Hooker Furnishings Corp (HOFT) 2017 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 2018. (Operator Instructions) As a reminder, this conference call 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 fiscal 2018 second quarter and first half, which ended July 30, 2017. We certainly appreciate your participation today.

Joining me today are Paul Toms, our Chairman and CEO; George Revington, Chief Operating Officer of Hooker Furniture Corporation and President and Chief Operating Officer of our Home Meridian segment; and Michael Delgatti, President of our Hooker legacy brand.

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 our fiscal 2018 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 $156.3 million and net income of $7.8 million or $0.67 per diluted share for our 13-week fiscal quarter ended July 30, 2017. First half net results were $287.2 million of sales and net income of $12.5 million, which converts to $1.08 per diluted share.

For the quarter, consolidated net sales increased nearly 15% compared to a year ago, primarily due to increased sales in the Home Meridian segment, double-digit increases in the Upholstery and all other segments and a small sales increase in the Hooker Casegoods segment. For the first half of fiscal 2018, net sales increased 11% primarily due to increased sales in the Home Meridian segment, with all other segment showing modest sales increases as well. Earnings per share increased to $0.67 per share compared to $0.46 in the prior year quarter, and earnings per share increased to $1.08 from $0.68 per diluted share for the first half.

Now Paul Toms will comment on our second quarter results.

Thank you, Paul, and good afternoon, everyone. We're very pleased to have achieved a nearly 15% consolidated sales increase this quarter, with sales up in all segments and in 8 of our 10 business units. The strong performance is noteworthy considering that the second quarter is traditionally the softest of the year for the retail furniture industry, also given the sluggish conditions across most retail channels during late summer. We believe our sales performance is an indicator that we are gaining market share.

Our sales and income gains also validate our strategy of focusing on emerging and winning channels of distribution. That strategy is producing significant revenue momentum at Home Meridian and beginning to have a positive impact at Hooker legacy brands as well.

Operating profitability continued to be strong for Hooker legacy brands, particularly Hooker Casegoods, which posted a double-digit operating profit margin for the fifth quarter in a row, achieving an 11.5% operating income margin for the quarter. In our Home Meridian segment, operating profit rebounded nicely from Q1. Excluding amortization of acquisition-related intangibles, operating income improved 79% compared to the second quarter of last year and 42% year-to-date.

In addition to the success we've had this quarter, the summer months have also been active for our long-range strategic initiatives. We've recently made 2 significant announcements. First, we announced earlier today Hooker Furniture Corporation reached a definitive purchase agreement to acquire North Carolina-based Shenandoah Furniture, an upscale domestic upholstery manufacturer, for $40 million. Shenandoah operates 3 very efficient upholstery plants in Valdese and Mount Airy, North Carolina, and here in our hometown of Martinsville, Virginia.

They're well positioned as a supplier to what is known in the furniture industry as a lifestyle specialty retail distribution channel, merchants who offer furnishings and decor in the upper medium price points, both in brick-and-mortar stores and online. Shenandoah is a successful, growing, profitable company focused on a winning channel of distribution in which we are currently underrepresented. We're excited about Shenandoah joining the Hooker Furniture family, and we expect the acquisition to close in our third fiscal quarter, which ends October 31, 2017.

Shenandoah earned about $8 million of operating income in 2016 and is tracking to similar rates of sale and profitability this year. However, we will only benefit from a partial year of earnings in our fiscal 2018, and we will have some onetime costs related to the acquisition, which may have a small negative impact on our fiscal '18 earnings per share, but which we expect the acquisition to be accretive to earnings in the first full year, which will be our fiscal 2019 year beginning in February 2018.

Secondly, we announced several weeks ago that we have expanded our Board of Directors from 7 to 9 directors with the additions of Paulette Garafalo, a senior executive in luxury consumer products retailing; and Tonya Jackson, a senior operations executive with expertise in supply chain management and international sourcing. We're pleased to have both Paulette and Tonya join our board and believe they bring strong skill sets and in-depth experience in areas that are critical to developing our strategy for success.

