Hooker Furnishings Corp (HOFT) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Hooker Furnishings Corporation Third Quarter 2022 Earnings Webcast. (Operator Instructions)

I would now like to hand the conference over to your speaker host today, Sir Paul Huckfeldt, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Lidiya. Good morning, and welcome to our quarterly conference call to review our results for the fiscal 2022 third quarter, which began on August 2, 2021 and ended on October 31, 2021. Joining me today is Jeremy Hoff, our Chief Executive Officer. We certainly appreciate your participation today.

During our 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 SEC filing announcing our fiscal 2022 third 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 $133 million, a decrease of $16.3 million or 11% as compared to the last year's third quarter. We reported a quarterly net loss of $1.2 million or $0.10 per diluted share compared to net income of $10.1 million or $0.84 per diluted share in the same quarter a year ago. For fiscal -- for the 2022 9-month period, consolidated net sales were $459 million, up $74 million or 19% compared to last year during the same period. We reported net income of $15.7 million or $1.30 per diluted share this year compared to a net loss of $19 million or $1.61 per diluted share a year ago, which was primarily due to a $44.3 million or $33.7 million after-tax noncash impairment charge.

Now I'll turn the call over to Jeremy to comment on our fiscal 2022 third quarter results.

Thank you, Paul, and good morning to everyone. While we were encouraged by a strong order backlog, which stands at 3x typical levels and industry-wide strong demand for home furnishings, we were challenged by ongoing supply chain disruptions during the quarter. Specifically, the slower than expected reopening of Vietnam and Malaysia furniture factories, following COVID-related shutdowns, continued high freight costs and logistics challenges had the most adverse impacts on sales and operating income.

Our third quarter consolidated revenue decline follows 2 consecutive quarters of double-digit sales and income gains at Hooker Furnishings during the first half of the year. The declines this quarter were driven by significantly reduced shipments in the Home Meridian segment due to the factory closures in Asia that began around August 1st and did not begin reopening until late in the quarter, and then at only about 25% capacity. The HMI sales decrease was partially offset by double-digit sales increases in the Hooker Branded and Domestic Upholstery segments versus the prior year period. These 2 segments have achieved 5 consecutive quarters of higher year-over-year net sales. The sales volume reduction at HMI was the primary driver of consolidated operating loss and gross profit decreases during the quarter. High freight and product cost also contributed to the decrease.

In addition, HMI had a significant -- a few significant charges during the period, including $2.6 million in onetime order cancellation costs to exit the ready-to-assemble furniture category. This was a move we made to improve long-term profitability by eliminating this low-margin category. Also, HMI incurred $1.9 million of higher than expected chargebacks from 2 club channel customers. These charges drove 75% of our earnings miss. Industry-wide inflationary pressures also were a factor in reduced income, along with decisions we made that will have a short-term adverse impact, but will strengthen the company in the long-term.

For example, exiting the HMidea RTA category, increased consolidated cost of goods sold by 200 basis points and contributed to the quarterly loss, but we believe this move will save about $10 million in product and freight costs related to RTA products on order and help us focus our resources in the areas where we can be most competitive and profitable. We remain confident that we're utilizing all available levers to help mitigate global logistics challenges, such as factory closures and reduced capacity, higher freight and transit costs, and decreased availability of shipping container space.

With the goal of minimizing cost and maximizing product shipments to customers during these disruptions, we believe we have mitigated as much as possible through measures, including surcharges and price increases to cover higher transportation and raw material cost. At the same time, we are rationalizing our stocking inventory to focus on A and B level top-selling products by prioritizing them for production and container utilization. We should point out that the surcharges and increases we enact typically trail price hikes received from logistics partners and suppliers for up to 90 days.

Despite all these efforts, the current supply side factors are unpredictable and often involve frequent, unexpected changes with little or no notice. For example, the Vietnam and Malaysia factories remained closed longer than expected and opened at only 25% capacity. We expect the factories to begin to approach 50% capacity in the near future, but don't expect full capacity at least until second quarter.

Now I want to turn the discussion over to Paul Huckfeldt who will discuss highlights in each of our reportable segments.

Thanks, Jeremy. I'll begin with the Hooker Branded segment, which reported a sales increase again this quarter and continues to be our most profitable segment, but also felt some of the impact of higher logistics costs in the quarter. Net sales increased by $8.7 million or 18.5% in the Hooker Branded segment compared to the prior year quarter, driven by higher demand and inventory availability as well as lower discount. The consistent and vibrant growth in this segment is driven by our diversification of the Hooker Branded product portfolio to address a wide variety of lifestyles and price points. The introduction of our new Commerce & Market accent furniture collection this summer, along with the ongoing strength of our Melange Accent collection, has significantly expanded our leadership position in the accent furniture category.

