Hooker Furnishings Corp (HOFT) 2017 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for their first-quarter 2017.

(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.

Thank you, Shannon.

Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the FY17 first quarter, which ended May 1, 2016. We certainly appreciate your participation today. Joining me are Paul Toms, our Chairman and CEO; Michael Delgatti, our President; and George Revington, President and Chief Operating Officer of our Home Meridian segment.

During our call, we may make forward-looking statements, which are subject to risk and uncertainty. Discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filings announcing our 2017 first-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 $121.8 million and net income of $2.5 million, or $0.22 per diluted share for our FY17 first quarter. This marks the first quarter to include consolidated financial results from Hooker's acquisition of the business of Home Meridian International, which we completed on February 1, 2016, the first day of our fiscal year. Home Meridian's results are not included in the Company's prior-year fiscal year results that will be referenced on today's call.

For the quarter, consolidated net sales doubled compared to a year ago, primarily due to the Home Meridian acquisition. This increase was partially offset by a 7% sales decrease in Hooker Furniture's legacy business, driven by lower sales in the Hooker Casegoods segment. Earnings per share decreased from $0.22 per share compared to $0.32 a share in the prior-year quarter.

The acquisition of Home Meridian this quarter resulted in some expenses that are typically not part of our operating results. I wanted to take a minute to put those costs into perspective before we discuss the results of our operations. We incurred about $1 million of deal-related costs in the quarter. We'll have some of those additional costs in future quarters as we continue to integrate HMI into our organization, but they are expected to be at a much lower level going forward.

As part of the acquisition, we recorded significant intangible assets, including trade names, goodwill, the value of customer relationships and the profit in the acquired backlog. Some of these assets are considered indefinite live assets; others will be amortized, mostly over a 10-year period. However, $1.8 million of profit in acquired backlog will be amortized over the first half of this year, much of it in the first quarter. This had a $1.3 million impact on the quarter's operating income, and will impact Q2 by about $500,000. Overall, we expect to record $3.2 million of Home Meridian-related amortization of intangibles during this year, and then about $1.4 million a year going forward.

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

Thanks, Paul, and good afternoon, everyone.

First-quarter results were impacted by weaker casegoods demand that we -- and we believe the overall industry -- have experienced since late last year. The slowdown at retail we first noted during the FY16 Q3 conference call persisted through the FY17 first quarter.

We believe the weakness was caused by a combination of factors, including lower consumer confidence, driven by volatility in the stock market, a temporary pause in housing activity, and depressed oil prices that negatively affected certain regions of the country in Q4 of last year and Q1 of this year. In general, retailers of all sizes have not been as willing to make large inventory investments as they were in the prior year. And high-ticket deferrable product categories like casegoods have been hardest hit during the retail slowdown.

However, in spite of lower sales and about $1 million in acquisition-related costs, we were able to deliver nearly a 7% operating income margin in our legacy businesses. Since the end of the quarter, we've been encouraged to see stabilization of demand and a strengthening of casegoods orders both at Hooker and Home Meridian in May, which improved sequentially over April.

During the same period, there's been an uptick in consumer confidence, recovery of the stock market and a rebound in housing. We expect these factors may result in an improved furniture retail environment, with less hesitation on the part of retailers to invest in inventory, and less hesitation on the part of consumers to make larger-ticket purchases, like casegoods.

Beginning with this quarter, we're very excited to now have Home Meridian as part of our Company. Long term, we believe our expansion into lower price points and additional channels of distribution that Home Meridian offers, will be extremely beneficial to our Company, and are confident that Home Meridian will be a significant contributor to both our top and bottom line.

During the quarter, Home Meridian's orders were also impacted by weaker demand, and not up to internal expectations for recent growth trends. In addition, seasonality is a bigger factor at Home Meridian, with the first quarter of the year typically representing just 20% of their annual volume, due to the company's business model and the impacts of the Chinese New Year on production and shipment.

