Hooker Furnishings Corp (HOFT) 2016 Q1 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 first-quarter 2016 earnings period. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation. Sir, please go ahead.

Thank you, Caitlin. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2016 first quarter which ended May 3, 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 uncertainty. 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 our fiscal 2016 first-quarter results.

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

This morning we reported consolidated net sales of $61 million and a net income of $3.5 million, or $0.32 per diluted share, for our 13-week fiscal quarter ended May 3, 2015. Net sales for the quarter were essentially flat, decreasing by less than 1%, or $440,000, compared to the prior-year quarter.

Net income increased nearly 24%, or $668,000. Earnings per share increased to $0.32 per share compared to $0.26 a share in the prior-year quarter.

Now Paul Toms will comment on our first-quarter results.

Thank you, Paul, and good afternoon, everyone. Overall, this was a solid quarter and we are pleased with our ability to grow profits more than 20% in spite of flat demand and inconsistent retail conditions around the country during the period.

As we reported in our press release earlier today, consolidated operating income increased nearly $1 million, or approximately 24%, driven primarily by improvements in our upholstery segment. Combined, Sam Moore, Bradington-Young, and Hooker Upholstery improved operating profitability by $900,000 year over year through cost reductions and increased manufacturing efficiencies.

Our casegoods segment built on last year's strong performance by again generating an operating profit margin of over 10% this quarter, driven by lower discounting and quality-related costs in spite of higher product and shipping costs. Moving forward, we believe we can continue to make incremental improvements in casegoods' profitability performance.

Despite the flat casegoods sales in the segment and soft demand during the period, we continue to see higher retailer confidence in the ability to sell large ticket bedroom, dining room, and occasional furniture. This trend, which began during the 2014 calendar year, indicates a continued recovery in the casegoods segment of our industry. There were a few short-term and seasonal factors that deflated revenues during the quarter.

First, late deliveries of several key introductions from the October 2014 High Point furniture market experienced delayed shipments of these products to retail stores until the beginning of the current quarter. Delivery of these collections are presently rolling out on retail floors. Sales across all brands were negatively impacted by lower oil prices, which softened business, especially in Texas and Oklahoma, two top states for Hooker Furniture revenues.

More recently, at the end of the last month we were pleased to hear reports from retailers around the country that Memorial Day sales were particularly strong, even for retailers in Texas and Oklahoma. This was an encouraging indicator that consumers are responding to aggressive promotions during holiday sale periods.

At the end of the quarter, Sam Moore's Bedford, Virginia, operations went live on the conversion of its enterprise resource planning system to a new platform. The new ERP system conversion we have been working towards for over two years was implemented the first weekend of May and the transition has generally gone very well.

Our new business ventures, H Contract and Homeware, each had double-digit year-over-year growth in the quarter, including a 50% growth rate in H Contract revenues.

At this time, I would like to call on our president, Mike Delgatti, to give a report on the April High Point Market and more details about the performance of our upholstery companies this quarter. Mike?

Thank you, Paul, and good afternoon. As Paul mentioned, significant operating income improvement in our domestic upholstery operations was a highlight of the quarter. At Sam Moore it was exciting to see a dramatic year-over-year improvement in operating income on the strength of better manufacturing efficiencies and cost reductions.

This profitability performance improvement was achieved despite the fact that sales were actually down for Sam Moore during the quarter. Employees were also challenged during the quarter by the conversion of Sam Moore's ERP system to a new platform in early May, requiring much time and effort on their part. As Paul mentioned, their work over the last 2 1/2 years to transition to the new system paid off with a successful go-live conversion during the first weekend of May.

Also during the quarter, Sam Moore introduced Sam Moore Studio, a comprehensive retail merchandising program aimed at enhancing the shopper experience through better display and selection. The studio program was very well-received at the spring High Point Market and we already have 30 commitments from retailers. We expect to increase these commitments by at least 50% by the end of the quarter.

We believe this program will help us grow our business with each retailer through gaining more retail floor space and achieving higher productivity in that floor space. The Sam Moore Studio will create a destination for the brand within participating retail stores and help us tell our value proposition in a more compelling way to consumers, who will appreciate the ability to customize their upholstery through fabric, finish, and trim options.

Moving on to Bradington-Young, our upscale leather upholstery brand had a particularly strong quarter on the top line and bottom line with a solid year-over-year improvement in operating profitability. Bradington-Young's top line continues to be boosted by ongoing successes of the comfort at home retail merchandising program and more recently by the luxury leather motion upholstery program introduced last fall. We believe this is the most comprehensive and versatile high-end motion upholstery program in the industry. It is selling well at retail and continuing to gain new placements.

