sam Moore, we continue to gain incremental business through our newly-developed categories of fabric reclining chairs and modular and sectional seating. The expansion into these new categories, especially modular seating, has positioned Sam Moore as a more complete upholstery resource, moving beyond the limited niche of a chair specialist. As the years progressed, Sam Moore's domestic incoming order rate comparisons have trended up on a consistent basis. For example, incoming orders were up 6.5% year-over-year in the first quarter, 7% in the second quarter, and 11% in the third quarter.

This sustained boost in top-line performance, along with the many cost reduction initiatives we've undertaken, has demonstrated that we can reach our short-term goal to operate at breakeven and generate operating profits, as our sales gains continue to develop. During several months this year we achieved a small profit,, although we've made lots of progress, we're not yet at the level we desire or believe to be achievable at Sam Moore. Operationally, we've made considerable strides in integrating our product development and manufacturing processes, simplifying our production, and finding ways to operate more efficiently. We believe that the combination of sustained growth and operational efficiencies will help us continue to improve profitability for the foreseeable future at Sam Moore.

At Bradington-Young, we have seen a welcome improvement in incoming orders over the last 45 days. Much of the increase can be attributed to a new retail display program we introduced for Bradington-Young domestic products at market, called comfort at home. This program includes educational signage, point-of-purchase materials, preferred shipping, and other incentives to the retailer. Participating dealers dedicate contiguous square footage to the Bradington-Young line for a high-impact store-within-a-store type display. To date, we have orders for over 50 at-home Bradington-Young displays, which has given us a boost through product buy-in, and helped us capture incremental floor space.

In past conference calls, we've mentioned that the unprecedented and dramatic leather raw material price increases, in the range of 30% to 40% that began about a year ago, has fundamentally impacted Bradington-Young and the entire leather industry. As consumers have gravitated to more moderately-priced products, leather seating has lost market share at retail to fabric upholstery and seating covered with bonding leather, which is a polyurethane-coated composite leather product that is about one-third the cost of conventional leather. We are addressing this at Bradington-Young in several ways, including the Comfort At Home program to capture more floor space, and by expanding our offerings of China-produced cut and sewn leather kits for our domestic products to improve the value equation.

We've also entered the new category of fabric-covered recliners capitalizing on our competency in motion furniture and leveraging the shift in product mix toward fabric-covered upholstery on retail floors. On the import side, we're offering more bonded leather products in the line, and are expanding our supplier base in an effort to strengthen our value proposition. These sales, volume and cost issues continue to challenge our profitability performance, but we continue to focus diligently on lowering our breakeven point, as well as stimulating the top line. We've taken substantial costs out of our business in recent months, including a workforce reduction of about 25 employees in September. That workforce reduction should get as much closer to our desired breakeven levels in the near future, especially if the order trends we've experienced recently continues over the next several months.

Now I'd like to call on Paul Huckfeldt to discuss factors that drove our sales and earnings performance this quarter. Paul?

Thanks, Alan. Consolidated unit volumes decreased about 11% in the third quarter, and volumes in all of our divisions, except fabric upholstery. Case goods unit volume was down about 10%, leather upholstery unit volume dropped almost 24%. Upholstered fabric seating posted a 5% increase in units sold. Overall, average selling prices increased about 6% during the third quarter, compared to the same quarter last year, primarily due to price increases implemented late last year and through the first nine months of fiscal 2012. Some of the impact of these price increases was offset by increased discounting on slow-moving inventory, as we continue to clean up our inventory position. As a result of these price increases, all divisions posted higher average selling prices, with fabric upholstery leading the way with a 9% increase, followed by leather upholstery at 7% and case goods at 6%.

For the quarter, overall gross profit margin increased to 23.5% of net sales, compared to 22% a year ago. Gross margins for our case goods division increased slightly to over 28% to roughly 26% in the prior-year third quarter primarily due to lower freight costs for imported furniture, partially offset by the discounting referred to earlier. Gross profit percentage for upholstered furniture remained flat at about 14.5%, as cost reduction efforts and higher fabric upholstery selling prices generally offset the impact of increased raw material costs, as the impact of the casualty loss related to a sprinkler malfunction at one of our warehouses occurred early in the third quarter.

Our selling and administrative expenses decreased in both absolute dollars and as a percent of sales. Selling and administrative expenses were $10 million in the 2012 third quarter, compared to $10.6 million in the previous year quarter. And as a percent of sales, they decreased from 19% last year to 18.5% in the 2012 quarter. The decrease in spending was due to -- decreased salaries and employee-related costs, thanks to a realignment in our officer group; lower advertising supplies and sample expense, which was the result of cost-cutting measures; lower contributions expense, due to decreased donations of second-quality furniture; continued lower bad debt expense due to adjustments in our accounts receivable reserves, which reflect favorable collection trends, and lower depreciation and amortization expense, as we pull back and stop doing as much maintenance on our old ERP systems, as we move to a new ERP project in the coming years.