Our Upholstery and All Other segments delivered positive results during the first quarter. Upholstery outperformed Casegoods, both in our Company and, we believe, the industry as a whole, during the most recent two quarters. Overall, our Upholstery segment reported a low single-digit sales increase compared to the prior-year quarter. And we were particularly gratified to see a robust increase in our import upholstery line, Hooker Upholstery.

Bradington-Young, our domestically produced premium leather line, continued the trend of low single-digit increases and solid operating profitability. Our customer upholstery specialist Sam Moore reported an operating income improvement of nearly 50% over the first quarter of FY16, despite a 5% net sales decrease due to exiting low or unprofitable sales in the prior year.

In our All Other segment, which includes two new business startups begun in 2014, the H Contract brand continues to grow, with shipments up 82% over last year, and a threefold improvement in operating income compared to the last year. At Homeware, we have not yet felt the impact of the repositioning of the product line, as that is still in process. While sales were down, Homeware cut operating losses in half. Overall, Homeware had minimal impact on our results in the quarter.

At this time, I'd like to turn the call over to our Hooker Furniture President, Mike Delgatti, to give us more details about the performance of Sam Moore, Bradington-Young, and Hooker Upholstery this quarter. Along with a report on the recently concluded April High Point Furniture Market, and tactics we're employing to stimulate demand in sales.

Mike?

Thank you, Paul, and good afternoon.

As Paul mentioned, the Upholstery segment performed relatively well this quarter, with a modest sales increase and an overall profitability increase of 20% year over year. Within the Upholstery segment, our imported upholstery line, Hooker Upholstery, led the way, with a double-digit net sales increase and significant gains in operating income compared to last year. Several factors are driving the improvements there, including some successful programs with a few major retailers, an expanded product line with a better value proposition, and a higher in-stock position on bestsellers.

At Sam Moore, we reported an operating income improvement of nearly 50%, despite a net sales decrease in the single digits, due to exiting low or unprofitable sales programs in the prior year. Sam Moore 's ongoing improvements in profitability, which began last year when we achieved our first profitable fiscal year, continue to be driven by greater manufacturing efficiencies, a better job of managing inventory obsolescence, cost reductions and higher gross margin products and programs.

In addition, we now have in place about 75 Sam Moore Studios, which are dedicated, branded retail display programs. The studio program is gaining traction and boosting sales at the retail level. In addition, a quick-ship program on best-selling recliners and sofa chair groups introduced at the April Market is having a positive impact on orders.

Moving on to Bradington-Young, our premium leather upholstery brand is off to a good start this year. Sales for the quarter were relatively flat year over year, but the incoming order rate has been fairly positive through May. Bradington-Young's performance continues to be boosted by the ongoing success of the comfort-at-home retail display program, and more recently, by the luxury leather motion upholstery program introduced last fall. We believe this is the most comprehensive and versatile premium motion upholstery program in the industry, and it is selling well at retail and continuing to gain new retail placements.

During May, we've been encouraged to see incoming order rate improvement on a year-over-year basis, which is a stabilization of the downward order trends we've seen in the previous two quarters. Another encouraging sign of strengthening retail environment for the positive reports we've heard from Memorial Day weekend sales.

In an effort to further stimulate demand, we have developed a comprehensive calendar of promotional events for the year, with each of them focusing on a major category of our product lines. These events typically have hundreds of retailer participants, and are supported by extensive digital advertising. We began with a national spring savings event in April, with 450 retailers spanning 600 locations, participating and receiving a discount on all Hooker, Bradington-Young and Sam Moore products. Savings were advertised both locally by participating retailers, and across multiple national digital channels.

That was followed by a campaign in May to introduce the Cynthia Rowley for Hooker Furniture brand to consumers, as we roll the line out in retail stores. Later this month, we plan a Father's Day event, with savings on recliner chairs. And throughout the summer and fall, we have promotional events scheduled, focused on product areas such as home office, home entertainment, the Bradington-Young luxury motion line, Sam Moore upholstery, and our top-selling Sanctuary Casegoods Collection.