In addition, our strategy to rationalize our stocking inventory to focus on top sellers is helping us maximize shipping and production capacity, product flow and cash utilization. While sales continue to reflect strong demand in a healthy furniture retail environment, higher ocean freight and product cost inflation impacted gross margin in the segment, diluting the gains from sales increases this quarter. We've implemented price increases to mitigate increased product costs. However, due to current order backlog levels and customer price changes taking effect at different times, we anticipate seeing more of the benefits of price increases in future periods as more products sold reflect the new pricing. Additionally, the segment is starting to see another round of product and logistics cost increases, which will likely necessitate additional customer price changes.

Despite these adverse factors, the Hooker Branded segment reported $6.7 million in operating income or an 11.9% operating margin. Incoming orders decreased slightly by 1.9% as compared to the prior year period when business was rebounding dramatically after the initial COVID-related disruption. Backlog remained historically high, nearly double as compared to the prior year third quarter when backlog was already elevated versus historical averages.

Turning now to the Home Meridian segment. Net sales decreased by $27.5 million or 37% compared to the prior year third quarter, driven by inventory unavailability due to the temporary COVID-related closure of factories in Vietnam and Malaysia during the period. Since such a large portion of Home Meridian shipments are shipped directly from our Asian suppliers to our customers' warehouses, the factory shutdowns and increased transit costs have a much more immediate impact on this segment. Home Meridian reported a $10.2 million operating loss, largely attributable to reduced shipments and higher cost of goods sold primarily from increased freight charges. In addition, higher than expected chargebacks in our club channel and the inventory cancellation costs related to HMidea's ready-to-assemble business contributed significantly to the operating loss.

Despite the disappointing financial results at HMI, we believe the challenges are short-term. We expect some improvements next quarter as the Asian factories increase capacity, but we don't expect them to ramp up to full capacity until the second quarter of next year. We're encouraged that demand remains strong, with Home Meridian finishing the quarter with backlogs 12.5% higher than last year's third quarter, but more than double as compared to pre-pandemic levels. In a long-term strategic move, we're pleased to announce that in mid-October, we opened our highly efficient 800,000 square foot distribution center in Savannah, Georgia, serving Home Meridian and its customers. The modern facility is a short distance from the port of Savannah and will enable us to substantially increase operating efficiencies, reduce our carbon footprint and ship orders faster. Our goal is to put the company on the -- position the company as a best-in-class logistics operator, and Savannah is a major step in that direction.

In the Domestic Upholstery segment, net sales increased by $2.6 million or 10% in the fiscal 2022 third quarter compared to the prior year period, and all 3 divisions of that segment reported sales increases in the 10% range. However, material cost inflation for most raw materials and higher freight surcharges offset the gains from increased sales. The segment reported an operating income of $1.4 million or 5.2% during the quarter.

We continue to be challenged by raw material shortages, but we saw a lot of improvements later in the quarter and expect these positive trends to continue. We've implemented price increases and surcharges with major accounts to improve margins. Since this segment has a current order backlog of 5 to 6 months and prices were not increased on backlog orders, we anticipate seeing benefits of the price increases beginning in the second quarter of next year.

All Other net sales decreased by $134,000 or 4% during the quarter due to a 5.6% decrease in our H Contract division. On a positive note, as COVID vaccines have rolled out, especially among the senior population, H Contract's incoming orders have increased 3 consecutive quarters in a row and finished the quarter with backlog 150% higher than the prior year third quarter. Despite the sales increase, All Other still reported a 10.7% operating margin for the quarter.

Finally, touching on our cash position and inventory positions. Cash and cash equivalents stood at $57.2 million at the end of the quarter, down $8.6 million compared to the balance at the fiscal 2021 year-end as we worked to increase our inventory levels, which were unacceptably low at year-end in an effort to service the high demand that we've experienced all year. During the first 9 months of fiscal 2022, we used cash and $5 million generated from operations to pay $6.6 million of capital expenditures, which included $4.4 million in our newly opened Georgia distribution center, $6.4 million in cash dividends and $2.6 million on our new cloud-based ERP platform. And finally, on Tuesday, we announced a $0.02 increase to our quarterly dividend to $0.20 per share, which represents an 11% increase. With our record backlogs and proven low fixed cost business model, we have the confidence in our ability to rebound as the production and transportation issues we've been facing begin to resolve next year.

