Hooker Furnishings Corp (HOFT) 2014 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the 2015 fiscal year and fourth 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, Paul Huckfeldt, Senior Vice President Finance, and Chief Financial Officer for the Hooker Furniture Corporation. Sir, you may begin.

Thank you, Abigail. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the 2015 fiscal year and fourth quarter, which both ended on February 1, 2015. We certainly appreciate your participation this afternoon. Joining me today are Paul Toms, our Chairman and CEO, and Michael Delgatti, our President.

During our call today, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing the 2015 annual and fourth-quarter results.

Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

This morning we reported consolidated net sales of $244.4 million and net income of $12.6 million, or $1.16 per share for our 52-week fiscal year ending February 1, 2015. Net sales for the year increased about $16 million, or 7% compared to $228 million for the fiscal 2014 year, primarily due to higher average selling prices in all segments and lower discounting in our casegoods segment.

Net income for the year increased nearly 59% to $12.6 million compared to $7.9 million in the prior year, and earnings-per-share were $1.16 this year compared to $0.74 last year. For the 2015 fourth-quarter, sales increased $7.3 million to almost $65 million, a 12.7% increase compared to net sales of $57.6 million for the fourth quarter last year.

In the fourth quarter, we reported consolidated net income of $4.3 million compared to $2 million in the fourth quarter of fiscal 2014. Now, Paul Toms will comment on our 2015 results.

Thanks, Paul, and good afternoon, everyone. Throughout this fiscal year profitability and sales performance improved across all segments of our Company with the year ending as one of the best in recent memory. After we reported the highest quarterly net sales in six years for the third quarter, momentum continued to build resulting in an outstanding fourth quarter that surpassed our expectations and made for a great year.

Along with gains in sales and profitability, we made considerable progress on multiple operational and strategic fronts throughout the year. We were pleased with significant improvements made in operating profitability this year. As we reported in our earnings release earlier today, consolidated operating profitability increased by $6.5 million or nearly 53% primarily due to a casegoods segment operating profitability improvement of $5.1 million and an increase in upholstery segment operating profitability of nearly $1 million.

After lagging behind upholstery sales for a few years, it was gratifying to see both an overall industry recovery in casegoods and, specifically, to see our casegoods segment lead the Company in sales and profitability growth this year. Our $10 million increase in casegoods shipments was driven by a stronger, broader product assortment; 60% growth in our container direct volume; and 40% growth in our international business, as well has lower discounting.

A more focused merchandising efforts and the opening of a Vietnam distribution center to service a mixed container program helped us gain traction in the better price points of our good-better-best assortment. At the same time, strong collections in the best category, both through new introductions and long-running classics, continue to be our top sales performers. Our efforts over the past two years to improve sales and operation planning processes really paid off this year, helping us achieve significantly lower discounting while having the right mix of best-selling products in stock to ship on a timely basis.

The move a year ago to restructure our sales management team from a product-based to a geographic-based organization also contributed to reduced discounting and enhanced profitability. This change allowed us more face time and strategic relationship building with individual customers, allowing us to better address the needs and nuances of each retailer we serve and add values in ways beyond just price. I believe we have been able to better address the market dynamics of each retailer.

While sales in the upholstery segment increased at somewhat slower rate than casegoods, domestically produced poultry lines Sam Moore Furniture and Bradington-Young, as well as our imported leather line, Hooker Upholstery, combined to achieve single-digit revenue gains in both the fourth quarter and the fiscal year. In addition, Sam Moore made significant strides in improving their service to retailers, reducing delivery times to 4 to 6 weeks during the second half of the year.

Our top line also benefited from two new strategic initiatives, Homeware and H Contract, which are aggregated in the all other segment, contributed $5 million of sales for the year and H Contract reported a small operating profit. While our profitability increases were driven by casegoods and over 90% operating income improvement at Sam Moore, continuing profitability improvement at Bradington-Young and H Contract's operating profit all played an important role as well.