Operating profit also increased in both absolute terms and as a percent of sales in the third quarter, compared to last year, thanks to the improved gross profit margin and the lower selling and administrative expenses, which offset the lower sales volume and the higher discounting in the quarter. Our balance sheet remains strong and continues to help cushion us from the impact of these uncertain economic conditions. At quarter-end, we had cash and cash equivalents of over $32 million, up $16 million from year end. We remain debt-free and have $13 million under our revolving credit facility, which remains in place until July 2013, and we also have $16 million available to borrow against the cash surrender value of Company-owned life insurance policies, as another source of liquidity if needed.

Our efforts to bring inventories to more appropriate levels throughout the early part of this year is the source of much of the positive cash flow, since the beginning of the year. Since the end of last year, we've reduced inventory by over $14 million, without adversely affecting our ability to service our customers. We continue to maintain a quarterly dividend of $0.10 a share, thanks to our strong cash position and our belief in the long-term viability of our product and our business model. Now, I'd like to turn the conversation back to Paul Toms for his outlook.

Thank you, Paul. After a noticeable softening of consumer demand from April through mid-September, we've seen a marked improvement in incoming orders over the last 60 days, and have healthy backlogs heading into the fourth quarter. As I mentioned earlier, most products introduced at the April market are either shipping or already at retail, and should favorably impact our sales during the fiscal fourth quarter and next year. There is still a number of uncertainties in the economy that are impacting consumer confidence, which is vital when selling a large-ticket discretionary purchase. These factors are continuing high unemployment, a volatile stock market, and the depressed housing market. While we're not bullish about the overall economy in the near term, we are bullish about our opportunity to further improve profitability, and our competitive position in the industry.

This concludes our formal remarks, and at this time, I'll turn the call back over to our operator, Ben. Thank you.

(Operator Instructions). And our first question today comes from the line of Matthew McCall from BB&T. Your line is now open, please go ahead.

Good morning, guys. This is actually Jack Stimac filling in for Matt today. I guess just as far as the order patterns went, you talked about the volume kind of being lower for the quarter, can you quantify maybe -- you didn't give -- did you give an order pattern for the quarter, or did I miss that, first of all?

I think we did give an order pattern for the quarter that was more in units as opposed to dollars. I think -- but I don't know that I have the information at my fingertips, Jack, as far as the exact dollars for orders in the quarter, but we did see as we indicated a pretty significant upturn in business starting in about mid-September and continuing through November, and I would say on a sequential basis, month over month, average orders were probably up 10% to 15% for case goods, and I think probably comparable for upholstery, but either Alan or Mike Delgatti can weigh in on that.

Okay. Discount, as far as gross margin has gone, it's been a nice improvement that we've seen the last couple quarters. I think you're the highest you have been since Q1 of last year. So as we look forward, what does that trajectory look like? Are you hoping to kind of maintain current levels? How much more room of improvement is there? And maybe if you could quantify what incremental discounting was during the quarter? And if there was -- I think you had expected freight to not have an impact, but if you could just maybe quantify what it actually wound up being?

Well, there's a number of parts to your question, but I think as far as discounting, we actually did have a similar level of discounting in the third quarter as we have in the first and second quarters and even going back to the fourth quarter of last year. We do expect that to -- diminishing as we worked inventories of that sort of inventory, discontinued and excess inventories down pretty significantly this fiscal year. Freight is definitely working in our advantage right now. I don't know that I can give you the impact on gross margins, but I think our freight costs are probably $800 less per container, maybe a little bit more than that, maybe $1,000 less, than we were seeing this time last year -- than -- and high freight inventories for imported products has worked its way through our inventories and out of the system, so freight has actually given us a little bit of a boost.

I think the opportunity to improve gross margins on a consolidated basis really comes from our upholstery divisions. Wood will have an impact of less discounting, and I think we've got some other efficiencies, but the big opportunities are really with our domestic upholstery manufacturing and bringing them back to profitability. And as far as the impact on gross margins, I don't know that I can quantify that. Paul?

Is that going to be purely volume related? Are there any other -- I know you guys have announced kind of the headcount reduction and things like that, but is volume the main driver needed to improve upholstery margins?

Volume actually -- no, I think at the current volume, we can post better results as a result of all the moves we've made throughout the year, which I don't think have really manifested themselves yet in our financial performance but --

Between the costs of making those changes and then not having them out of the system long enough, haven't really seen them yet.