While the recent April High Point Market was not one of our strongest in terms of attendance or written orders, we have found that our post-market sales have been stronger than usual, especially on a couple of new casegoods collections. One of these collections, Alvoro's, is a casual European traditional group in our best price point category, while the other, Sandcastle, is a coastal cottage group in our better price points. We will be accelerating delivery of both these collections to dealers early in the third quarter so that we can derive full benefit from the fall selling season.

Now, I'd like to turn the call over to George Remington, President and Chief Operating Officer of Home Meridian, to give us an overview of their quarter.

Thank you, Mike, and good afternoon.

Before discussing the performance and strategies of Home Meridian division this quarter, I thought it might be appropriate to provide an overview of our operations. Home Meridian has five marketing divisions. Pulaski Furniture provides better casegoods. Samuel Lawrence provides more modest-priced casegoods. Samuel Lawrence Hospitality provides custom products in the three- and four-star hotels. Prime Resources does motion upholstery. And finally, Right 2 Home focuses on our e-commerce products and services.

While each of the divisions has a distinct positioning in the marketplace, the best way to understand our business is to look at it by channels of distribution. Five years ago, we changed our strategic direction by clearly defining distinct channels of distribution and organizing to focus on the channels that were growing faster than the industry average. These emerging channels required that we be able to provide custom products and services to the biggest and the best customers in those channels. That continues to be our strategy today.

Our largest channel of distribution, which we call mega-accounts, these are the largest traditional furniture retailers, wholesale clubs and mass merchant accounts that have the potential to generate $10 million of sales or more annually. What differentiates them is that these customers require proprietary products and services, and are large enough to justify the resources required to serve them.

We have 15 of these traditional mega-accounts. In Q1, they generated approximately 51% of our total sales and grew 3% over the prior year. We have strong programs in place with these accounts, and a robust portfolio of design projects in the pipeline with this class of customer.

Our fastest-growing channel is e-commerce. Sales to e-commerce accounts totaled 15% of our sales, and grew 44% over the same quarter last year. Sales in e-commerce channel include customers that are 100% online retailers, and the dot.com portions of our club and mass merchant customers. Our e-commerce sales have grown by a compounded average rate of 36% for the last six years.

This channel is supported by four of our five Home Meridian marketing divisions, including a dedicated division in Right 2 Home, which develops custom products and services for the channel. Home Meridian participates in both the white glove and the drop-ship portions of the business, and is dedicated to being continuous investments in terms of both specific product, warehousing, inventory systems and logistics improvements.

We have major initiatives into the hospitality and international channels as well, which constitute 8% of Home Meridian sales and grew 18% over the prior year during the quarter. We expect continued growth in these channels, especially in hospitality, where the favorable market conditions for building and refurbishing hotels in the US is on the upswing. We expect the positive environment for hospitality to be sustained in the foreseeable future. These channels have typically grown faster than the overall industry, as evidenced by Home Meridian's experiencing 7% compounded growth over the last six years.

The balance of Home Meridian sales totaled 26% of the division's total sales. This portion of our business includes traditional, large and small independent furniture retailers and rental customers. This portion of our business actually declined in Q1. These channels, particularly rental, were affected by more of a recent downturn, and traditionally have not grown as fast as the channels.

While Q1 orders were soft in the first three months of the year, we had a sizable uptick in May, which made the year-to-date orders virtually flat. The May increase in orders was due in part to better business, in part to major accounts' reorder after cycling through excess inventory. Typically, these orders flow out in a 90-day lead time between order and ship.

In terms of operating performance, in Q1, Home Meridian sales were even with the prior year. The general industry slowdown, along with a slowdown in orders from some of our major customers as they inventory-cycled, dampened the growth we projected. We believe that our competitive position with our major accounts has not changed.