The profitability performance for the year says a lot about the leverage in our business model. At this time, I'd like to call on our President, Mike Delgatti, to give more details about the performance of Sam Moore, Bradington-Young, and Hooker Upholstery, as well as our accomplishments in merchandising and marketing initiatives at the Company this year.

Thank you, Paul. Our upholstery segment also made progress this year on strategic merchandising programs, operations, and in servicing our retailers while growing sales and increasing operating profitability by 50% or nearly $1 million.

Sam Moore achieved a 7% sales increase and Bradington-Young increased sales by over 4%. After a slow start to the year, upholstery had increases in both sales and incoming orders during the fourth quarter. Focusing on each company individually, I'll begin with Bradington-Young, which built on the sales and profitability improvements of the previous year. New product lines and retail merchandising programs helped stimulate the business. In particular, last fall we introduced a comprehensive motion upholstery program offering 22 different pieces and four different arm styles, all with the option of power motion. Our emphasis on style, quality, and premier seat cushions and comfort, along with the ability to quick ship special orders in 4 to 6 weeks was very well received and benefited sales in the fourth quarter and so far in the current quarter.

Our Comfort at Home retail display program is still going strong with around 150 dealers. Our So You! customer order retail program is also doing well. What this tells us is that retailers gravitate towards upholstery programs with multiple options, as it makes their floor space much more productive. Today's more fashion conscious and style savvy consumers also enjoy these programs that allow them to personalize their product according to their taste and decorating schemes.

We introduced another retail program last summer, BY Express, a recliner program that ships within 72 hours of receipt of an older. This program also stimulated sales for Bradington-Young beginning in the second half of the year. In light of all the new retail merchandising concepts and a number of manufacturing efficiency improvements, we believe Bradington-Young is on solid footing to achieve additional profitability this year and beyond.

While Sam Moore's operating results were below expectations for the year, we were pleased in the improvement in operating income from last year while growing sales. We particularly were pleased with the improvement in service to an industry standard 4 to 6 weeks shipment of products to retailers. In order to build on this momentum and gain more retail floor space, we will be introducing at the spring High Point Market next week be Sam Moore Studio program, a comprehensive retail merchandising program aimed at enhancing the shopper experience through better display and selection.

This program allows us to tell the Sam Moore story of fashion and customization, and will facilitate shoppers' selections of custom fabrics, finishes, and trend details through a mobile swatch and touchscreen system. We believe this will help us gain more retail floor space and achieve higher productivity in that floor space. The Sam Moore Studio will also help us tell the value proposition of the Sam Moore brand in a more compelling way to consumers, who will appreciate the ability to customize their upholstery through fabric, finish, and trim details.

Fiscal 2015 marked the first full year of the rebranding of our imported leather upholstery line from Seven Seas to Hooker Upholstery. This has now been fully implemented and very well received, and we believe this will have a long-range positive impact. The Hooker Upholstery line for example is now shown on the Hooker Furniture website, benefiting from the high consumer traffic on the site, referrals to retailers through our Find It Now feature and gaining much more consumer exposure.

Our digital marketing efforts, as a whole, have made great strides this year. We launched two new websites for Hooker Furniture and Sam Moore. The websites offer industry-leading features. These include responsive design which recognizes the device the consumer is using to access the site and optimizes the screen layout for the best experience, and a live chat option. Since launching this feature, we've hosted over 10,000 unique chat sessions, directly interacting with consumers.

The national digital advertising and social media campaigns we executed this year were very successful as well. Our fall campaign, for example, which focused on our Rhapsody collection achieved nearly 90 million consumer impressions, lifted website visits over 50% during the period, and resulted in a noticeable increase in overall casegoods orders and sales.

At this time, I would like to call on Paul Huckfeldt to give us more details of our performance during the fourth quarter and fiscal year.