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

Thank you, Paul. Consumer and retail demand remained historically strong with consolidated backlogs nearly triple compared to pre-pandemic levels. However, we expect continuing supply chain turbulence to impact our net sales and income in the short-term, at least through the second quarter of next fiscal year. We expect our Hooker Branded and Domestic Upholstery segments will continue to be less challenged than Home Meridian because more than 70% of Home Meridian's business is shipped via direct container versus the domestic warehouse distribution model in the Hooker Branded and Domestic Upholstery segments.

In addition, higher freight costs have a greater impact as a percentage on HMI's lower-priced product line. In the short to mid-term, we look forward to the expected efficiencies and cost savings from HMI's new Savannah facility. The facility puts us in an excellent position to grow HMI's warehouse business. We will continue to focus on factors we can control, such as developing relevant new products to meet consumer needs, operational improvements, managing overhead and cost, and executing our strategic growth initiatives. We remain very optimistic about our long-term success as we manage through a challenging environment.

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

(Operator Instructions) Our first question coming from the line of Anthony Lebiedzinski with Sidoti.

So, first, I have a couple of questions here on HMI. So obviously, a tough quarter here for the third quarter, down 37% in terms of sales. So given the backlog and the partial reopening of Vietnam, what would be a reasonable sales estimate for Q4 for HMI? If you could take a stab at it that would be very helpful.

Say about $60 million. It's really uncertain -- it's tough to predict because of the -- just the erratic nature of this whole COVID situation and shut -- and opening and closing, but that's the ballpark that we're thinking now.

He's given you a number based off of what we're getting -- we're being told from a capacity standpoint what's available. So in these times, in the short-term, this is a little more of a capacity budget versus the sales budget, obviously.

Right, right. Understood, yes. Okay. And then I heard you guys call out the 2 out of the 3 unusual charges for HMI, the RTA and the club channel, unless I missed the third one, did you guys give that number or what that was?

There were 2 in the club channel, and there was 1 for the RTA.

Okay. Got it. Okay. Perfect. Okay. And then in terms of the new warehouse, so were there any onetime costs that you guys wanted to call out as far as getting that new facility up and running? And can you expand on the increased operating efficiencies you plan to get from that for next year? If there's any way you could quantify that, that would be very helpful.

Well, of course, we have to fill it up, and we did incur some costs to move products from our other warehouses. We're exiting our California and North Carolina Home Meridian warehouses. Probably spent $0.5 million in the quarter, most of it on relocating inventory. Next year, I think our forecast shows us saving about $2 million. That will increase in subsequent years. But we -- like I said, we've still got to fill the warehouse up before we can maximize the savings.

Okay. Got it. And then -- so Jeremy, I know you guys did move as far as RTA exit. Are there any other segments or subsegments of the business where we should expect anything -- kind of similar to what you just did here? I understand the rationale certainly makes sense from a longer-term cost saving perspective, but anything that you -- we should be aware of as far as anything strategically that you guys are looking to perhaps exit out of? Or you're happy with the current business lines?

No. There's not anything imminent in what you just asked. I do want to add to Paul's question -- or his answer on the last one, the savings at HMI for next year. It won't be fully realized, but around $6.5 million, if you consider West Coast warehouse, some salaries that had to do with the RTA division mostly and then the savings that we're anticipating with Savannah by not having the drayage from the port all the way to Maiden and Madison, those are very significant, of which probably $5 million to $5.5 million would be realized next year.

Okay. All right. That's definitely meaningful, for sure. Okay. And then just in terms of the total backlog, can you perhaps quantify what that was at the end of the quarter?

Total backlog was $331 million company-wide.

Okay. Great. And then as far as the price increases, can you perhaps talk about what you guys did in the third quarter and plans going forward? And then I guess just to stick to that same topic. So if we assume that costs kind of stabilize, and I know it's a big if, but assuming that they do, would you expect to have the planned price increases offset the higher cost by Q1 of next year? Would that be a reasonable assumption?

Yes. And regarding price increases, most are rolling in now and going and will be executed within about a month. So -- and depending on which side of our business we're talking about, it will affect backlog on certain businesses, where we just couldn't absorb and it will not affect backlog on other businesses.

Right, right. So it will...

So, in other words, there's a little bit of a trailing feature to that.

