Hooker Furnishings Corp (HOFT) 2012 Q4 法說會逐字稿

Greetings ladies and gentlemen. Welcome to Hooker Furniture's quarterly investor conference call reporting its operating results for the fiscal fourth quarter and year-end 2012.

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, Paul Huckfeldt, Vice President of Finance and Chief Financial Officer. Please go ahead.

Good morning. Thank you, Stephanie. Welcome to our quarterly conference call to review our sales and earnings for the 2012 fiscal year and the fourth quarter, both of which ended on January 29, 2012. We certainly appreciate your participation this morning. Joining me today are Paul Toms, our Chairman and CEO, and our President, Alan Cole.

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

Yesterday, we reported net sales of $222.5 million and net income of $5.1 million, or $0.47 a share, for our 52-week fiscal year ending on January 29, 2012. Net sales for the year increased $7.1 million, or slightly over 3%, compared to the $215 million we reported in 2011 with unit volume growth across all divisions.

Net income for the year increased 56% to $5.1 million compared to $3.2 million in fiscal 2011. Earnings per share were $0.47 compared to $0.30 in the prior year. For the 2012 fourth quarter, sales decreased $606,000 to $54.4 million, a 1.1% decrease compared to sales of $55 million in the fourth quarter of last year.

We reported net income of $628,000 in the fourth quarter of fiscal 2012 compared to a net loss of $182,000 in the fourth quarter of fiscal 2011. Net income for the fiscal 2012 quarter was negatively impacted by a $1.8 million charge -- that is $1.1 million after-tax or $0.10 a share -- for an intangible asset write-down of our Bradington-Young trade name. We'll discuss that write-down further in more detail later in the call.

Now Paul Toms will comment on our 2012 results.

Thanks, Paul, and good morning everyone.

Considering both external economic challenges and changing business conditions that required internal adjustments throughout 2011 and early 2012, we had a very good fiscal year. Progress in several of our operational goals enabled us to grow net income 56% on a 3% sales increase.

As the year moved forward, we reduced excess inventory, improved cash flow, cut operating losses in our Upholstery division. Operating income for our Case Goods division was over 10% higher than a year ago even while discounting to reduce inventory levels and dealing with the unfavorable impact of volatile ocean freight rates in the first half of the year. We were able to generate significant cash flow this year as we turned inventory into cash and reduced operating losses in our Upholstery division. In order to reduce the risk of future surpluses and further improve the availability of best-selling items, we've implemented new inventory management systems and now believe the composition of our inventory is much cleaner and focused on active and best-selling products, even if we are a little bit low on inventory at this time.

We're gratified that both the Case Goods and Upholstery divisions had unit sales increases for the year and are particularly pleased with the growth at Sam Moore where shipments of our domestically produced custom upholstery line increased over 13% for the year with sales increases every quarter compared to the prior year.

Sales of Bradington-Young's imported leather line increased over 9% for the year. Shipments of Bradington-Young's domestically produced line decreased approximately 7% year-over-year. The 7% sales dip for Bradington-Young's domestically produced leather line was not unexpected considering the dramatic raw material price increases in the leather market and the resulting shift at retail from higher-end leathers to more promotionally priced bonded leather, faux leather and fabric covers. However, Bradington-Young's domestic line ended the year with positive momentum as shipments were up in double digits for the fourth quarter compared to the prior year. We'll get into more specifics about progress in the Upholstery division later in the call.

The slight 1.1% sales decrease in the fourth quarter compared to a year ago can be partially attributed to soft demand at retail during the quarter, but was driven more by transitions in some of our world sourcing. As we work through some vendor shifts from China to Vietnam and Indonesia, initial shipments of several well-placed new collections were delayed a few months, which impacted the fourth quarter.

We'll have a lot of help getting our arms around these sourcing transitions from our new Vice President of Operations, Bill Reece, who joined us early last month. Bill has over 40 years in the furniture industry with a wealth of experience in Asia where he has been based for over 15 years. His expertise will help us improve our vendor performance and vendor alignment as he works with our merchandising team to match our product line with our (technical difficulty) our customers' expectations for quality, on-time delivery and value. The addition of Bill to our Company is just one example of how we strengthened and developed our management team over the last year.

