Hooker Furnishings Corp (HOFT) 2017 Q3 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 fiscal 2018 third quarter and first 9 months. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Crystal. Good afternoon, and welcome to our quarterly call to review our sales and earnings for the fiscal 2018 third quarter and first 9 months, which ended on October 29, 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 brands.

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 third quarter results. Any forward-looking statements 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 $157.9 million and net income of $7.2 million or $0.61 per diluted share for our 13-week fiscal quarter ended October 29, 2017. First 9 months net sales were $445 million and net income was $19.7 million, which converts to $1.69 per diluted share.

For the quarter, consolidated net sales increased nearly 9% compared to a year ago, primarily due to an above-average sales increase in Home Meridian, our largest segment; and a double-digit sales increase in our Upholstery segment. These gains were partially offset by a slight decrease in sales for the Hooker Casegoods segment.

For the first 9 months of fiscal 2018, net sales increased 10%, primarily due to double-digit sales increases in Home Meridian and Upholstery. All other segments showing flat to modest increases as well.

Earnings per share increased to $0.61 per share compared to $0.56 in the prior year quarter and earnings per share increased to $1.69 from $1.23 per diluted share for the first 9 months.

Now Paul Toms will comment on our third quarter results.

Thank you, Paul, and good afternoon, everyone. We are pleased that the strong order trends and backlogs we noted at the end of the second quarter, enabled us to achieve a consolidated sales increase of nearly 9% during our third quarter. We experienced sales growth in 8 of our 11 business units and all but one reporting segment. Consolidated operating income improved as well despite approximately $700,000 in acquisition-related costs as we completed the purchase of Valdese, North Carolina-based domestic upholstery producer, Shenandoah Furniture, during the quarter on September 29.

Our sales gain was driven by higher shipments at Home Meridian, which reported a 7% increase; and by the Upholstery segment, which had an approximate 36% sales increase. The 3 traditional components of the Upholstery segment reported 20% sales growth in the quarter, and the segment also benefited from the inclusion of $3 million of revenues from our recent acquisition, Shenandoah Furniture, the final month of the quarter.

We were excited to complete the Shenandoah acquisition and expect them to be a solid contributor in both sales and earnings going forward. While we benefited from their shipments in October, their earnings contribution was tempered by amortization of the acquisition-related intangibles in the month. Consolidated operating profitability improved by $1.3 million or 12.7% in the quarter. There was a slight erosion in operating income margin at Hooker Casegoods and in our domestically produced Upholstery business due to higher ocean freight costs and higher returns and allowances in casegoods and inflation in some raw materials impacting domestic upholstery. It was taking -- we're taking steps to mitigate the impact of both of these factors.

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

Thank you, Paul. Home Meridian's net sales compared to last year were 7% up in the quarter and 13% year-to-date. As a result of the extra sales volume and ongoing expense management, operating profit was up 31.5% in the quarter and 79% year-to-date. A shift in the pattern of our orders brought our backlog down 15% year-over-year by the end of the quarter, so our comparison to the last year's fourth quarter shipments may be challenging. However, the wild card in our fourth quarter is the dramatic sales growth some of our e-commerce customers are experiencing as a run-up to Christmas.

Sales to our emerging channels remained robust, totaling 37% of HMI sales year-to-date. E-commerce, hospitality and mass channels were the standouts growing 46%, 41% and 39%, respectively, year-to-date. Sales to our traditional channels were strong as well as we have had growth with several large traditional customers growing 12% year-to-date.

Our newest division, Accentrics Home, continues to be our fastest growing division, growing 59% so far this year. With this focus on products of emerging channels, this division has just launched its first major product lines at October market, which were very well received and will be shipped in Q1 of next year.

In addition, the other divisions had very good markets, with Pulaski, Samuel Lawrence and PRI all launching new collections that will begin shipping in January and February 2018.

We have expanded, reorganized and refreshed our 92,000 square-foot High Point showroom at the October market. The redesign was needed to accommodate the launch of Accentrics Home and reflects a more gracious, engaging and on-trend attitude. In addition to helping forge strong personal relationships with our customers, the new showroom provides a stylish fashion-forward environment that supports the product view and selling process.