And the whole industry is facing this right now. It's -- there could be more price increases. And same thing will happen is that they'll roll in, depending on whether you apply them to backlog or whether you allow backlog to stand at the lower margins. And that's a business decision by each business.

And our next question coming from the line of Sandy Mehta with Evaluate Research.

Given that these temporary issues are there for everybody in the industry, stock prices have come down because of this, the medium-term outlook is very positive, the CapEx that you had for Savannah is now behind you. Any thoughts of possibly -- and then the high net cash position, any thoughts of a possible buyback? I noticed the dividend increase yesterday, which was excellent news, but any thoughts in terms of possibly buying back stock?

We discuss buybacks a lot. Obviously, capital allocation, we have the luxury of being able to have capital allocation discussions pretty regularly. And we've considered a buyback and not ready to act on that. Our Board talks about -- we talk about buybacks at every quarterly meeting. We also talk about the possibility of acquisition to grow the company and also to invest in additional inventory. I think we're still well below our inventory levels. We're below historical inventory levels. And with the demand the way it is, we really need to grow inventory above even historic levels. So I think that we're not ready to commit to a buyback at this point, but it's a discussion item pretty regularly, and certainly a possibility.

And one other question, can you comment or give some color on incoming order trends? And in terms of how consumers are reacting to higher prices, so we see anecdotally very strong housing industry data, people are moving to suburbs, people are moving from one state to the other. So the housing demand remains strong, but housing prices are up, furniture prices are up. And can you just give some color on what you're seeing out there in terms of how consumers are reacting to that?

Yes. Right now, the higher end companies within all of the brands have the moat, I would call it, closer to the pulse because those are more sold orders. So I believe that's a better indicator for what you're asking. And in those companies, orders just keep -- they keep going, it hasn't slowed down really at all. The businesses that are more stocking for warehouse orders, those orders, they're so far out on the backlog that that has inherently slowed down orders within those businesses, but the backlog is over 3x historic levels. So hope that answers your question.

Yes. Just for perspective, in February of 2020, our backlog was $122 million. At the end of 2021, it was $240 million, and it's $331 million now. What we're also seeing is we're not seeing cancellations. Despite price increases and all the other demands on -- the inflationary demands on consumers, we're not seeing cancellations. And as you pointed out, housing is still robust, even at these higher prices, and we think that trend is going to continue for a number of years with all the favorable demographics of millennials settling down, buying homes, moving to the suburbs, the new work trends. We think that all supports solid long-term growth.

And our next question coming from the line of John Deysher with Pinnacle Value Fund.

I was just curious, you called out higher freight costs, but what other costs are increasing? I know we've talked about this in the past, but where are you seeing the highest cost pressures going forward?

Well, that's bothly -- both on inbound from overseas, and once it's here, all of the domestic trucking is significantly higher as well. To give you an idea, I mean, it just -- it consistently goes up. And now, we're in a season where you're starting to figure out, okay, what's the contract going to be and all the contracts are higher. So it really is more a -- it's -- what's not up, I mean, would be an easier question. It's -- across the board, logistics is up.

It's raw material...

Right. (inaudible) logistics is up.

Yes, yes. (inaudible)

Yes.

But -- I mean, in terms of raw materials, what are you seeing in terms of the foam issue and lumber prices and all of that, how is that moving?

Foam has been mostly mitigated. It still can be a challenge at times, but not to the point where it's really hurting our production significantly like it was before. Lumber seems to have stabilized somewhat, although we could get an increase tomorrow. So a lot of the raw materials did take significant price hikes recently, but some of it has seemed to slow down. And the foam issue has definitely started to get much, much better, where it's not affecting our production.

Okay. That's good to hear. You mentioned adding inventory, where would you expect year-end inventory to be at this point, approximately?

Actually, don't expect year-end inventory to be a lot higher than it is now.

I think he's saying, what would we want it to be, is that right?

Right.

No, that's where I was going is we'd like to add another $15 million to $20 million over the course of next year. But right now, we're shipping every -- almost everything that's in transit is sold. So we're shipping everything we get, so we're not going to see a lot of growth in the short-term, but we'd like to add $15 million, $20 million over the course of next year as factories get back online.

And which segments do you think that would mostly fall into?

Mostly in the Hooker Branded segment.

Branded. Okay. Good. Good. And then finally, now that Savannah is behind you, do you have a ballpark CapEx number for fiscal -- for next fiscal year?