First of all, having Alan Cole in the position of President of Hooker Furniture Corp. in August 2011 with oversight for all sales and marketing functions for the combined Company has already enhanced our marketing efforts as we strive to present all three companies more cohesively to the retailer and consumer. At the same time, Mike Delgatti was promoted to President of Hooker Upholstery. He is already bringing fresh, strategic thinking to every aspect of our Upholstery sales, marketing, and operational initiatives. Having Mike oversee both Sam Moore and Bradington-Young helps leverage the strengths and best practices of both companies without eroding the personality and unique positioning of each.

At the very end of the fiscal year, we strengthened our Hooker Case Goods merchandising management by reorganizing the product development staff into two teams with specialized product line responsibilities. The new team-based and product-specialized approach is improving product development agility and creative collaboration while providing clear direction, more accountability, and opportunities for individual and Company growth. This kind of collaboration between experienced merchants and new merchandising talent has helped us freshen and update our product line over the last several years and to emerge as a design leader in the marketplace. Just about 10 days from now when the April High Point market opens, we will have the opportunity to showcase our line in a redesign renovated show room in the International Home Furnishings center that unites all three brands.

At this time, I'd like to turn the discussion over to Alan Cole who will fill us in on those exciting details along with an overview of progress in our Upholstery Division this year.

Thank you, Paul. Good morning everyone.

Paul is right. The upcoming April market will be one of the most exciting in years for Hooker Furniture as the Wood and Upholstery divisions now share an 80,000 square foot redesigned and renovated show room. We have moved our Case Goods show room from the space that it occupied for over 30 years to a higher traffic location on the same floor for a unified presentation to the marketplace that better reflects who we are as a company. The show room will feature compelling displays, open sight lines, a dealer and designer resource center, a glass-walled entrance hub and a company history display, a welcoming lobby lounge, and café. This show room reflects our revitalized product direction and the energy and excitement about our future. It positions Upholstery as an integral part of the Company and Hooker as a unified resource. It signals a fresh, new era at Hooker Furniture built on a wonderful legacy.

Another exciting aspect of the upcoming market is that Sam Moore, known primarily as a chair resource for 70 years, will now become a full line upholstery company with the introduction of 12 new sofa groups encompassing over 100 items. These sofa groups include sofas in both standard and studio sizes, correlating chairs and sectionals. The expansion into sofas is a logical extension not only of our chair line but also of the modular seating accommodations program we introduced a couple of years ago. The sofa line will be another important vehicle for building on the momentum of Sam Moore's double-digit growth last year.

As Paul mentioned earlier, Bradington-Young's imported leather had sales -- had very nice sales growth the past year of nearly 9%. Our ongoing strategy to position this lower-priced line as a complement, not a replacement, to our domestic leather line continues to work well. Our domestic leather line in fact ended the year with momentum with a double-digit shipment increase in the fourth quarter compared to the prior-year period. We attribute much of the uptick to our strategic introduction at the 2011 furniture market of a retail display program for our domestic leather line called Comfort at Home. Just since last market, over 85 retailers have set up 800 to 1000 square foot Comfort at Home displays of the Bradington-Young domestic line. Each display requires a minimum of four stationary sofas and six reclining chairs. This program has helped us expand our retail floor placements and has particularly helped us strengthen our domestically produced leather reclining chair line, which has been the hardest hit product category from the retail shift that has occurred in the last year and away from our priced leather goods to promotional leathers or fabric upholstery.

The advancements we're making on the sales and merchandising side were an important driver of the progress we made this year and our goal to return our Upholstery division to profitability. While we still have work to do, we're encouraged by a reduction in operating losses of over 40%, excluding the write-down of our Bradington-Young trade name.

In addition to the sales, marketing and merchandising improvements, our better profit performance was also the result of extensive cost reductions and operational efficiencies. We wrote down the carrying value of Bradington-Young's trade name because of the operating losses in the division over the last few years. However, we believe we have taken the proper steps to right-size capacity and reduce cost structure and we have made a lot of progress as we've moved through this year. Long-term, we think Bradington-Young is important to our future, and we expect it to become a contributor to Hooker Furniture's profitability.