Thanks, Mike. For the year net sales were up in our casegoods segment, tanks to higher average selling prices, which were the result of continuing strong sales of our best price point products and lower discounting. Discounting was much lower than last year because we've done a better job managing inventory obsolescence, had less excess inventory to dispose of, and we've been able to discount excess inventory less by -- able to be more selective in our promotions.

Selling excess inventory and exiting the Opus and Envision product lines resulted in a modest decline in our unit volume, but the lower volume was more than offset by higher average selling prices. Net sales in the upholstery division increased due to increased average selling prices in both our leather and fabric upholstery divisions but was partially offset by lower unit volume, particularly in our imported leather upholstery company.

As Mike reported, Hooker Upholstery got off to a slow start earlier in the year. And while they are back on track now, the slow start negatively impacted their full-year results. Overall, average selling prices increased 11% during the fourth quarter and slightly over 9% for the fiscal year, primarily due to lower discounting, mix of product shift, and some modest price increases.

For the full year, gross profit increased by $8.1 million to $62.8 million and gross profit as a percentage of net sales increased to 25.7% from 24% the prior year. In addition to increasing net sales, the favorable impact of lower discounting also improved our gross margin on a dollar per dollar basis, so reduced discounting was the primary factor in the gross profit improvement for the year. Beyond the discounting, though, we were able to hold our core cost of goods steady on imported products, and we were able to reduce domestic upholstery manufacturing costs somewhat as a percentage of net sales, which also contributed to our gross margin expansion.

Gross profit for the fiscal 2015 fourth quarter increased both in absolute terms and as a percentage of net sales to $17.5 million, or 27% of net sales. This compares to $14 million or 24.2% in the same period a year ago and was driven by the same factors as our full-year results.

Selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales during the fiscal 2015 year. Higher SG&A was due to increased commission expense due to higher sales and higher bonus expense due to higher earnings, especially in the casegoods segment. We also incurred higher salaries, benefits, and marketing costs in our all other segment as we grow those new business ventures, H Contract and Homeware.

Operating income for fiscal 2015 fourth quarter was $6.5 million, or 10% of net sales compared to $3.5 million or 6.1% of net sales in the fiscal 2014 fourth quarter.

For the fiscal year, operating income was $19 million or 7.8% of net sales compared to $12.5 million or 5.5% of net sales in fiscal 2014. Our balance sheet remains strong with cash and cash equivalents of over $38 million, which allows us to invest in inventory, receivables, and the cost of growing the initiatives we spoke about earlier. We remain debt-free and have $13 million available under our revolving credit facility which remains in place until July 31 of 2018. In March, we declared a quarterly dividend of $0.10 per share, which represented at the time a 2.1% dividend yield at the share prices at the time.

And now, I'll turn this discussion back over to Paul Toms for his outlook.

Thanks, Paul. While our business was hitting on all cylinders in the fourth quarter, incoming orders slowed somewhat as is typically the case during Q1. During February and March, the first two months of our fiscal 2015 first quarter, demand was consistent with the same period in the prior year but down high single digits compared to the fourth quarter. In addition, ocean freight rates have increased approximately $750 per container on average since July, which necessitated a small price increase to our customers on March 30 which should offset the impact of the increased freight rates that are beginning to flow through our inventories.

We have seen business began to pick up during the second half of March. Overall economic conditions are favorable to the furniture industry with new home sales and existing home sales the strongest in recent memory. Housing affordability remains good, and significant improvements in the employment rate and job growth are both positive indicators.

We are optimistic that housing and furniture retailing will continue to strengthen as we move through this year and believe we are well positioned at Hooker with a fresh and sellable product line across all brands and the right inventory to service our customers throughout the country and across the globe.

This ends the formal part of our discussion. And at this time I'll turn to call back over to our operator, Abigail, for questions.

(Operator Instructions)

Todd Schwartzman, Sidoti & Company.

First question I wanted to ask Mike, what percent of your deliveries in the quarter were made in that 4 to 6 week window?

