Hooker Furnishings Corp (HOFT) 2016 Q2 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 second quarter. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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. Please go ahead, sir.

Thank you, Mallory. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2016 second quarter and first half, both of which ended August 2, 2015. We certainly appreciate your participation today.

Joining me today are Paul Toms, our Chairman and CEO, and Michael Delgatti, our President.

During the call, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and the SEC filings announcing our fiscal 2015 second-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 $60 million and net income of $3.9 million or $0.36 per diluted share for our 13-week fiscal quarter ended August 2, 2015. Both net income and earnings per share increased over 70% compared to a year ago on an approximately 10% or $5.3 million net sales increase compared to the prior year quarter. First-half sales were $121 million, up $4.8 million or 4.1% and net income was up 46% or $2.3 million to $7.4 million which translates to $0.69 per share.

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

Thank you, Paul, and good afternoon, everyone. We were pleased to report a very good quarter both top and bottom line across all segments of our business. All segments, including casegoods, upholstery and our all leather segment, encompassing startups H Contract and Homeware, performed well and profitability improved year over year. This was very apparent in the quarter and also year to date for the first half of the fiscal year.

At 10%, consolidated sales increase in the second quarter helped offset flat sales in the first quarter to bring the first half to a better level as we head into the traditionally strong fall selling season and second half of the year. The solid sales performance for the quarter was especially gratifying considering that summer is traditionally the weakest quarter for our industry. We are comparing to a weak quarter last year. But that said, we would have to go back seven years to find a fiscal year second quarter as strong as the one we just completed.

The improved revenues were driven by the casegoods segment, where sales rebounded nicely from last quarter as delayed October 2014 product introductions load to retail and began to sell well. Within the upholstery segment, sales were up year over year for both Bradington-Young and Hooker Upholstery, but down at Sam Moore, where shipments were adversely impacted by the conversion of Sam Moore's Enterprise Resource Planning System to a new platform.

The business disruptions at Sam Moore were most prevalent midway through the quarter but improved by quarter end and are now stabilizing. Even with the sales decrease in the low double digits, we were pleased at Sam Moore's ability to improve operating income 170 basis points here in the quarter.

Operating income was a highlight across the board for the Company during the quarter and first-half. For both the quarter and first six months, the consolidated operating income increased in both absolute terms and as the percentage of sales. With the casegoods segment achieving an operating margin of over 10% for the fourth consecutive quarter. Operating income in the upholstery segment more than doubled in the first half, with a $1.5 million increase in operating profitability year to date.

Combined, our new ventures, H Contract and Homeware, reported a net sales increase in the quarter and the first-half and realized their first quarterly operating profit for that segment during the quarter. The solid performance was driven by H Contract, where we are pleased with the progress we're making.

We are on track to exceed our sales plan for the year. Between the two startups, we gained traction a little quicker at H Contract as we have been able to leverage existing assets and attract a strong executive to lead that business. We expect H Contract to continue to broaden its customer base and product assortment. Gross sales can contribute more significantly to consolidated operating profitability the balance of this fiscal year.

At Homeware, we are making progress by adjusting our strategy, which Mike Delgatti will go over in more detail during his comments.

At this time, I would like to call on Mike to provide more details on the performance of Sam Moore, Bradington-Young and Hooker Upholstery. He will also touch on other initiatives underway at the Company and provide some insight about the refinement of our strategy at Homeware. Mike?

Thank you, Paul. Good afternoon, everyone.

As Paul mentioned, the significant improvement in operating profit for our upholstery segment was a gratifying accomplishment for the quarter and first-half. This improvement is a result of an ongoing multifaceted approach. We have purged non-value-added costs, improved manufacturing efficiencies and capacity utilization, introduced new product lines and programs to yield higher gross margins, and moved away from some less profitable programs.

Taking a look at each of our upholstery brands separately, we will start with our Hooker Upholstery imported leather line, where we had a particularly good quarter rebounding from a 10% sales decrease last quarter to achieve a 13% sales increase this quarter. In addition, operating income improved 540 basis points and demand was also strong, with orders up 7% for the quarter.