Sales at Hooker Upholstery, our imported leather upholstery line, were down about 10% for the quarter. Just as last year when Hooker Upholstery came on stronger in the second half of the year, we expect improving business as we move through this year as well. We have strengthened the opening price points for Hooker Upholstery and are seeking to be more creative and innovative in our design and color direction.

We are also pursuing a strategy to diversify the Hooker Upholstery product line, and as part of that strategy, we introduced a barstool and counter stool program at the April High Point furniture market that was very well-received and continues to be ordered at a brisk pace. The bar and counter stool program was one of several strong introductions at the April furniture market for Hooker Furniture's brands, where attendance was up in the mid-single digits compared to April market a year ago. And a favorable development for both Bradington-Young and Hooker Upholstery, we have seen in a welcome stabilization of leather prices.

Going into the market, our strategy in casegoods merchandising was to strengthen our better price points and our good/better/best assortment within the accent and occasional categories and in whole-home collections. This strategy was successful and we had a big hit with our Skyline Collection, an urban contemporary look crafted in highly-figured Cathedral cherry veneers.

As we move through the summer, we will be busy developing our Cynthia Rowley whole-home collection set for introduction at the October High Point furniture market. We recently showed renderings of the collection to major retailers at a dealer design meeting, and they were extremely excited and enthusiastic about the style direction of the collection.

Now I would like to call on Paul Huckfeldt to give us more details on our performance during the first quarter of fiscal 2016.

Thanks, Mike. Consolidated net sales decreased for the fiscal 2016 first quarter, primarily due to decreased unit volume in both our casegoods and upholstery segments, partially offset by increased average selling price in both segments. Unit volume decreases in our casegoods segment were primarily due to decreases in container direct shipments to retailers during the quarter. That was partially offset by increases in non-container shipments.

The shift from container to non-container sales contributed to higher average selling prices, as did another quarter of lower discounting. The decline in upholstery segment net sales was due to decreases at both Sam Moore and Hooker Upholstery, partially offset by increased volume at Bradington-Young. Our all other segment contributed positively to sales in the fiscal 2016 quarter compared to the prior-year period, but is still a very small component of our overall sales.

We believe the decrease in our fiscal 2016 first-quarter sales results compared to our 2015 results is primarily due to overall inconsistent conditions at retail and some product availability challenges due to some expanding lead times and late deliveries of some of our more popular October market introductions in the casegoods segment. We expect the delayed deliveries we experienced in the first quarter to be less of an issue going forward.

Overall, average selling prices increased 4.9% during the quarter, primarily due to lower discounting, the mix of products shipped, and some price increases to offset cost increases. Consolidated gross profit increased in the fiscal 2016 first quarter, primarily due to improved upholstery segment gross profit due to greater operating efficiencies including better materials management, labor efficiency, decreased use of contract manufacturing, and lower medical claims expense, as well as adjusting or exiting certain low-margin sales arrangements.

And in the casegoods segment gross profits increased due to better discounting -- lower discounting, and product mix and lower returns and allowances as a result of better quality experience on products, which began in the second half of last year and carried into this quarter.

Consolidated selling, general, and administrative expenses were essentially flat, decreasing slightly as a percentage of net sales and in absolute terms, primarily due to decreased medical claim expenses due to planned design changes and better claims experience. Also, decreased contributions of off-quality furniture, which was another benefit of our improved quality experience, and decreased banking expenses due to changes in some of our sales policies. These decreases were partially offset by increased professional service expenses related to increased compliance and consulting costs.

Operating income for the fiscal 2016 quarter $5.2 million, or 8.6% of net sales, compared to $4.2 million, or 6.9% of net sales, last year. Our balance sheet remains strong with cash and cash equivalents of nearly $41 million, which allows us to invest in the inventory receivables and the costs of growing our two new initiatives, which Paul mentioned earlier. We remain debt free and have $13.5 million available under our revolving credit facility, which remains in place until July 2018.

Earlier today we declared a dividend of $0.10 a share, which represents a 1.6% dividend yield at today's share price.

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

Thanks, Paul. While we are encouraged by strong Memorial Day sales reports from our customers, inconsistent and sluggish retail conditions on a day-in and day-out basis have caused demand for our products to be relatively flat throughout the first quarter and during the first four weeks of the current quarter. In addition, key economic indicators such as consumer confidence have been inconsistent, while most key housing indicators such as new home sales, new housing starts, existing home sales, and household formations appear improved year-over-year.

Our outlook for the second quarter is a demand environment that is similar to the first quarter. Longer term we remain optimistic both with our core business and our new ventures and all indications are that the fall selling season and second half of the year should be strong.

This ends the formal part of our discussion and at this time I will turn the call back over to our operator, Kaley, for questions.