Our gross margins are better than the prior-year period as a result of pricing improvements, customer mix and lower freight rates. However, investments in marketing and warehouse reduced the operating profit slightly. With business slower than projected, the marketing and warehousing investments are being reviewed, and reducing them is part of a series of countermeasures we have in place to increase operating profit.

From our perspective, Home Meridian also had an excellent April Market. Our Eric Church-licensed furniture brand rollout, the largest licensed collection in HMI's history, was successful, with first production shipping into retail floors and additional key customers picking up the line. Also, our Samuel Lawrence launched a major collection called Urban Vintage, which combines natural and rustic looks, with urban industrial elements addressing a current emerging style trend.

Being flexible in product design and following emerging style trends is a big part of our value proposition. We believe our core strategies are working, and that we are on target in both our emerging channels and our style direction. We're enjoying our new relationship with Hooker, and we are learning a lot. We look forward to a stronger second half.

And at this point, I'd like to turn the call back to Paul Huckfeldt.

Thanks, George.

I've already mentioned the deal-related costs and the intangible amortization. This had a significant impact on our results, but are not regular components of our operations. Looking at some of the more typical items, consolidated net sales increased, due to the addition of Home Meridian businesses, which contributed about $65 million to net sales.

In our traditional Hooker businesses, net sales for the FY17 first quarter declined about $4 million, or 7% compared to the first quarter of FY16, primarily due to decreased unit volume in our Casegoods segment, which is partially offset by increased average selling prices in all three segments of the legacy businesses. Unit volume decreases in the Casegoods segment were primarily due to lower income in order rates, reflecting the softer demand environment that Paul Toms noted earlier.

Container direct shipments to retailers were particularly hard-hit, as retailers worked through inventories and showed a little less willingness to commit to larger inventory positions at the present. This shift from container to non-container sales contributed to higher-average selling prices, as did continued lower discounting.

Upholstery segment net sales increased almost 3% on higher average selling prices, which offset a small decline in unit volume. Although still a small component of our overall business, net sales in our All Other segment grew over 50% year over year on higher unit volumes and average selling prices, reflecting the steady growth of our H Contract business. Overall average selling prices in the traditional Hooker businesses increased 4.9% during the quarter, primarily due to the mix of product shift and some price increases.

Consolidated gross profit increased with the addition of Home Meridian's results. For the traditional Hooker business, gross margin improved, but gross profit dollars declined, primarily due to the decreased volume in Casegoods. Which negatively affected gross profit by about $1.6 million and more than offset a modest decrease in product costs driven by lower freight rates and improved upholstery segment gross margins, resulting in modest sales increases, as well as lower freight costs for imported upholstery. And lower manufacturing costs at Sam Moore, thanks to the improvement in materials management resulting from the ERP implementation last year.

Consolidating sales and general and administrative expenses also increased with the addition of Home Meridian. Excluding amortization of intangibles, Home Meridian SG&A expenses are lower as a percent of sales compared to the traditional Hooker business. So Company-wide SG&A costs as a percentage of sales were lower than the prior year. Within the traditional Hooker business, SG&A expenses were higher than the prior year, primarily due to about $1 million of acquisition-related professional fees, as well as higher marketing-related costs, which offset lower commissions expense due to lower sales.

For these reasons, operating income for the FY17 first quarter was $4 million, or 3.3% of net sales, compared to $5.2 million, or 8.6% of net sales for our legacy Hooker businesses in the FY16 first quarter. Pro forma first-quarter FY16 operating income for the consolidated businesses would have been about $4.8 million, or 3.9% of sales if the transaction had occurred a year earlier.

Our balance sheet remains strong, despite the use of $25 million of our cash on hand and our decision to take on debt in order to invest in the assets of Home Meridian. At the end of the quarter, we had cash and cash equivalents of over $32 million, available to provide the required working capital and to service our acquisition-related debt, which stood at $52 million as of the end of the quarter.