Much of this came on the strength of a successful launch during the April High Point market of a new barstool program. As a result, April marked a new product order [were] up 54% when compared to a year ago. Since barstools are a new category for us, this represents incremental sales for the Hooker Upholstery brand.

Moving on to Bradington-Young, our domestically produced upscale upholstery brand, also had a solid quarter with sales up 8% and incoming orders up 6%. The luxury motion premium leather upholstery program introduced at the last October High Point Furniture Market is selling very well and gaining momentum at retail.

We believe that, particularly in the upper end leather market, we are capturing market share as we have been consistently growing at a pace in the mid-single digits most quarters. As retail conditions continue to improve, we see retailers begin to shift their good, better, best merchandising strategy more to the better and best price points, which benefits the Bradington-Young brand.

In addition, we have had some relief recently from leather costs, which is beneficial to both Bradington-Young and Upholstery. After many months of rising leather costs, we have seen around a 2% to 3% reduction in leather costs. Most importantly, leather pricing has stabilized after a long period of volatility. At Sam Moore, completing the conversion to a new ERP system platform during the quarter impacted production and shipping, resulting in sales decrease from the low double digits. The operating income improvement of 170 basis points at Sam Moore, despite reduced sales, was gratifying. While there was some impact of the ERP implementation on August shipments, we expect to be back up to our free go live run rate by October.

Another positive for Sam Moore this quarter was the Sam Moore studio retail dedicated space program introduced at the April market. We now have approximately 60 dealer commitments to the program and revenues will be positively impacted as shipments of products for these retail galleries roll out in the third and fourth quarter.

Now shifting gears a bit, I would like to turn attention to the Homeware brand and our revolving strategy.

Performance continues to improve with sales up year over year this quarter. Sam Moore reported a lower operating loss in the fiscal second quarter and first-half compared to the last year. However, performance is not where we expected or would like it to be. We are continuing to refine our product mix and our value proposition at Sam Homeware.

In going forward, we will focus on the wholesale portion of the business. We will be eliminating the direct to consumer portion of the business early in the current fiscal third quarter. Going forward, we will focus on growing sales and distribution with online and omnichannel retails.

We believe that the wholesale portion of the business and the small parcel rapid shipping product model is viable and can be grown across the broad spectrum of accounts. We expect that it will take Homeware longer than contract to reach critical mass and profitability.

However, we view this investment as a vital step towards future of consumer-centric home furnishings, retailing and the migration of retail sales to online outlets, which represents the fastest growing channel in the industry.

Shifting now to our casegoods business, we are seeing positive developments. Total sales for the quarter were up 13% or $4.2 million, and orders were up 7%. Leading the way was the dining room category where sales were up 31%, bedroom sales were up 25% and occasional furniture sales were up 12%. Historically, Hooker has been known as the category killer in home office and home entertainment furniture. However, major changes in computer and entertainment technology and consumer preferences have impacted growth in these categories.

In response to these changes, our strategy has been to expand whole home collections which include bedroom, dining room, accent and occasional while maintaining our relevance in the home office and home entertainment categories. The significant growth during the first half in bedroom, dining room and occasional furniture is the gratifying validation of that strategy.

In addition, we have also been pursuing a strategy to strengthen the better price points in our good, better, best assortment in order to expand our market penetration and gain retail floor space. That strategy too gained traction during the first half of the year as several of the collections in the better price points have performed very well at retail. Our mix container program out of the Vietnam warehouse, which services the better portion of the product line, is also strengthening.

Our international sales are also faring well year to date with an 11% increase, despite a strong dollar. Casegoods are driving the international sales gains.

Finally, our marketing initiatives have contributed to our top line. During the quarter, we continued our digital national advertising with a May event that featured new additions to our popular Sanctuary collection and was deployed across the Google display network, and a heavy flight on Facebook.