At this time, I'd like to call on George Revington, who will comment on the results for our Home Meridian segment. George?

Thank you, Paul. Home Meridian's net sales compared to last year were strong, up 20% in the quarter and 17% year-to-date. We're also pleased with our turnaround in operating profit from last quarter. As a result of the extra sales volume and good expense management, operating profit was up 79% in the quarter and 42% for the first 6 months, as Paul has mentioned earlier.

Demand is also strong, with orders for the quarter up 12% and order backlog up 23% at quarter end. It makes us feel positive about the rest of the year. Sales to our emerging channels again were robust, totaling 39% of Home Meridian's total sales. E-commerce, hospitality and mass channels were the standouts, growing 59%, 27% and 141%, respectively. Sales to our traditional channels also remained strong, growing 14% year-to-date.

Our newest division, Accentrics Home, grew 72% year-to-date and generated a significant portion of Home Meridian's total sales growth. This division's lifestyle-focused products are on trend in multiple ways. Accentrics products are focused on the fastest-growing product categories, like fashion upholstery; are sold mostly through emerging channels; are sold as items instead of collections; and are the right price, style and scale for the fast-growing millennial customer base. At the fall market next month, we'll plan to officially debut Accentrics to our traditional furniture retailer base in a new showroom, which is a dedicated space to display the line, which will enhance the potential of this new division even further.

We continue to focus on the organization's resources on developing products in the fastest-growing product categories and then marketing them to the largest and best customers in the growing channels of distribution. With our continued growth, we're making organizational adjustments and investments, both shifting resources within the company as well as bringing in high-performing employees with new skill sets that we need to compete in the evolving marketplace. As part of this, we recruited new employees to enhance our business systems here and in Asia and to spearhead our data analytics effort for quality control and other business processes.

At this time, I'd like to turn the call over to Mike Delgatti, President of Hooker legacy brands, who will comment on the progress made this quarter resulting from our strategic reorganization of the company's legacy business units, which was effective May 1. We'll also give more details on the performance of the Casegoods and Upholstery segments as well as new executive appointment at Hooker Upholstery. Mike?

Thank you, George, and good afternoon, everyone. As George mentioned, on May 1, we put in place organizational changes at Hooker legacy brands to better position the company for profitable sales growth. We now have 4 dedicated business units: Hooker Casegoods, Hooker Upholstery, Bradington-Young and Sam Moore, each focused on a specific product niche, with a company president who is completely immersed in the business unit. The business unit presidents oversee dedicated leadership and support teams and product development, sales management and operations.

We have also created 4 channel-specific sales teams that cross-sell the products from all the Hooker legacy divisions into high-growth distribution channels: e-commerce, international, interior design and contract. We are in the middle of developing strategies and appropriate organizational structures for each. While we are in the early stages of deriving measurable benefit from the new strategy and leadership, all the early signs are quite positive.

After appointing presidents for Hooker Casegoods, Bradington-Young and Sam Moore earlier, we appointed a president to our fourth legacy business unit, Hooker Upholstery, during the quarter. Jeremy Hoff joined Hooker Upholstery in the new position of President. Most recently, he served as President of Theodore Alexander Furniture since 2015, and prior to that was Senior Vice President of sales at A.R.T. Furniture. We're very pleased to have an executive of Jeremy's caliber to provide focused and dedicated sales and merchandising leadership to Hooker Upholstery, which is already a fast-growing business unit with positive momentum.

During the quarter, we were pleased with the sales and profitability increases in both of the Hooker legacy brand segments and in 3 of the 4 business units. It was especially rewarding to see shipments beginning to grow again at Hooker Casegoods, where sales increased approximately 4% for the quarter and 2% for the first half, breaking out of a trend since last year of modest quarterly sales decreases or flat shipments in the segment. Orders and backlogs are even stronger, with orders up 9% and our backlog up 26% at quarter end as we enter the historically strong fall selling season at retail.