Around 60%.

And what is that -- just to refresh -- what was it a year ago in Q4?

A year ago it was probably close to 40%. Let me clarify one issue, and that is a part of that 60% reflects dealers' desire for us to ship their orders at a future date. They program out and are not necessarily looking for their product to be produced and shipped within that 4 to 6 week window.

Got it. Okay. Regarding the gross margin for the quarter, I think you covered some of the puts and takes somewhat. I'd like to maybe delve a little bit more into that. I know, Paul Huckfeldt, you mentioned that the ASPs are up 11%, I think. Is that correct?

Right.

Okay. Can you maybe speak to some of the other puts and takes? Maybe some more color on the mix shift. And also I'm not sure -- I may have missed it if you did quantify the relief that you had in discounting on a year-over-year basis, but just kind of maybe speak to how that factored in to the gross margin. It seems that when you have fired on all cylinders as you said, Paul Toms, it seems that in the past when you've done so, it's also been in a Q4. I'm just wondering what is it that tends to be seasonally unique to you guys where you have -- more frequently than not when you have that kind of tailwind, it is in the fourth quarter of a given fiscal year.

Discounting accounted for the year, $3.5 million, $4 million of difference. I think I said there's about $1 million turnaround in our upholstery operations, most of which is at the gross margin line. Fourth-quarter tends to be good -- we had great volume. Couple that with -- I think we saw a good discounting experience in Q3, too. I think we talked about that on the call, too. So we've got two quarters of good discounting and then you stack some good volume on top of that. Upholstery had good results or much better results than they did the same fourth quarter last year, was a tough quarter for Sam Moore. So hitting on all cylinders is the right description. It's nothing special, nothing unusual. Just good volume; continued low discounting, which we attribute to focus on accounts and also focus on inventory management. It takes a while to build those disciplines, and they are starting to pay off.

And on mix shift, I know that casegoods grew faster than upholstery in the quarter, so within upholstery clearly you've made some inroads on custom versus non, and that's something that's got to be a margin boost. What can you say about the mix -- and I know you've spoken to the better category of price points, but what can you say more specifically within casegoods that may have helped the mix in Q4?

Todd, we have become a collections-focused or centric Company and those collections include bedroom, dining room, home office, occasional, home entertainment. And what we are finding is that the two most fastest-growing areas of our business, casegoods business, are bedroom and dining room followed by occasional. And our largest business segment, albeit a modest difference today, is home office. And we are even experiencing growth in that category today. So through collections, again, we are growing bedroom, dining room, and pulling through other product categories with those collections specifically home office, occasional. And we are even doing more home entertainment business through that collections effort.

Great. And on the freight cost side, when does that $750 per container increase reset?

We've been experiencing that for several quarters. With our fairly slow inventory turns it's just now starting to cycle into cost of goods sold. We have some price increases coming that will help offset that. We expect to see something in that ballpark when we renegotiate our freight rates this spring, mid spring. So we kind of think that's the territory right now and we've built in price increases to cover that.

And to expand on that, Todd, it isn't like we experienced in exact $750 increase on every container. We had maybe 40% of our containers that shipped at a rate that we negotiated last May but containers that we didn't contract for under that rate were subject to increases as much as $2,000. But on average we saw an increase of about $750 since July.

And in terms of the ripple effect of the port situation, do you think that it's Q2 when we see that fully in the rearview? Just one more current quarter and that's it, or are there some more lingering effects that you might affect expect?

You know the port congestion you hear about the most is on the West Coast ports where they have labor slowdown. We don't really bring that much product through West Coast ports. Some of our direct container direct business to customers from Texas West comes through West Coast ports, but 80% of our business is shipped out of warehouses in Virginia. That all comes to East Coast ports, primarily Norfolk. So we weren't as impacted by the West Coast problems that were so well publicized. But actually there's congestion on the East Coast as well and specifically at Norfolk, and we've been impacted by that. And the impact is it's taken truckers a lot longer than it should to pick up containers at port, and it messes up how long they can be driving in a day and it takes what should be a day trip and turns it into something more than that. So there's an impact on the drayage from the port here, and I don't think that's going to correct itself real quickly. We are looking at a couple of alternatives, other East Coast ports or even a barge service from Norfolk to Richmond to try to mitigate some of the congestion at the Norfolk port.