We also have access to a $28 million revolving credit facility, and about $22 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility. In today's release, we also announced a quarterly dividend of $0.10 per share, which represents a 1.8% dividend yield at current share prices.

Now I'll turn the call back to Paul Toms for his outlook.

Thanks, Paul.

To be clear, we were disappointed in our performance this quarter, which fell short of analyst expectations, as well as our own internal expectations. However, we're confident that the drivers of this under-performance are short term, primarily caused by the decrease on the top line in Hooker Casegoods and the resulting impact on earnings, as well as $1 million in acquisition-related costs.

We continue to believe the fundamentals of our business and of our business model, are sound. Upholstery grew in both sales and earnings this quarter. And our new start-up ventures, especially H Contract, did well. Home Meridian was very close to internal projections in sales and earnings, given the $1.3 million impact on the quarter's operating income from the amortization of the acquired backlog margin that Paul Huckfeldt discussed earlier.

We also anticipate Q1 being a weaker sales quarter, based on HMI's history of shipping only about 20% of their annual volume in the first quarter. We're more convinced than ever that the Home Meridian acquisition was an excellent strategic decision for Hooker Furniture. Long term, our expansion into lower price points and additional channels of distribution that are growing much faster than the traditional channels, will be extremely beneficial to our Company. We remain very confident that Home Meridian will be a significant contributor to both our top and bottom line going forward.

Based on the improving May casegoods order rates, generally good Memorial Day sales results, and the timely placement of new products and programs at retail we are planning for late summer, we are optimistic about the second half of the year, and very confident about the long-term success of this Company. We look forward to delivering improved results in Q2 and the second half of the year.

That concludes the formal part of our discussion. At this time, I'll turn the call back over to our operator, Shannon, for questions.

Thank you.

(Operator Instructions)

Matt McCall, BB&T Capital Markets.

Good afternoon, everybody, this is Reuben on for Matt.

Hey, Ruben.

George, if I may, I will start with you. I just have a couple questions. I appreciate the color you gave on the breakdown of your businesses -- very helpful. Can you talk about what changed in the quarter from your expectations within those different sub-segments? You mentioned your mega-accounts. I know you gave us the growth rates for each, but maybe -- was all of the disappointment, if there was any in the quarter, in that 26% of your business that's the traditional large and small independent, or did you see a slowdown in some of your other business as well?

Our performance was pretty close to the expectation, both on the top line and the bottom line. But it could have been better. And kind of the shortfall, I think, is some of the major retailers were inventory-cycling in the time period. I think some of them over-planned the flow into Chinese New Years. And that slowed down the requirements in the second quarter.

And you said that, that was recouped in May, more or less, right? Is that the --?

The order flow in May was much better. Some of those orders will flow into the second quarter, some will flow in the third quarter.

Okay, great. And you guys have been helpful with Q1 seasonality. It's generally 20% of revenue. Can you give us any help us far as profitability, what's normal in the first quarter for Home Meridian? And maybe a little bit of help for Q2 and then the back half, just to give us an idea of how the business is -- generally breaks out?

Q1 is pretty significantly below the other quarters because of the leverage on sales and the lower sales volume. I would say the split is typically 15% profitability in the first quarter, moving up to 20%-ish in the second half.

That's directionally correct. A big part of it is covering the fixed costs, and the increase sales you get in the second quarter really are pretty significant.

Right. And then the remaining two quarters, I guess, the rest of the balance is split between those two quarters pretty evenly.

The second and the fourth quarters are downright --

The second and the fourth quarters are advantaged by shipments to some of the clubs which are episodic, that flow in the spring and the fall.

Okay, that's helpful. And then maybe how about, through demand within different price points on -- you guys cover a broader range now with Home Meridian. But can you talk about within maybe the Hooker legacy business, where you saw relative strength or weakness? And then was there any particular, I guess, within Casegoods and Upholstery, where you saw better demand?