We continue to focus on the organization's resources on developing products in the fastest-growing product categories, including fashion upholstery, small parcel items and accents and marketing to the largest and fastest-growing customers. To that end, we have reidentified our list of mega customers. These are customers that we can do the most business with that require proprietary products and services. In addition to our current list of 10 mega accounts, we now have an additional 10 accounts we call target mega accounts. We feel these customers are the ones that have the best opportunities to grow significantly with us in calendar year 2018 and on into 2019.

At this time, I'll turn the call over to Mike Delgatti, President of Hooker legacy brands, who will comment on the performance of the Casegoods and Upholstery segments, including the High Point market results.

Thanks, George, and good afternoon, everyone. The robust performance of the Upholstery segment was gratifying this quarter, highlighted by double-digit gains in both sales and operating income.

For the quarter, sales were up 36% on the strength of double-digit sales gains at Hooker Upholstery and high single-digit gains at Bradington-Young and Sam Moore. The addition of $3 million in revenues from Shenandoah for the month of October further boosted sales. As

Paul mentioned, we're excited about the contribution of Shenandoah will make to our financial performance, market position and competitiveness. We expect Shenandoah will add around $10 million in revenue per quarter going forward and profit margins at or above that of our existing upholstery businesses.

We believe in the future of domestically produced upholstery, particularly as it relates to the growing, winning channel of regional and national lifestyle retailers that Shenandoah serves, a channel in which we were previously underrepresented.

On the strength of the 36% sales increase, operating income for the quarter was up almost 90% in the Upholstery segment. The increased profitability was driven by improvements at Hooker Upholstery, which has resolved the vendor quality issue that negatively impact shipments during the prior year quarter and by the addition of Shenandoah's results in October. Orders in this segment are up in the mid-single digits, and backlogs are down slightly due to quicker delivery times and a better in-stock position for the Hooker Upholstery imported line.

Hooker Casegoods had a slight sales decrease for the quarter, and shipments are essentially flat for the year-to-date. However, incoming orders are positive and the backlog is up 25%. With the increased backlog in orders of nearly 6% year-to-date, we expect to see increased shipments in the fourth quarter.

Turning to the recent October High Point market. We adjusted our sales strategy a bit as a result of a poorly attended September premarket due to the back-to-back hurricanes in Florida and Texas because a large number of major retailers who normally would have placed orders at premarket were forced to stay home. We were not in a position to order new imported products until after the October market. Because of this, we directed the sales reps to emphasize in-line products we have in inventory, including 2 of the most successful April High Point introductions, Boheme and American Line. In addition, we offered retailers promotional incentives and in-line goods at market and post market.

In newly introduced products, we had success at Hooker Casegoods with a contemporary mixed materials collections called Miramar in better price points that represents a new style category for Hooker. At Bradington-Young, we expanded our fast-growing luxury leather motion upholstery line with smaller scale offerings. We had a very good response to how our motion upholstery and recliners at Hooker Upholstery and had the best market at Sam Moore in several years. As a result of placing our orders later in a later-than-normal Chinese New Year, we will not ship most of the new introductions until the first quarter of the next year.

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

Thanks, Mike. As reported earlier, sales increased about 9% over the prior year quarter. Consolidated unit volume also increased about 9% and average selling prices were essentially flat for the quarter.

Home Meridian's unit volume was up also nearly 9% and ASP was down about 2%. Unit volume in Upholstery was up about 42% due to higher sales in the import upholstery business that's now fully recovered from the quality issues of last year. And Shenandoah Furniture, we added -- also added volume this quarter.

Upholstery average selling prices declined about 5%, mostly due to product mix. For the first 9 months, consolidated unit volume increased nearly 17% while average selling price decreased 5.3%, mostly due to the increases in the generally lower priced Home Meridian products in our product mix.