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

Thanks, Alan. Sales for the year were up in both our Case Goods and Upholstery businesses thanks to increased unit volumes and higher average selling prices in both segments. Overall, our average selling prices increased nearly 10% in the fourth quarter and 2.5% for the fiscal year as compared to the prior-year period.

Much of this improvement was due to mix of product shipped. In particular, the increase in net sales for Upholstery segment represents increases in fabric upholstery average selling prices of 7.3% and an increase in unit volume of 4.2% compared to the prior year.

Gross profit for fiscal 2012 fourth quarter increased both in absolute terms and as a percent of net sales to $12.9 million, or 23.8% of net sales. This compares to $10.9 million or 19.8% of net sales in the same period a year ago. The improvement was driven by lower freight costs on imported furniture, higher average selling prices, particularly in Upholstery, and lower upholstery manufacturing costs due to the many cost reduction initiatives underway.

For the full year, gross profit increased by $2 million to $48.9 million while profit margin was up slightly to 22% of net sales from 21.8% in the prior year. Margins in our Case Goods business were down just under 1% as a result of heavy discounting to reduce excess inventory. Most of that (technical difficulty). This was partially offset by lower freight costs on imported product, particularly in the second half of the year.

In the Upholstery division, margins improved primarily through cost reduction efforts and higher fabric upholstery selling prices. These improvements were partially offset by increased raw material costs and a casualty loss expense of $181,000 related to a sprinkler malfunction at one of our warehouses this summer.

Selling and administrative expenses decreased both in absolute terms and as a percent of net sales during the 2012 fiscal year. This was a result of having lower salary and benefits related expenses due to cost reduction and a life insurance claim as well as lower bad debt expense thanks to favorable bad debt experience and lower AR balances, lower depreciation expense due to lower spending on maintaining our old systems as we prepare to move to a new ERP system, and lower advertising and sample expenses which were the result of cost cutting efforts. These savings were partially offset by increased commissions and design fees on increased sales and charges to write off improvements in one of our -- in our former show room as we move to this renovated show room.

In the fourth quarter, selling and administrative expenses increased slightly in absolute terms and as a percent of net sales compared to Q4 last year primarily due to slightly higher bad debt expense as we took a reserve against a note receivable from a former supplier and higher bonus accruals in the Case Goods division.

Operating income for fiscal 2012 fourth quarter was $726,000 or 1.3% of net sales compared to an operating loss of $879,000 or 1.6% of net sales in fiscal 2011. We have restructuring charges of similar amounts in both years. In fiscal 2012, we were wrote down the Bradington-Young trade name by $1.8 million. Last year, we wrote down the Opus trade name about $400,000 and accrued $1.4 million to consolidate Bradington-Young's two leather upholstery plants into a single facility.

For the fiscal years, operating income was $6.7 million or 3% of net sales in fiscal 2012 compared to $4.1 million or 1.9% of sales in fiscal 2011. This improvement was mainly due to lower freight costs in imported products and improved domestic Upholstery performance in fiscal 2012.

Our balance sheet remains strong and continues to help cushion us from the impact of a difficult sales environment. At quarter end, we had cash and cash equivalents of around $40 million. We continue to remain debt-free and have over $13 million available on our revolving credit facility, which remains in place until July of 2013. We expect to put some of this cash back into working capital as we increase inventory levels somewhat in the coming months so that we can better service our customers.

We continue to maintain our quarterly dividend at $0.10 a share, even though this represents a large portion of our earnings for the year. Our board is comfortable with the current dividend thanks to our cash position and belief in the long-term viability of our business model.

Now, I will turn the discussion back over to Paul Toms for his outlook.

Thank you, Paul.

Our sourcing transition from some of our vendors in China to vendors in Vietnam and Indonesian will continue to result in extended leadtimes and some shipping delays which will impact sales throughout the first quarter and to a diminishing degree in the second quarter. We expect our new Vice President of Asian Operations, Bill Reece, to help that transition go as quickly and as smoothly as possible as he helps us with our vendor performance and alignment.