Our results generated 37 million consumer impressions, over 130,000 clicks on our website and nearly 12,000 consumers visiting our dealer locator to find a retailer in their area who carries the collection, which was an 8.7% conversion rate. This fall, we plan a digital campaign with a strong call to action and drive to retail incentive.

We are also excited about the launch of the major new brand with the Cynthia Rowley whole home collection featuring three unique personas. We plan to have 90% of that collection ready at High Point Free Market next week. Overall, we are optimistic about our results and direction as we anticipate an exciting October High Point Furniture Market and a strong fall retail season.

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

Thanks, Mike.

Consolidated net sales increased for the quarter due to net sales increases in our casegoods and all other segments. The increases were driven by higher unit volume and higher average selling prices in both units. For the year, increases in net sales in the casegoods and all other segments more than offset a net sales decline in the upholstery segment, which was due to lower unit sales.

Consolidated gross profit increased primarily due to increase net sales and decreased discounting and returns and allowances in the casegoods segment, which helped offset cost increases on our imported products. Also contributing to higher consolidated gross profit were improved operating efficiencies and decreased contract manufacturing cost in our upholstery segment as well as increase sales volume in our all other segment.

All segments also benefited from decreased medical claims costs in both the quarter and in the first half.

Consolidated selling and administrative expenses were essentially flat for the fiscal 2016 second quarter, despite the higher commission expense resulting from the increased sales. Lower donations of distressed inventory, lower bad debt expense and lower selling and marketing expenses partially offset the increased commission expense and increases in other benefit expense and depreciation.

Thanks to flat spending and higher sales we saw SG&A decline as a percent of sales from 18.7% in fiscal 2015 second quarter to 17% of net sales this quarter. For the fiscal 2016 first half, consolidated selling and admin expenses decreased slightly in absolute terms and 1% as a percentage of sales, primarily due to decreased medical claims expenses, lower donations of distressed inventory, lower banking expenses and lower brand management expenses and bad debts, partially offset by increased professional services fees and higher sales commissions due to higher sales.

Due to all these factors, consolidated operating income increased both in absolute terms and as a percentage of net sales.

Our casegoods segment generated an operating margin of over 10% again this quarter and the upholstery segment operating income more than doubled in the fiscal 2016 first-half and nearly doubled in the fiscal 2016 second quarter. Our balance sheet remains strong with cash and cash equivalents of nearly $44 million, which allows us to invest in inventory receivables and cost of growth initiatives. We remain debt-free and have $13.5 million available under our revolving credit facility which remains in place until the middle of 2018.

Earlier today, we declared a dividend of $0.10 per share for the quarter, which represents a 1.6% dividend yield at today's share price. Now I would like to turn the conference discussion back to Paul Toms for his outlook.

Thanks, Paul. The economy continues to be favorable to our industry, particularly in the housing sector where improved home sales, housing starts and household formations are especially beneficial for larger ticket furnishings like casegoods. Consumer confidence is healthy and interest rates remain at historically low levels, which should keep housing affordable. While we haven't seen demand pick up as much as we typically do in the late summer, we still expect demand to strengthen over Labor Day weekend and throughout the fall and are well-positioned to take advantage of the expected upturn in retail business. We remain optimistic about our long-term future as well, both with our core business and our new ventures.

This ends the formal part of our discussion and, at this point, I will turn the call back over to our operator Mallory for questions. Thank you.

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

Paul Huckfeldt, you talked about some cost impact. I think you were talking about the import products specifically. Can you get a little bit more specific, kind of like maybe some better things were happening in leather? But what was the -- I'm not talking about price necessarily, but what was just the cost pressure in the quarter and how do we think about the different buckets as we look forward?

We saw freight costs, which I think we've talked about before is freight costs spiked late last year, early this year. They've settled down a little bit. But freight costs are definitely up and costs in Asia have increased some. We've seen some price increases from Asia suppliers, but mostly it is freight that went up.

Can you give me some specifics around the magnitude of the pressure in the quarter and how to think about it as we look forward?

I would say it's the 1%, 1.5% freight impact. Of course we built some of that back into pricing where we can. But freight is up, not as much as we feared it might be this year, but it was up 1 -- let's say 1% over the same time last year.