We believe the uptick is driven by several factors. We're realizing the benefits of successful product introductions for casegoods the last 2 furniture markets in October of 2016 and April. In addition, our focus on emerging channels is beginning to positively impact casegoods, along with our emphasis on key accounts, which are best-in-class retailers within the traditional furniture store channel.

The Upholstery segment achieved a double-digit sales increase for the quarter and high single-digit increase for the 6 -- first 6 months of the year on strength of robust sales increases in both Hooker Upholstery and Bradington-Young divisions. Hooker Upholstery sales increase was driven by a better in-stock position, and Bradington-Young increase was driven by a dramatic growth in the luxury motion upholstery line. Incoming orders for the Upholstery segment were up 5% at quarter end, and the backlog was up 14%.

The Upholstery segment's sales and operating profit performance was partially offset by net sales decreases at Sam Moore in both the quarter and 6-month periods. However, we are starting to see a positive turnaround in orders at Sam Moore. We saw a bit of improvement in July orders but even better in August, and manufacturing efficiencies are also improving.

Now I'll ask Paul Huckfeldt to provide more details about our results.

Thanks, Mike. As I reported earlier, sales increased about 15% over the prior year quarter due mostly to higher sales in our Home Meridian segment, double-digit increases in the Hooker Upholstery and all other segments and modest sales increases at Hooker Casegoods.

Consolidated unit volume increased 26% while average selling price decreased about 10% for the quarter. In addition to changes within segments, the high growth rate of the lower-priced Home Meridian product compared to the slower growth rate of the traditional Hooker products has had an impact on these consolidated changes. Home Meridian's unit volume was up nearly 32%, and ASP was down about 11%, reflecting, to some degree, the increased sales in e-commerce channels and mega accounts, which tend to favor smaller and lower-priced products.

Unit volume in Upholstery was up about 14% due to higher sales in the import upholstery business, now that we've recovered from the quality-related inventory availability problems which began around this time last year. Upholstery ASPs declined about 1% just due to product mix. For the half, consolidated unit volume increased by nearly 22% while ASP decreased 8% due to the same factors that influenced the quarter.

For the quarter, gross profit increased $4.6 million mostly due to higher sales, and gross margin improved by about 30 basis points due to customer and product mix at HMI and improved operating efficiency and fixed cost absorption in our Upholstery segment, which offset an 80 basis point decline in the Hooker Casegoods segment gross margin due to moderately higher freight costs in the current year. Consolidated gross profit year-to-date increased $6.2 million, with all reporting segments showing increased gross profit, with the largest dollar increase coming from Home Meridian. Consolidated gross margin remained the same at 21.3% for the first half of both fiscal 2018 and 2017.

Consolidated selling and administrative expenses for the first half increased in absolute dollars but declined as a percentage of net sales primarily due to higher selling expenses attributable to the higher sales, increased salaries and professional expenses, which primarily offset the absence of a $1 million acquisition-related cost recorded in the Hooker Casegoods segment last year.

Amortization of acquisition-related intangibles was also lower in fiscal 2018 because we fully amortized a short-term intangible in the prior year. The net reduction in amortization expense from prior year was $0.5 million in the quarter and $1.8 million year-to-date. Our year-over-year comparisons benefited from these lower acquisition-related costs by about $0.03 a share in the quarter and 16% -- $0.16 per share compared to the FY17 first half. For these reasons, operating income for the fiscal 2018 first half was $18.9 million or 6.6% of net sales compared to $12.2 million or 4.7% of net sales in the fiscal 2017 first half.