While most macroeconomic indicators are continuing the long fall that began a year or so ago, certain concerns still exist such as the slow rebound of the housing market, global economic instability and most recently rising fuel costs. We expect consumer confidence and the furniture retail demand to improve as we progress through the year.

On the sales side, we're going up against a 13.4% sales increase in the comparable quarter a year ago that was driven by heavy discounting at the time. Yet due to our operational improvements, reduced discounting activity and more favorable ocean freight rates, we are hopeful we can deliver better profitability even on reduced sales in the short term.

That ends the formal part of our discussion. At this time, I will turn the call back over to our operator, Stephanie, for questions. Thank you.

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

Thank you. Good morning everybody. So on the delays out of Asia, can you quantify what you think the impact was on the top line in Q4?

You know, Matt, probably is hard to quantify I can tell you in absolute orders we probably impacted sales to the tune of a couple of million dollars. But then you question, if those products had gotten out onto retail floors and had some activity, how much would we have experienced in reorders? So (technical difficulty) really gone the orders that were actually delayed within the quarter. I don't know that I can speculate on how much they would have sold and would have generated and sold orders.

So the answer is probably the same as this one, but can you give -- do you have any idea of how many of those orders were actually lost or canceled because of the delays?

I do have that. It's very few have been canceled. I think the opportunity cost though at retail is the one that is harder to measure. But no, we have not experienced a lot of cancellations. It is just delayed shipments into a sub second quarter.

Got it. Okay. So you highlighted, I think Paul Huckfeldt maybe highlighted the benefit from lower freight rates year-over-year. I think we have seen ocean freight rates move higher through the first part of this year. Can you talk about what we should assume hits your cost of goods line as we move through the next few quarters?

Right now, we're still selling inventory that we brought in and in fact will continue to bring in at current freight rates. So in the short term, we feel like we're going to have an advantage in the comps over last year. Last year, we were selling very high-priced inventory. It was probably a -- there is at least a 2% margin swing I think from quarter to quarter just based on the freight differential.

Right now, the freight lines are negotiating rates. Of course, they are pushing the raise rates because they haven't made a lot of money in the last year, but it's very demand driven so we're not sure yet how much of those freight rates are going to stick. But right now, we're selling at sort of normal freight costs. I think the rates haven't changed. The inventory that we have in place and the inventory that we are bringing in now over the next month or two is going to be at current prices. So, we should have some favorable comparability for at least that point. You need to stay tuned to see what happens later in the year.

This is Paul Toms. Like you, we are reading the same articles projecting rate increases of $400 to $800 per container, but there is always a lot of posturing right ahead of when everybody signs contracts in May. To date, we haven't really experienced a lot of increase, maybe $100, $150 a container, and we do have some of our freight lines presenting us contracts for next year that are not at significantly inflated rates.

Okay. What about other influence, similar articles about the cost of poly foam costs going higher? Obviously that is going to hit upholstery more but outside of poly other inputs, what are you seeing on the inflation front from other items?

Matt, this is Alan. We are seeing some pressures on raw materials that are petroleum-based, such as foam seating, such as different kinds of upholstery materials. So we take that into account in our pricing adjustments at the April market, and so we should be able to cover that through our selling price increases.

As far as leather is concerned, which is a component that we are always concerned about, we saw some small relief in leather prices later last year. Now, we're seeing some relatively modest increases in leather, but having said that as compared to a year ago, leather prices are up considerably. We really are not hearing that is going to swing dramatically one way or the other. So I think the leather pricing has finally stabilized and probably will go up some over the course of the year, but not nearly as dramatically as it did a year ago.

Okay. Then one other one on the gross profit line, I looked back the last few years and maybe you can help me understand the seasonality here. Q4 to Q1, it looks like there's -- and I know we have been in a rocky period here -- but the last few years, it looks like there's been a couple of hundred basis points of pressure Q4 to Q1 on the gross profit line. What is it about that seasonality that we should keep in mind as we are forecasting out Q1 margins?

That's interesting. I don't know that I have ever really notice that the way you have, but the fourth quarter, there seems like there's always some adjustments, adjustments for LIFO, maybe adjustments for obsolescence and there may be some unusual things going on in the fourth quarter that we wouldn't typically see in the first quarter even at a gross margin level.