Okay, and so that is not net of price. So as we think about the net impact on profitability moving forward, maybe take it a step further and talk about some of the puts and takes that we should account for as we move through the remainder of the year.

Let me -- Matt, this is Paul Toms. Before we move on to that question, let me out a little more color around what Paul just said with the freight increases. We did see freight costs increase ahead of Christmas last year and as we typically -- you see more stress or more demand for what capacity there is as people moving stuff over here for Christmas. And rates definitely went up and we paid some surcharges and that continued after Christmas and through the spring.

And when we negotiated contracts, we actually -- we saw a good increase over what we had the previous May, but not as much as what we had been experiencing most of the year.

We had a price increase in March, which is not typical for us. We typically have one increase a year in September. But due solely to what was going on with freight costs, ocean transit costs, we put in a price increase in March that definitely offset what we had experienced with freight cost and what we expected to continue to experience.

We also took a modest price increase on about half of our -- well, no, it would probably be more like about 40% of our casegoods in the spring and early May, which has not filtered through yet. I really think net, net of that is probably about what Paul said, around 1% impact freight is actually a little bit less than I think we've -- had a minimum recovered of freight cost increase with the price increase in March.

The impact of the price increase on 40% of our imported casegoods probably is just starting to show up a little bit. And I think that will be spread over time as it filters into inventory and it's not on all goods and it's not on newer introductions, but all-in probably on about 40% and an impact of 1% or less. Hooker Upholstery will also benefit from lower freight costs.

Okay, got it, got it. So on Sam Moore, can you talk about how much of the decline was ERP-related, how much was exiting some of that low margin business and how much of it was demand? And kind of the same forward-looking viewer commentary would be helpful.

I believe the majority of the decline related to the ERP implementation. It cost us about 10% and sales for the quarter. And then beyond that, moving away from low gross margin programs.

Okay, got it. Okay, final one for me. Paul Toms, I guess for you, you talked about the incoming orders, not as much as usual, yet you are still bullish about Labor Day. Can you talk about kind of both of those, and how they work together? What do you think has caused the slower period or slower growth or --? In incoming orders? And what gives you confidence that, other than the macro items you talked about, that you will see that recovery as soon as Labor Day?

Okay, you know, I think there are a few things at play here. One is, we had a stronger quarter in Q2 than we typically do in Q2. Almost -- what do we say, 10% over last year's second quarter and on the income and orders side, maybe not quite 10% but closer to say 6% above last year's second quarter. So I think we are comparing to a stronger quarter this year than we typically have second quarter.

We are also having our conference call ahead of Labor Day, where typically we have it after Labor Day. So typically, by the time we had the second-quarter conference call, we've got some visibility on how Labor Day weekend went. And as you know, that is a huge weekend in furniture retail. So we don't have that visibility this year.

And our orders for the first four weeks of August are up. They are up about 3.5% consolidated over the first four weeks of last year's August. But, the step up between the second quarter and August is not as much as we typically see. But we are typically looking at it after Labor Day instead of before. So some of that is just a gut sense of how things feel and I don't know that it's much more than that.

I have not heard anything from customers that makes me think that the fall won't shape up. I think everybody is planning on fall being good. The environment, with housing being stronger than it has been in seven or eight years, it certainly bodes well for our industry. And I am sure there is some psychological impact from the volatility in the stock market.

But I think fundamentally, we are in good position, both at the Company but also our industry that to capitalize on the upturn in housing and I expect the furniture business will be a better in the fall than it was the summer, as it always is. And I think I don't see anything that makes me think this fall won't materialize as we expect.

So I guess one more, just to follow up on that, the August order rate is up 3.5%. Is there anything -- you mentioned the tough comp in Q2, but is there anything from a comp perspective as we progress through the year that could maybe make -- even though you are seeing acceleration sequentially that the comp is tougher to the point where you can't -- where the growth will actually moderate?