Right. Alan, are you still on the call?

I am, and I would echo what you said. The improvements, of course certainly, the order trend, if it maintains, will help us overall on leveraging of fixed costs across greater volume, but in addition to that, we have a lot of one-time costs such as severances and such, that won't be recurring, so the operational improvements we've made will begin to show up in the quarters ahead as well.

Okay. And if I could ask one more question I guess maybe a two-parter on the initiatives you guys have outlined and you talked about how you have made some progress in international, if maybe you could talk about where you kind of see that going over the next year or so? And then also, one of your other initiatives with the cross dock initiative, kind of what percentage of sales that's working out to be, and if it's playing out as you expected?

International, as we said, is about 6.5% of our consolidated volume. I think we grew -- it's almost doubled it last year and we're up about 60% this year. The target is to be at 10% of sales within the next two years, so we still feel that's an attainable target. It's also -- represents actually a little bit larger part of our profits then it does our volume. So our executive there, Brad Miller, has done a very good job in that arena.

The second question was on a cross dock and to date, that's running at about $5 million a year. I would say that's not all incremental volume, but some of it is. And I think we've gotten some of our midsize dealers to commit to containers of that probably weren't buying by container before. And then some of our customers that were buying containers are buying through the cross dock because it allows them to carry less inventory, buy broader, and more frequently than what they were doing previously.

So it's been a positive impact. This probably hasn't had the size impact that we would have modeled yet. But I think overall container direct business is harder in this sort of environment we've been in, people are less willing to commit the amount of money it takes to float containers, as opposed to just ordering what they've sold out of our Virginia warehouse.

Okay. Great. Thanks for taking my questions.

Jack, I was feverishly working while Paul was answering some of those questions. I've got a couple of numbers to go with that.

Okay. Great.

It looks like excess discounting was over what we sort of consider normal, was around $1 million last quarter. Which is what it's been the last couple of quarters. Cost of goods sold, this is the time of year when last year we saw the big spike in freight costs which affected LIFO, and it had a multiplier kind of effect, the swing looks like it's around two, a little over $2 million from last year to this year on cost of goods sold.

From freight?

Now the costs are back to normal. So we're not going to see a lot more improvement unless we see a big drop in freight costs. So current costs are normal, last year was the anomaly. So it's about a little over $2 million swing from this time last year, from the same quarter last year.

And with that discounting, how would you expect that to trend in the next quarter?

We expect it to be less but still probably a little bit well, I don't know, fourth quarter last year is when we started to see it, so I would expect a little bit less than we've seen in the first three quarters of this year.

How long do you think it will be before that's not an issue at all?

I think the excess discounting, we'll be done with it this year. There will be some of it in the fourth quarter, but not a level of the first three quarters.

We always have normal discounting, and there's always a closeout cycle.

That's a good point. We are in a fashion business and we turn over our line, average product probably has a life about two to three years. So you're always going to have that turn over but hopefully not the amount of excess inventory that we entered this year with, which to quantify it, was I think we were at 16% or 17% of inventories with that type of inventory, compared to our total inventories and today, it's down more in the mid-single digits.

Thank you.

One last answer, orders for the quarter I just have consolidated they were up 2.6% from last year.

I think sequentially is where they've improved.

Sequentially, they were -- yes, they were up 51.

We'll get that information before the call is over.

Up about 5%.

Great, thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Todd Schwartzman from Sidoti & Co. Your line is now open, please go ahead.

On the case goods, how do you think of the gross margin ceiling, if you hold volume constant at the last couple of quarters?

I would say the gross margins that we are achieving right now are probably about where we're going to be going forward. We've got some inflation that we are expecting out of Asia on the cost of goods. We did pass a price increase September 1 that I think is starting to show up in our monthly financial results. Freight, I don't think is going to get much better than it is now, probably grew would go up a little bit.

If it continues they'll take capacity off-line and we'll go through another --

And then the discounting being less will have some impact on gross margins as well.

But we are seeing price increases too, so it's going to be several moving parts.

Okay. And I'm not sure if I inferred something incorrectly, or if maybe your outlook has changed ever so slightly, but as far as the incremental margin that you're expecting due to the full flush through of the slow-moving goods. It sounds as though there is a greater likelihood of some of that creeping into Q1 and certainly past the end of January, I wonder if you could just speak to that briefly?

I really think we'll have the excess discounting behind us this year. We really expect it to have the -- expected to have it behind us by the end of the third quarter, and I think we've got the vast majority of it behind us, we may have just a little bit trailing into the fourth quarter, but I think as we enter next year, inventories are properly sized, and the amount of discontinued, pre-discontinued, inactive and excess inventory is way down from where it was, when we entered this fiscal year.