Okay. Last one for me, you talked about the show room consolidations. Was there any impact on the P&L in Q4 that we should adjust for as we move forward?

We had a little bit of accelerated depreciation on the balance of the improvement in our old show room show that we had to go ahead and (multiple speakers)

Couple hundred thousand.

200,000?

Yes.

Okay, good. All right. Okay, thank you all.

Thanks, Matt.

Todd Schwartzman, Sidoti & Company.

Hi. Good morning, gentlemen. On the sourcing shift, can you give a sense of what percentage, quantify what percentage of all Chinese sourced sales volume is being moved to other countries?

Okay, I'm glad you asked that, Todd, because I would like the opportunity to clarify. It would probably, in 2010, sourced 90% of our product, imported product, in China. Last year -- we are not moving product from China to Indonesian and Vietnam. We're just bringing new products out much more in Vietnam and Indonesia factories than we are in China factories. So it's really as we develop the product, we're bringing it out from factories in those other countries. We still have probably 65% to 70% of our volume coming out of China. We have one factory in particular that has been an excellent vendor for years, and we continue to source a lot of our product with that factory in China, including our major introduction to this market. So we expect that, at the end of the day, it is probably going to be maybe 60% this year will be produced in China and maybe 30% in Vietnam and 10% in Indonesian. So, the majority actually is not moving but there is some that is moving. That part is the part that's been a little bit problematic in terms of just getting delivery in the normal time frame as we bring new vendors online and put in processes and just there's a little bit of a learning curve for both of us.

With that in mind, the new items, are these existing vendor relationships in Indonesia and Vietnam?

No, some of them are Taiwanese businessmen that have opened factories in Vietnam and others are new vendors, so a little bit of both.

So, aside from the delay element, are there learning curve issues that you're experiencing now as well as in terms of the new relationships?

I just think, even when you have the same ownership, a factory in Vietnam is different than a factory in China. We have to get in there and get people comfortable with what our expectations are for quality, and engineering and finishing and whatnot. There is actually a learning curve, whether it is a new vendor whether it is an existing vendor, but a new country and a new factory. I would say that probably the delays are running a month to two months, maybe six weeks on average.

Has that delay been fairly stable, or what is the trend been in recent weeks?

I would say it's probably stable. For right now, we expect that to improve as we continue to work with these factories. I think having Bill Reece involved is going to help us too. We have spent a fair amount of our time traveling back and forth to Asia also to work with people and have some of them come over here. But my sense is right now we're still experiencing delays in that one to two month range, but we expect we will be able to bring them to more normal lead times within -- probably by the middle of the second quarter.

Just looking at the big picture, is this really a diversification issue? Is it primarily labor costs? Give us a sense, if you would, the rationale for spreading things out and for launching some of these new products sourced from changing that mix around a little bit?

Well, you know, it's probably not diversification so much in terms of we still have this one vendor that we do a significant amount of our business with in China and that we really don't see that changing in the short term because, although there is inflation in China that has impacted the more promotional and mid-price parts of our line, the higher-end parts, if we can develop product that really warrants the price, which were able to at this one vendor, we can still I think show good value out of China. But in the more mid-price parts of our line, inflation in China has taken the value away. That is why we've moved our Envision product to Vietnam, probably all the new introductions starting about a year and a half ago. I see more of that in the future. I also think Indonesia is probably better for our midpriced product and maybe even some of our higher-end product. Their costs are maybe not as low as Vietnam, but I think the skills are better in some ways and the factories are probably a little more compatible to our middle and upper price part of our line than Vietnam is.

For inventory, what trend should we expect to see throughout the year?

I think you should expect it to see it increase over the next couple of quarters. We kind of overshot our targets for inventory levels. Some of it is because of the delays we've experienced on new products but I would say right now we're probably under-inventoried by $7 million to $8 million. So I would expect to see cash come down and inventories to go up by about that amount over the next two quarters.

Great, thanks. Also if you would for fourth quarter, could you quantify the Upholstery loss versus a year ago?