Well, I think the third and fourth quarter are going to be much tougher comps than the second quarter was. The second quarter last year was our weakest quarter. So the bar is raised in the third and fourth quarter. But as I said, we are 3.5% up in orders and ahead in shipment as well the first four weeks of this quarter. So I expect us to comp well, but there are going to be harder comps.

We finished strong last year.

Yes, I'm sorry. I wrote down the wrong quarter when he was talking before. I got it now. Thank you, guys.

Mark Montagna, Empirical Capital.

I wanted to go back to just some of your shipping costs, trying to understand that a little bit better. Do you work a lot on -- is it contracts that are kind of set in price? Are you dealing with spot pricing? And then how much of, say, the higher shipping cost is more international versus, say, domestic?

Well, it is all international because we don't pay to ship to our customers domestically. We have some freight from the port in Norfolk or Wilmington to Martinsville, Virginia. But that is not a significant part of the overall inbound transit costs and it has not changed that much over the last 12 months, so the increase we were talking about was ocean transit, container freights on shipping vessels.

And we do negotiate and execute contracts for about half to maybe two-thirds of our needs in May of every year and then we go to the stock market for the remaining part of our needs. And, even having those contracts, in years where freight costs are rising significantly like last year, the steamship lines come back and ask you for an increase, or they will give you the space at the lower rate when it's available. But it's typically detrimental to us to not give them an increase if costs are going up pretty much throughout the system.

The same thing on years like this, where we have negotiated contracts. If rates are falling, we will typically work with them to load containers at less than the contracted rate. So I hope that answers your questions.

Yes, that's helpful. So then, when you look at housing, as kind of being an indicator of potentially future results, how much of that is driven by housing sales or versus home remodeling?

Both are favorable to our industry and home remodeling is I think a big part of what sustained us the last four or five years in the absence of really strong housing sales. But any time there is people moving, whether they are forming a first household or they are moving to a larger house or to downsize into a smaller house, those are all generally involve some furniture purchasing and remodeling.

Typically, with housing turnover, there is better business for casegoods. With housing remodeling, it tends to benefit our upholstery better. So over the last four or five years, I think upholstery has outperformed casegoods in our industry. And now, you are seeing casegoods outperform upholstery typically.

So all of it is triggered, I think, by housing and I would say furniture beyond housing turnover just life events typically have an impact on furniture -- people getting married, people getting divorced, people having kids, people retiring. All of those things typically have some furniture-related activity with them.

Okay, just lastly, you've got the ERP up and running over at Sam Moore and I'm wondering, do you have any other systems installations that are coming in the other divisions? Or such as the ERP or whatever other systems?

We are completing the last phase of our ERP rollout at our Bradington-Young division. We feel like that one is going to be a little more simple and straightforward, because we have developed the manufacturing application, which -- at Sam Moore. So I think -- I won't say it's going to be easy, but I think it's going to be easier.

We've tested, we found some of the bugs through this process we talked about. So we should be able to have -- we expect to have a smoother implementation at BY, which will be at the end of this year or early next year. Mike Delgatti just crossed his fingers.

We believe that is going to be the case and we expect that like the end of this year or early next year.

So is that the only additional one that you have?

Yes.

Okay, and then -- (multiple speakers)

That completes the circle. That is the completion of about a six-year project with $7 million or $8 million of cost and a lot of time -- people's time here. It is a major change bringing all three of our companies on the same operating platform.

We took it slow. And we've had a few bumps, but it didn't shut the place down. So we feel like stretching out was the right decision.

That sounds great. It sounds like a major burden that you are not going to really have to focus on. I would imagine that frees up a fair amount of management time and you can start -- keep gathering all those efficiencies, I suppose.

Right, deriving the benefits now.

Yes, excellent. Thank you.

Thank you. I'm showing no further questions. I would now like to turn the call back to Paul Toms, Chairman and CEO, for any further remarks.

Okay, I really don't have any additional remarks. We are glad we are able to report a good quarter in our second quarter this year. We look forward to being back on the phone with you in early December to go over our third quarter. Thank you for attending today. Goodbye.

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