Make sense. With regard to Homeware, what was the operating loss and by how much did that narrow from last year? In the quarter?

It was about the same as the prior year.

And are you targeting any point in the calendar as far as breakeven, or is that just kind of a work in progress?

We are not targeting anything in fiscal 2016 calendar for breakeven at Homeware. I think we are still in a kind of building stage. We are still getting the product line filled out and figuring out the right price points for the e-commerce accounts that are distributing Homeware. And I think we have growth maybe double the volume this year, but there is still an operating loss that we are budgeting. It's lesser than we had in fiscal 2015 but still a loss.

And as far as the SG&A associated with Homeware manpower, are you set for the foreseeable future, or is there any plan for expansion there?

I feel like we are pretty well set. And actually, we are taking some of the folks that were focused almost exclusively on Homeware last year and using them in other areas of the business in addition to what they are doing in Homeware. So specifically, we have a healthy e-commerce business for Hooker and the other brands -- Bradington-Young, Sam Moore, Hooker Upholstery, and some of the talent that has been focused on just Homeware is also helping manage our e-commerce business. And we have another program that we have with about 30 of our best customers, called P3 where we help them establish a local e-commerce model for their territories, their marketplaces, and those folks are also involved in that program.

And for each contract what did you earn in the quarter?

I think just a little bit better than breakeven -- maybe a percent or two -- something on their volume.

Is that still -- from a long-term perspective, is that still a viable business for you to be in?

Very viable. We are seeing growth almost every month. It seems like it's growing a little bit. And we have a very accomplished general manager running that business, and it seems like we are getting to traction there.

And I know I've asked you in the past about the planned evolution of the products -- the H Contract products. Has there been anything to update us on there in terms of the breadth or depth of those offerings?

Well, they continue to bring new products to market although at a much, much slower pace at smaller scale than we are used to in residential casegoods or upholstery. So -- but I think for that type of business we are bringing out what would probably be a normal amount of new product introductions. We've introduced I'm guessing 15 to 20 SKUs over the last couple of months.

Okay. And have you encountered any issues, any concerns regarding the salesforce selling into that channel?

Well, the salesforce that distributes each contract is a separate salesforce than distributes Hooker, Bradington-Young, or Sam Moore, so it's a contract salesforce that's carries other noncompeting contract lines, selling into the same types of distribution that our contract reps do.

Great. Thanks, guys. Appreciate it.

Reuben Garner, BB&T Capital Markets.

With the demand picking up lately, how much would you attribute this to share gains versus just general overall market improvement? And can you talk about what the retailers have been saying about trends and their expectations for the rest of 2015?

I think most retailers are optimistic about the prospects for a good year in home furnishings. There are some regional challenges relating to higher oil prices, for example, but generally they remain optimistic.

And the share gains versus the general market?

We believe it's really the growth that we've experienced is some of both. Yes, business has been better, but we also think we are making gains in market share, and it varies from brand to brand. Casegoods, for example, 2015 was a particularly good year in terms of market share gain.

Okay. Perfect. So margins had been trending up in recent quarters, but it seemed Q4 was a pretty big step-up. Can you talk about the components of that increase? I think it was about 400 basis points on the EBIT line. Can you talk about what the difference maybe was between Q4 and the prior quarters and maybe how to look at that going forward, particularly with the ocean freight rate increases? And how much of that was in the back half of the year, and how different it's going to be going into the first half of this year?