Yes we can. Give us just a second to lay our hands on it. I know it was significantly less. I think probably more improvement at Bradington-Young than Sam Moore. Part of that had to do with the comp. Fourth quarter a year ago for Bradington-Young we were in transition of closing our charitable plant and consolidating all of the production into Hickory, and there were some costs in there that were one time or unusual costs that we didn't have this year. At Sam Moore, improvement fourth quarter last year over fourth quarter this year but probably not as dramatic.

It improved by about $1.3 million. Including restructuring charges, it went from $5.3 million in 2011 to $4 million.

For the full year.

For the full year, right. But (multiple speakers)

He was asking the fourth quarter. You know, I'm sorry. We don't have that information at our fingertips. But --

Yes, sorry about that, Todd.

All right. I can circle back with you on that.

What we probably can say, would like to point out is that we're making tremendous improvement in Upholstery. We had expected to be at breakeven or better in the second half of the year and we didn't get there. But I think sequentially every quarter is better and we are very close to breakeven at both companies with domestic operations.

Including the restructuring charge, it was $1.9 million this year versus $3 million last year.

And the restructuring was $1.8 million.

Restructuring was $1.8 million, right.

Okay, thanks. CapEx tax rate for fiscal '13, any thoughts there?

CapEx is going to be comparable to this year, probably $3 million to $5 million. You know, we've got this ERP which is going to be the bulk of our CapEx. The tax rate with improved profitability in Upholstery, we expect that to return closer to normal levels. This year was unusually low. We expect it to be back in the 30s%, probably the mid to low 30s%, not back to our full marginal rate.

Okay. ERP, any kind of sense, any update on the timeline, where you are, where it's going?

I think it is going like most ERP implementations go. Optimism and then maybe a little bit of disappointment but I think we are go live Phase 1 sometime this summer. I think we've got a pretty good head start on Phase 2 which will probably go live -- let me think -- realistically probably early next year.

Phase 2 being Upholstery.

Phase 2, right, is our Upholstery, which is the customization and manufacturing modules plus what we already have in place in Phase 1 in finance order process.

All right. Thanks a lot, gentlemen.

Thanks, Todd.

(Operator Instructions). John Deysher, Pinnacle.

(Operator Instructions). [John Frizzle], Fifth Third Bank.

Thank you. Would you talk -- in the shift of both product mix and manufacturing location, could you talk a little bit about the pricing freedom you've got or foresee in those mid-line product ranges going forward? Is sounds like you've got a little top line glib of some sort that you're responding to by product mix and relocation of manufacturing.

I'm not sure that I fully understand your question but I can say that (multiple speakers)

It's mostly about price. It's mostly about your pricing freedom in the market for your midrange products to products that you are sourcing out of Indonesia and Vietnam.

Right. Really to date, there is a lot more of our midpriced and starting price point product that we have started introducing in Vietnam than there is Indonesia. We're really getting ready to produce our first group in Indonesia, which is a higher price point group within our line. But Vietnam I think generally is viewed as a country, force country for more moderately priced furniture.

In our line, what we've tried to do is to develop product lines that are targeted at a younger slightly less affluent consumer, Gen X and Gen Y consumer going back for about the last couple of years. Those products, they are smaller scale. They're cleaner designs and they're also less expensive by probably 15% to 20% than our typical Hooker products. They are more price sensitive first to get placed with the retailers and second that consumer, I think there is probably less discretionary income or they are more price conscious that maybe our core Baby Boomer consumer. So as we have seen prices go up in China, that type of product we felt like we could produce in Vietnam at slightly lower cost.

I'm showing no further questions at this time. I will now turn the call back over to management for closing remarks.

All right. Well, we really don't have a lot of closing remarks. We appreciate everybody joining us today. We are a little disappointed in our fourth quarter, that we had some of the interruptions that we did and weren't able to deliver even stronger results but I think, all in all, the year was a good year. We made progress on a lot of fronts. I think we ended the year in much better shape inventory-wise and cost-wise and manufacturing efficiency in our Upholstery division than we entered the year. So we are optimistic about the current year and fiscal year 2013. I know that we've got some short-term hurdles to get over, but I think some internal operational improvements and a little bit better conditions at retail and hopefully we can deliver another good quarter. Thank you for joining us.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.