And was there anything scheduled to ship in the third quarter that was pushed out for any reason to Q4?

Yes. Perhaps there was, always with first production on imported products, it's a little bit of an uncertainty as to exactly when we're going to get the products, and I would say that in a few of our case goods collections, we might have hoped that they would have shipped in the third quarter that they ended up shipping in November. So yes.

And what was the value of that?

Probably in terms of sales, you may be looking at $1 million, $1.5 million of placements on new product.

Thanks for that. Your goal previously, off-margin goal was 10%, if I recollect. Is that intact? And also, what might be your time horizon for achieving it?

Well, it is still our long-term goal. We've been at that level of profitability before in case goods, and believe that, that's attainable, although it's several hundred basis points higher than we where we are today. Upholstery, I'm not sure that 10% is a realistic goal for operating income. I think there, probably mid-to high single digits is more realistic. And honestly in the near term, our goal with upholstery, domestic upholstery is to get it to break-even. We believe there is opportunity to improve consolidated margins next year through improvement in domestic upholstery manufacturing profitability and some smaller improvements in case goods, but I don't think we are looking at 10% in the near term.

On the imported case goods side, is that double-digit, is that kind of an open-ended bogey?

We feel like that's an attainable target, but we've got to get discounting out of the system, excess discounting, we've got to improved product quality a little bit, we need a stable environment for freight rates, and I guess the wild card is what's going to go on with costs and inflation in cost out of China, where we're still fairly heavily concentrated in case goods, and in Vietnam and other countries, where we're migrating. We think we can recover that in price increases, but there's always some sort of lag.

Right. The leather business, you had previously spoken to a strategic review. If and when at the end of this fiscal year, if it hadn't -- I'm not sure if it was breakeven with the minimum standard or achieve some minimal profitability. I heard Alan detail the improvements underway. But be that as it may, what is the strategic view you take now of the leather business?

I don't know if Alan is still on the call and if he is, I'll let him answer first. Alan, are you here? I know he had a flight to catch. And we have Mike on, who can speak to some of the current points of leather. But I want to talk from a strategic standpoint, we do think leather is an important part of our business, both import leather as well as domestically produced leather. It complements what we do, it rounds out our company. Leather really, Todd, has been dramatically impacted this year by the significant price increases we took on the raw material earlier in the year and the impact that, that had on our pricing and then on demand.

And I think it's really driven business to alternative materials, bonded leather has taken significant market share away from leather. And I think fabric has benefited, as leather costs have gone up. To have the sort of increases we had in the law raw material, leather hides earlier in the year, in this sort of demand environment, it couldn't have come at a worse time and I do think it's impacted not just Hooker, but other large companies that compete in the leather arena. We've seen that business bounce back over the last 60 days, maybe 45 to 60 days, but that business was much more severely impacted on the incoming order side in the summer than either fabric, upholstery or case goods.

I know you take more of a long-term view, and I think that's commendable, but looking back three months to the last conference call, for the quarter, for Q3, was the leather profitability or loss commensurate with what you guys were expecting three months ago? Was it better or was it worse?

It was worse. We lost more money than we expected in leather for the quarter. We lost about the same amount, I think, that we lost a year ago in the third quarter. And we would have expected better results based on our consolidation of the plants and reduction of headcount probably by 20%, since we did the plant consolidation. And we've got a lot of other critical product projects that are in works that we expect to have a favorable impact on our profitability, but it hasn't come as quickly as we would have hoped.

Okay. Lastly, for Paul Huckfeldt, two questions. The fourth-quarter tax rate, and maybe also if you could speak briefly to the slight bump in payables in Q3?

Tax rate -- this quarter, we had a return to provision adjustment, that we filed our tax returns, we had a $100,000 adjustment that affected the rate favorably this quarter. It should drift back up at current levels of income. Our permanent differences have a dramatic impact on the rate. I'm not sure I can predict the rate without doing a reconciliation, but it will go up from this quarter. Probably more like -- it will look more like the annual rate.

Okay. Thanks. And the payables for the quarter?

The bump in payables is just a timing of inventory. We have lots of different terms with our different suppliers and it's just the timing of product -- there's nothing unusual, just the timing of invoices.

Terrific. Thank you, gentlemen.

Thank you, Todd.

Thank you. And with no further questions in queue, I'd like to turn the conference back over to Mr. Paul Toms for any closing remarks.

All right. I really have nothing more to add than what we've already said, but we do appreciate everybody's interest in our Company, and participation in the call today. We look forward to delivering good results, hopefully, at the end of the fourth 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.