For the quarter, gross profit increased $3.4 million, mostly due to higher sales. We also saw a slight improvement in gross margin due to customer and product mix at Home Meridian as well as efforts to improve margins, which began earlier this year. Improved operating efficiency and increased fixed cost absorption in the Upholstery segment offset 160 basis point decline in the Casegoods segment, which was due primarily to higher freight costs and slightly higher returns and allowances in the current year.

Consolidated gross profit year-to-date increased $9.5 million, with all reporting segments showing increased gross profit with the largest dollar increase from the Home Meridian segment. Year-to-date consolidated gross margin was essentially flat compared to last year.

Consolidated selling and administrative expenses for the first 9 months increased in absolute dollars, but declined as a percent of net sales due to higher net sales. Spending in the current year quarter increased -- partly attributable to $700,000 of acquisition-related professional fees as well as higher salaries and bonus expense. In the prior year 9 months, we reported $1 million in costs related to the acquisition of Home Meridian.

Amortization of the acquisition-related intangibles was also lower in fiscal 2018 because we fully amortized some short-term intangibles last year. The net reduction in amortization expense from the prior year was $1.5 million year-to-date.

For these reasons, operating income for the fiscal 2018 year-to-date was $30 million or 6.8% of net sales compared to $22 million or 5.5% of net sales in the fiscal 2017 first 9 months.

Our balance sheet remains strong despite the use of cash and debt to acquire the businesses of Home Meridian last year and Shenandoah Furniture at the end of September.

As of quarter end, we had cash and cash equivalents of over $32 million available to provide required working capital to service our acquisition-related debt, which stood at $55 million as of the end of the quarter. We also have access to $28.5 million on our revolving credit facility and $23 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility.

This morning, we also announced an increased dividend, increasing to $0.14 per share, an increase of about 17%, which represents about a 1.2% dividend yield.

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

Thanks, Paul. The third quarter had mixed results and the retail weakened significantly across all segments in the month of September, partially due to the hurricanes that hit Florida and Texas. In October, retail bounced back, along with incoming order trends and shipments across all segments. The October High Point furniture market was good for most all divisions. However, due to a later-than-normal Chinese New Year, we expect the impact of shipments from market to fall on the first quarter of next year. The order and shipment trends for Hooker Casegoods and the Upholstery segment should have a favorable impact on sales for the fourth quarter, but the reduced backlog in orders at HMI compared to their record fourth quarter a year ago could negatively impact sales comparisons for the Home Meridian segment in the upcoming quarter.

We believe the overall macroeconomic environment is strong, especially housing and consumer confidence. New home purchases last month were at the fastest pace in a decade, with a 6.2% monthly increase that reflects the underlying strength of the U.S. economy. Additionally, November consumer confidence increased for the fifth consecutive month and remains at a 17-year high. According to the Commerce Department, new home sales in October increased to a seasonally adjusted annual rate of $685,000, marking the third consecutive monthly gain. Along with the economic environment, we believe the strategies we have in place is working, and we expect Shenandoah Furniture to be a solid contributor to both sales and earnings going forward.

This ends the formal part of our discussion. At this time, I'll turn the call back over to our operator, Crystal, for questions. Thank you.

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

So first, I just wanted to see if you have some sort of estimate as to the hurricane impact. I know September was tough, but October came back. But net-net, I mean, would you be able to say how much of the revenue was impacted for the quarter because of the hurricanes?

This is George. I think that Home Meridian was impacted more severely as a result of this. Not sure I've got a number. But if you think through it, of our 15 large customers represent almost 70% of our business, 10 of them have a really high concentration of business in the Southeast and in Texas. And the vast majority of them operate on full container business with 90 to 120 day lead times. So if they have a sudden pause in their orders as a result of the hurricane, it makes them become over inventoried. And when they become over inventoried, they really can't stop the flow of goods that they've got coming. So their first action is to reduce their orders. So that affected our orders in the third quarter fairly significantly. At the same time, we can see what the retail sales are now, and the retail sales now or at the planned level. We can see the orders in November are at planned level. And there are offsetting events to that, one of them is, while the backlog is down, the backlog's also changed because such a high proportion of our business is becoming e-commerce compared to prior year. And in e-commerce, we have virtually no backlog at all because we ship at -- in 12 -- in 24 to 48 hours. So I would have to say it was significant in the order flow, but that it's recovered would be the best where I can answer the question.