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

Thanks. Good afternoon, guys. So let's start with -- the one word I don't think I heard was freight and any type of pressure on the cost side from freight. We had anticipated a little bit more gross margin pressure on the casegoods side from some freight rate issues.

Can you just talk about what you saw in the quarter and maybe did we misunderstand it or did the pressure just result -- did the pressures that resulted just come in a little lighter than you expected?

I would say -- Matt, this is Paul Toms and I would say our freight rates in the last quarter are slightly less than they were in the two previous quarters. Still elevated over last year probably by 15% what we were experiencing in Q1 last year, but maybe 5% to 10% less than we experienced in the previous couple of quarters.

We did have a price increase effective March 30 that was to mitigate the impact of freight cost increase that we experienced last year and anticipated for this year. We did just sign contracts for the coming year and I think we're signing contracts at about the rates we are paying today. So, again, maybe 15% above last year, but not as high as they were at a peak in the last couple of quarters.

Okay. And is there a dollar number that you can point to as how much freight was up year over year, just from a margin pressure perspective?

You would be saying in total what we were seeing versus per container?

No, just your total, what you reported on your cost of goods line. How much freight took that number higher.

I don't know that -- Paul may have a better idea on that.

The impact was about maybe 1%.

But we've again offset that with a price increase that should be taking hold about not. It typically takes maybe six weeks to start seeing backlog get shipped and orders entered at new prices in the --.

Okay. So point of pressure last quarter should be offset, neutralized going forward?

It's tough when you get that close, Matt, because you've got that pressure, you've got the price increases cycling in, you've got product mix questions. So when you are building this into your model you've got -- I'm not sure that you can just say, well, we're going to raise your margins 1% or drop them.

Sure, sure, got it, okay. If I recall correctly, the EBIT margin target in casegoods was always around that 10% level. It seems like you are pretty steadily there now.

Is there -- I think you said that there's opportunity for further improvement. Paul Toms, I think you said that. Can you talk about the drivers of the improvement in where you think that new margin target should be and when we can get there?

I wouldn't set a different target, Matt, although I did say I think we can improve incrementally from where we are and I think the biggest driver of that improvement will be if we are able to grow sales and leverage the fixed costs that we have. The model is pretty good in terms of throwing off additional revenue when we get over the breakeven point.

So I think -- I don't see a lot lower cost, say, for discounting. I think we're probably about as lean as we are going to get quality. We're not quite on target, but we are close to the quality cost that we would have that we would've anticipated. So it is really more just with increased sales leverage in those.

Got it. Then I want to ask the same question, and I guess this might be for Mike. When you talk about the upholstery side of the house, what's the way we should look at the upholstery margin opportunity as we progress through this year and then longer term?

Well, there clearly is opportunity on the upside. The greatest opportunity will be with the Sam Moore brand. We're making good progress in that area and like Paul said, for B-Y volume is our best opportunity to improve profitability of performance. And B-Y is also making some good strides in improving operating income.

And Hooker Upholstery, once again, it's leveraging volume against a fixed cost. We've had some challenges growing that brand. We have some strategies in place, so we believe we will turn around revenue performance, and as we do that we anticipate profitability to improve as well. But the good news is that at the end of the first quarter, all upholstery brands were profitable.

So, Mike, can you put any more detail to that? What is the potential for the margin across the upholstery segment? Can you get to --? I've got in my model the target is 7%. I might've made up that number, but is that a reasonable target? And if so, over what time period?

I think B-Y is there and Hooker Upholstery is really close and we hope over the next three, four quarters Sam Moore to achieve a level in that 6%, 7% range. And there is opportunity beyond that as well, which is where B-Y is in terms of operating income performance today on a consistent basis.

Might as well throw in; Sam Moore may be off a little bit this quarter. That may affect upholstery because the short-term effects of ERP go live. And I think (multiple speakers).

Okay, that was actually my last question. I think -- I can't remember which Paul said it or maybe it was you, Mike, but you said the implementation has gone generally well. Has there been any type of issues, costs, service delays, anything like that?

Yes. There has been some interruption to service scheduling issues, which have caused us to delay the completion of some orders. There have been some issues that have impacted manufacturing efficiencies.

Now we are producing and shipping every day and have from day one. We do believe we will fall short of our budget for May, but what will help us out is the fact that it's a five-week period. But we are addressing the issues very aggressively as they come up and we do anticipate things to smooth out over the next, I don't know, couple of months or less.

So, yes, this quarter I don't think you can -- you wouldn't want to just use this quarter as (multiple speakers).

Got it, okay. Thank you, guys. Good luck.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

All right. This is Paul Toms and on behalf of the three of us, we appreciate everybody joining us today. We are glad we could report good results this quarter and we expect reporting them again next quarter.

We look forward to being back together with you in about 90 days. Thank you for joining us today.

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