It's going to be a little high -- it's going to be high again next year because we're renovating a showroom and we're going to complete our ERP project. We've typically been a pretty low CapEx company, very often under $5 million. I'm going to say next year, it could be around $8 million or $9 million.

$8 million or $9 million, okay.

Yes. We're moving to a great new showroom. It's going to require some CapEx and then finishing this ERP project will be the other big piece.

And that showroom revolves around the Hooker legacy brands.

Right.

Is that a high point?

Yes.

Yes.

It is. Okay. All right. Great.

(Operator Instructions) And our next question coming from the line of Jeff Geygan with Global Value Investment.

With respect to backlog, and I know you've made a few comments around this. At these elevated levels, assuming that the supply chain resolves itself at some point, what would you expect the stickiness of this backlog to be?

I think that on -- if you're talking the Hooker -- if you're talking the legacy brand business, so on that side of business, I believe that is in line with what we may see in the future as well. I mean it's -- because that's more sold orders, that's more based on the consumer. I think once we get past, to your point, the supply issues, I think the HMI backlog would come significantly down because we would actually be able to perform on it and get it to a level that would still be advantage, but not at the level it's at currently.

So, your expectation in terms of withdraw or cancellation of the current backlog?

We really have not had cancellations of any -- it hasn't been big at this point and we don't expect to have major cancellations in our backlog in the near future.

All right. And then couple that with imposing price increases, what is your expectation in terms of the elasticity of demand and potential volume impact as you raise prices?

We believe that our price increases are very much in line with the overall industry, so that's #1. #2, I don't pretend to know where that elasticity takes us. But there has to be a point somewhere, but I believe we've had a deflationary industry for my entire career, which is 25 years. So I think we're making up some levels there. I mean we're up -- I think, the industry as a whole is in the 20% to 30% range of how much it is up over this period of time. And I bet the industry deflated at least that much over 25 years. So I'm not sure how to answer your question on where that inflection point actually is, but those are some -- just some points.

And we cover a number of price points. So obviously, as we see an evolution, we'll move -- we'll support the businesses that are most favored by their price points.

All right. Our analysts talk to a number of companies in different industries, and it's fairly universal to your issues about labor, yet you did not mention any labor issues. Can you address that, please?

Yes. It's probably amiss on our part, candidly, because labor is an issue, it's -- particularly in the domestic factories. We have -- we've put a lot of initiatives in place, including in-house recruiter, but we're doing things. You have to do things differently or you're not going to succeed in the labor market. So we're doing, I think, a relatively good job, but it still is very much a challenge.

We've had...

And what type of...

Yes. Right. Sorry.

What type of wage increases have you experienced?

Probably in the range of around -- probably around 5% would be the overall.

All right. Circling back on your freight/logistics, you indicate that like most people, you have had -- seen accelerated costs, but we follow the shipping industry fairly closely and it seems that's mitigated itself somewhat in the last, say, 4 to 6 weeks. Can you speak to real-time versus the Q that you just reported out just directionally what you're seeing?

We're still seeing an increase, especially in the costs coming from overseas. We believe some of that has to do with factories shut down and equipment in the wrong places. So more of a supply and demand issue with the equipment that's maybe creating a bit of a short-term level, but we're not seeing decreases at this point.

And contract rates are going up.

Yes. Right.

Even if spot rates come down, contract rates are going up. So we're not budgeting a lot of short-term -- a lot of reductions in the short-term.

Got it. And last and somewhat unrelated question, you did talk about capital allocation and share buybacks and the Board contemplates the buyback from time to time. Under what circumstance might the Board consider buying back stock, if not today?

I think that we contemplate it, but there are -- between the fact that we're very comfortable -- we're pretty comfortable having probably an excessive safety cushion of cash. It's served us well through the recession through a number of downturns over the years. So we probably keep too much cash on the balance sheet if you were just looking at it formulaically. So we try to keep -- we keep more cash. We also are -- we -- I think we stated pretty regularly that we would like to grow by acquisitions, so we try to preserve cash for that. So we feel like, in the long-term, to grow a bigger, healthier company is a better investment than buying back our own shares, although there's got to be -- I mean, there is a price -- I don't -- I can't quote that price, but there is a price where we would buy back shares.

That's fair. I know it's been a challenging environment. Appreciate your taking time to speak with your shareholders today.

I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Jeremy Hoff for any closing remarks.

Thank you, Lidiya. I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fourth quarter and year-end results in April. I hope everyone has a wonderful holiday season. Take care. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.