Our balance sheet remains strong despite the use of cash and debt to acquire the businesses of Home Meridian last year. At the end of the quarter, we had cash and cash equivalents of nearly $46 million available to provide the required working capital to help fund the Shenandoah acquisition and to service the debt related to our previous HMI acquisition, which stood at $44.7 million at the end of the quarter. We also have access to $28.5 million on our revolving credit facility and about $20 million -- $23 million of cash surrender value in our company-owned life insurance, which gives us additional financial flexibility.

On August 29, we also announced a quarterly dividend of $0.12 per share, which represents about a 1.1% dividend yield. Now I'll turn the discussion back to Paul Toms for his outlook.

Thanks, Paul. Given the strong incoming orders and higher backlogs across all segments, we're encouraged about our momentum going into the fall season. We do have some concerns about slower retail sales in late summer experienced across all types of channels and as well as slightly lower housing starts and sales. However, the positives outweigh the negatives, with a generally positive macro environment, a stock market at record highs, strong employment and consumer confidence at very healthy levels. Our growth strategies are working, and our expectation for the fall selling season and the balance of the year is optimistic.

That ends our formal presentation. At this time, I'll turn the call back over to our operator, Shannon, for questions.

(Operator Instructions) Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first, I have a couple of questions on the acquisition. So could you perhaps share with us how much revenue the Shenandoah did in 2016?

Anthony, I think, we've -- Paul's already addressed that with you or no, earlier? Okay. Last year -- they're on a calendar year -- it was just slightly over $40 million in revenues.

Okay. Got it, okay. And -- okay. And can you talk about the trends that they have seen in their business over the last few years, whether that's been growing or stable or any sort of color?

Generally, their trends have been pretty consistent, steady growth in the 5% to 10% range every year. As we said in the release, they're focused almost exclusively in the lifestyle specialty store channel, and they've been able to grow consistently by focusing in that channel with a couple of very important retailers in the channel.

Okay. And is -- and the last question I will have as far as the acquisition. Is it all U.S.-based? Or are there any international customers?

They're, I would think, 100% U.S.-based. Their manufacturing is all domestic, in Virginia, North Carolina, and I believe their customer base is U.S. primarily. They may have a store or 2 in a foreign country, but I think most of what they produce is for domestic consumption.

Got it, okay. And then -- so turning over to the results. First a question for Mike. You talked about the Hooker Casegoods business and your focus on emerging channels. Can you talk about like how much of your business is now coming from the emerging channels for the Casegoods business?

Overall, emerging channels represents about 30% of our business.

Okay. And as far as the Home Meridian, I guess it's a question for George there. So obviously, that business unit has done quite well, and you talked about continued focus on large, fast-growing customers in emerging channels. So is this mostly a function of increased penetration from your existing accounts? Or are you getting a lot of -- a lot more new business from new customers? So maybe you can -- if you could just kind of parse out like where that growth is coming from, give a little bit more specifics.

So we have a core set of very large customers where we're doing proprietary products, and in almost every case, we're growing that business. Some of the growth is modest. Some of it's very significant. But we also have a series of target large accounts, where we have strategies to grow, where we have low penetration. So we're having success both in the portfolio of companies that we have now but also in the targets that we're addressing.

Got it, okay. All right. And then from a cost perspective, are you -- can you share with us as to what you're seeing there? Anything to call out? I mean maybe perhaps touch on the ocean freight costs. What are you seeing there? What are your expectations?

So in Asia, the costs are stable. We don't -- we're not experiencing pressure from cost increases. Capacity over there is available, which means that it's a buyer's market. We're the buyer. And freight rates seem to be pretty basic, about what we planned. So I don't see a lot of cost pressure on -- in either category.

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

Okay. Well, we appreciate everybody joining us today. We're happy to report good results for our second quarter. We're excited about the acquisition of Shenandoah. We think it'll be a very good acquisition for the company, get us into a channel of distribution where we're presently underrepresented.

And we look forward to being with you again in about 3 months to talk about the third quarter and, hopefully, have Shenandoah acquisition closed by that point. Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.