Okay. If you look at the Hooker business, I think the weakness was in, I'd say, in our direct shipments. So customers, those are typically our larger customers that would buy stock and buy it by containers. And I think they saw some of what Home Meridian's large customers saw. They went into the quarter over-inventoried and were less willing to commit to inventory during the quarter.

Regionally, two of our largest five customers are located in oil-producing regions -- Oklahoma and South Texas. And those areas, I think, have been particularly depressed, as oil exploration and related industries have been impacted with low oil prices. Beyond that, upholstery outperformed wood. As we said, Upholstery actually grew for the quarter. Wood was down low double-digits in demand for the quarter. And beyond that, I would say e-commerce is a faster growing channel than our traditional bricks and mortar stores.

But you know, we had an interesting experience. We have -- one of our top five accounts is in South Florida. And our shipments with that account were down 50% in the first quarter. But their sales of our products were flat versus their first quarter last year. So there is nothing wrong with the demand at retail of our products. They were just over-inventoried going into the quarter.

And I think we saw that play out, both in Home Meridian's business and in our business. So, disappointed that shipments were down that much to a large customer, but I'm encouraged that what their selling in the quarter was basically flat to what they sold a year ago.

Okay. And the improvements in May -- is that what gives you confidence that maybe inventory has leveled out? Or is there something else in your conversations with customers that leads you to believe that the inventory situation is corrected, and from here it will be a little more normalized?

You know, it's not just that inventories are better-balanced to demand now at our customers. I think the environment for home furnishings, and particularly for casegoods, is better than it was the previous two quarters.

I think in our core consumer demographic, which is $100,000-and-up household income, if there is volatility in the stock market like there was late last year, I think it puts people on the sidelines. We're selling a large-ticket postponable purchase, and people have to feel good about their investments and their wealth and their job security before they're going to go out and spend for something they don't have to buy at the moment.

So I think the stock market has basically recaptured the losses that it incurred late last year. Consumer spending is up, consumer confidence is fine. And housing, I think, was in a little bit of a lull late last year, early this year. I think housing is more robust now, both new homes and existing home sales. So to me, the environment is better, our retailers are placing orders, the post-market period that we just [feel] more optimistic than we did at the end of either one of the last two quarters.

Great, okay, thanks, Paul, very helpful. A couple more. In the past the promotional environment was elevated. I know you guys have some immense sales coming up. Do you feel like the customer/consumer getting a little better has eased the promotional activity? Or do you still feel it is a pretty promotional environment out there?

This is Mike. I still think it's a pretty promotional environment out there. A call to action or hook is still necessary to drive consumers into retail stores. So we will continue down that path. We have, as I highlighted earlier, the right plan of calendar of events between now and the end of the year that will support the promotion of all product categories, or most important product categories, on the Casegoods side as well as the Upholstery side.

Okay. One more question. The working capital inventory level as a percentage of sales was a little bit lower year over year. Is that just the inclusion of the HMI business, or is there some things you guys have done? I know you talked about building appropriate inventory levels for your expectations in the back half of the year. Is it just the way HMI's business works?

Well, any HMI business does change that relationship a little bit, because so much of that business [has] shifted from [container] to direct. On the Hooker side, we've been trying to adapt, and I think we've done a really good job in the last couple of years of managing our inventories. With the law of inventory cycles, sometimes that's difficult. But we're guiding our inventories up and down, I think, more successfully to match sales.

I think inventories will start to climb, preparing for a better fall selling season. But we've been trying to manage our -- I think we've done a pretty good job managing inventory levels too. AR is down some because of some sales shortfall in Casegoods as well. But I think most of it's done -- it's inventory management, and then the differences coming from HMI.

Okay, great. Thanks, guys, appreciate the color.

All right, thanks.

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

All right. We appreciate everybody joining us this afternoon, and we look forward to bringing you better results three months from now in early September. Thanks again.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.