Okay, got it. Yes, thanks for that information. So -- and while we're on the topic of Home Meridian, so just looking at the third quarter, so your overall sales in that segment were up 7%. You highlighted in the press release that the sales to your e-commerce customers were up 45%. Just wondering if you could -- if you look at your customer base and put them in different buckets so to speak, can you give us a sense of sales performance for these different subsegments for your different customers?

So I think we listed the ones that did well. I -- those gains I think were offset in certain segments. Our small account business was down slightly. Our international business was down primarily in the far East. And there's kind of a timing issue inside of our club business where we'll have a good rollout this fall, but it didn't fall into the third quarter.

Okay. So there's some timing shifts?

There is a timing shift on part of it, yes.

Now when you say club business, you mean like Tesco? Or what do you mean by club business?

Not without being specific, we have a group of -- we have a series of customers in that class, some of which we ship periodically, and we'll ship in a very short periods of time. So a couple of weeks can make a really big difference.

Got it, okay. Okay. And then switching over to the casegoods. So you mentioned that the full impact of the full market introductions won't be realized until early next year. So is this really primarily due to the timing of the Chinese New Year?

I think, Anthony, it's due to a couple of things. Chinese new year is later. It doesn't start until around the middle of February. And so product that is shipped out just before they shut down for Chinese New Year, this year will fall into the first quarter of fiscal '19 rather than the last quarter of the current fiscal year. And just that 2 weeks of additional shipping time will impact us and probably more on new products because, typically, new products take about a month longer to produce than existing products and the vendors will try to work with us to get the most important new products out before they shutdown. And so that's probably the bigger impact. The second impact is we really ordered less new product early this year than we have in the last few market cycles, and that was driven primarily by not having as much feedback as we needed to order new products. We had premarket in September where we typically see 60 or so customers, large customers. It was pretty much washed out this year. There was -- customers from Texas and Florida didn't come to premarket because they were dealing with the impacts of the hurricanes. And then also, there was a storm blowing up the East Coast during the same time period as premarket, so lots of customers canceled. We told the reps to stay home, and we saw maybe 1/5 of the normal traffic that we had seen at premarkets. So we didn't have the feedback that we would like before we pull the trigger on new products. And since we weren't able to order early, it's going to be harder to get them shipped early.

Okay, got it. Thanks for putting that into perspective. And now switching over to Upholstery obviously is a very strong performance there. What would you say are the main factors driving the solid performance in Upholstery?

Certainly, one of the drivers was Hooker Upholstery. They have managed their way through the quality issue they had a year ago. They are in a much stronger inventory position today and have been in a stronger inventory position for the last several months and in a much better position to service our customers, which is reflected in sales. Bradington-Young, their luxury motion program continues to do extremely well. It's a fast-growing area of their business. And then Sam Moore business has gained traction over the last several months. So we're seeing really encouraging signs there both in terms of orders and sales.

Okay. And just lastly, as far as the Shenandoah Furniture, I do appreciate you guys calling out the revenue impact. Obviously, there was some impact as far as expenses. So is that a 1 quarter issue? Do you expect any additional acquisition-related costs in 4Q?

The acquisition -- the additional acquisition-related costs will be fairly nominal. There's some follow-up stuff we have to do with auditors and valuation specialists. But we're talking in the hundreds -- maybe a couple of hundred thousand tops, probably less than that. We will have the amortization of the faster amortization of the backlog this year, which we'll call that out as an intangible asset. So you'll see it separately, but that will be higher this year than it will be going forward too.

Okay. Any -- do you have an estimate for that?

It's going to be another $600,000 -- it would be $600,000 in the fourth quarter.

And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Paul Toms for any closing remarks.

All right. We appreciate everybody joining us today. We feel pretty good about the quarter, and yet there's plenty of opportunity to improve. We look forward to getting back together with you to go over the fourth quarter and full year results in about like 4 months.

Four months, right.

April. Thank you again for joining us today. Bye.

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.