The biggest element of the improvement was reduced discounting. I don't think we are going to reduced discounting a lot more. We also leveraged volume; that helped some. And in the quarter we had a pretty big turnaround. I think I mentioned this earlier is that we had a pretty big turnaround at Sam Moore. They had a horrible fourth quarter last year so that was a $750,000 turnaround from last year. So those are the three elements. Although we've experienced increased freight rates, to this point most of that, like I said, is because of -- is in inventory because of our just inventory turn cycle. So it really hasn't hit us -- it will start to hit us in the first quarter, and then we hope -- we expect to mitigate that beginning later in the first quarter with a price increase, which should be fully implemented during the second quarter.

Okay. And the $750 container cost increase -- what is the base that that increase on?

That represents about a 22% increase in our container cost, or about a 2% to 3% hit to our margins, 200 to 300 basis points. If we saw it on every container and every shipment out of Martinsville that we made. But as Paul said, we did have a price increase that would offset the impact of the increased freight costs. We had the price increase on March 30, so we figure it will probably take six weeks for that price increase to really show up in our shipments. We've got about a six week backlog on average of casegoods, so you expect that show up in probably mid-May, which is like the first month of the second quarter.

And if you are comping against first quarter last year, discounting was a little bit higher so we'll mitigate a little bit of that with better discounting.

And we have had one other pleasant surprise in regards to freight and that's we finally are seeing some relief from fuel bunker surcharge standpoint. So I think the most recent quarter we had a pretty good positive impact from fuel bunker surcharge.

Okay. And back on the December call I think someone asked about the fuel impact on the other raw materials and you thought it may be an overall net positive impact. Has a changed at all in the last 10, 12 months?

I don't think fuel really shows up that much other than container and often times not so much even there. It seems like the adjustments are typically pretty small, but I guess the big decrease in oil prices late last year -- the surcharge -- the recent adjustment was the largest one we've seen in years.

And I don't think foam prices changed as much as you might think considering they are a petroleum-based product.

Okay. And last one is, you guys are up to about $39 million in cash. Can you update us on what your capital allocation strategy is with that? And then that's all for me. I appreciate you guys taking my questions.

Well, that's a good question, and we are always looking at acquisitions. We feel like we've got not only the excess cash but the borrowing capacity to make a meaningful acquisition. Absent being able to find an acquisition that fits us strategically, we have a share repurchase plan in place. And we always have the option of increasing the dividend which up until today has been a little bit over 2%, but our preference -- and I think most of our investors' preference -- is to make a smart acquisition that would help grow the Company beyond the organic growth and the strategic initiatives that we've been able to enjoy.

Great. Thanks, guys.

Mark Montagna, Empirical Capital.

I have a couple of questions. When you are talking about the higher freight rates -- that's within COGS and you mentioned you've seen a margin decline. Is the margin decline only within gross margin, or are you talking about net EBIT margins actually -- the EBIT margins being down?

It will flow through -- it's a variable cost and it's going to flow through at least temporarily. Like I said, we will mitigate that with price increases but there is going to be a short-term impact that flows through to operating income.

Okay. And then second question, are you getting any positive -- are you still getting positive response from your product lines from the fall tradeshow? And are there any early indications of high enthusiasm leading up to the April tradeshow?

Well, there is enthusiasm regarding the April market -- we did have a good pre-market, so the initial response to our casegoods introduction specifically were very positive. We did not show a poultry at pre-market this time. As far as last October, we are deriving a benefit today from our upholstery introductions which shipped sooner than casegoods. Casegoods are just shipping now so we really don't have a retail history at this point in time. We are optimistic, just based on the number of placements coming out of the October market and the level of success we had with the collections that we introduced, but again no retail reports at this point.

Okay. Thank you.

I am showing no further questions at this time. I would now like to turn the call back over the Paul Toms for any further remarks.

All right, well we actually don't have any additional remarks, but we appreciate everybody's interest and thank you for joining us on today's call. We'll look forward to updating you in about two more months with our first quarter results. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.