Hooker Furnishings Corp (HOFT) 2022 Q4 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 fourth quarter of 2022. (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, Liz. Good morning and welcome to our quarterly conference call to review our financial results for the fiscal 2022 full year and fourth quarter, both of which ended on June 30, 2022. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We 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 year-end 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 $594 million, an increase of $53.5 million or 10% compared to last year, driven by year-over-year sales increases of more than 20% in both our Hooker Branded and Domestic Upholstery segments. These sales gains were partially offset by a 1% sales decrease in the Home Meridian segment. We reported net income of $11.7 million or $0.97 per diluted share this year compared to a net loss of $10 million or $0.88 per diluted share last year. Last year's loss was due principally to a $44 million or $34 million net of tax noncash intangible impairment charge.

The fourth quarter, which began on November 1, 2021, and ended on January 30, 2022, was seriously impacted by COVID-related factory shutdowns in Vietnam and Malaysia, which resulted in a 13% consolidated sales decrease in the quarter. In the quarter, consolidated net sales were $135 million, with the decline driven by a 24% or $19 million revenue decrease at HMI and a 12% or $5.8 million sales decrease at Hooker Branded. These lower sales were slightly offset by a $3 million or 13.5% increase in the Domestic Upholstery segment.

For the 2022 fourth quarter, the company reported a consolidated net loss of $4 million or $0.33 per diluted share as compared to a net income of $8.5 million or $0.71 per diluted share in the fourth quarter of fiscal 2021. The quarter operating loss was primarily a function of a $12 million operating loss at Home Meridian. Contributing factors in the fourth quarter loss included inventory unavailability due to COVID-related Asian factory shutdowns from August through late in the year, continued high freight costs, a decline in e-commerce and hospitality furniture sales, and costs of approximately $5 million for the company's planned exit from unprofitable businesses and channels.

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

Thank you, Paul, and good morning, everyone. For much of the year, we successfully mitigated a multitude of macroeconomic challenges while growing sales, remaining profitable and undertaking transformative, strategic initiatives for a long-term expansion of the business. This was particularly true on the Hooker Legacy side of our business and during the first half of the year for all segments.

During the first half, all segments achieved double-digit sales increases, and we were able to better meet historical levels of demand with the right product assortment and inventory readiness. Some of the macroeconomic challenges we faced included soaring ocean freight costs and shipping bottlenecks through the year, material and component parts inflation, staffing and foam shortages.

During the course of the last 18 months, transportation costs have more than tripled, substantially increasing our cost of imported goods sold. We were able to mitigate these dynamics until late summer when the unexpected COVID-related shutdown of Asian factories began in August and continued through late in the year. While incoming orders remained strong and backlogs were at historic highs, this loss of production capacity virtually halted much of our supply of imported products. This hit Home Meridian immediately and even began to cause out-of-stock issues and low inventory receipts at Hooker Branded in the fourth quarter despite that segment's U.S. warehousing model. All of these factors contributed to the 13.2% consolidated sales decrease in the fourth quarter.

Over the last few months, Asian factories have begun to ramp up production again and are currently operating at around 85% to 90% capacity and improving weekly. While we are confident that production of imported goods will reach 100% capacity in the near future, we will not feel the full impact of higher production until the second quarter as we forecasted late last year.

Our planned exit from unprofitable businesses and channels at HMI, including inventory write-downs, charge-backs from the Clubs channel and order cancellation costs as we wind down our RTA furniture business resulted in onetime costs of over $5 million in the fourth quarter, which was a major driver of our consolidated net loss during the final quarter of the year. However, we believe these strategic exits will help boost profitability going forward as they allow us to focus on more profitable businesses and stable channels to drive long-term growth.

Even as economic factors beyond our control buffeted our financial performance beginning last summer, we continue to create long-term momentum and pursue new opportunities to expand the business. We undertook strategic initiatives such as opening the largest facility in our history, an 800,000 square foot distribution center in Savannah, Georgia, to help HMI reduce cost and delivery times to our customers. Other ambitious initiatives in the second half included entering the Las Vegas furniture market with an 8,500 square foot showroom to serve interior designers in the Western U.S.

On January 31, 2022, we entered the fast-growing outdoor furniture arena with the acquisition of upscale resource Sunset West, creating an opportunity for incremental sales as we become a player in an increasingly important furnishings category with an outlook for sustained growth.

Finally, we are extremely excited about our plan to have all Hooker Legacy divisions move showrooms at High Point Market beginning next April, as our companies occupy the entire 113,000 square foot third floor of the Showplace building. Our Hooker Legacy companies will have immediate increases in exposure necessary in achieving our organic growth initiatives.

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

Thanks, Jeremy. I'll go over the performance of each of our segments, beginning with Hooker Branded. For the 2022 fiscal year, net sales increased by $38 million or 23.5% compared to the prior year. The revenue gains are attributed to a stronger product portfolio, effective supply chain and logistics management and robust consumer demand. Hooker Branded managed well through some turbulent economic conditions while achieving double-digit sales gains and increased profitability through the first 9 months of the year. Our decision to honor prices in the backlog had a short-term unfavorable impact on margins, but by the end of fiscal 2022, the majority of shipments in the Hooker Branded segment carried price increases, which were implemented in July 2021 to mitigate higher ocean freight and product cost inflation.

However, sales volume declined in the fourth quarter due to reduced inventory availability, resulting in lower operating income compared to the fiscal 2021 fourth quarter. Incoming orders increased by 24% compared to the prior year period when business had already dramatically rebounded from the initial COVID crisis.

Backlog remained historically high and nearly doubled as compared to the prior year-end when backlog was already at a high level, although part of that increase is due to the lower shipments in the fourth quarter.

Moving to the Home Meridian segment. Net sales decreased by 1% compared to the prior year period due to decreased unit volume as a result of COVID-related factory shutdowns in Vietnam and Malaysia, which led to lower shipments. For the fiscal 2022 fourth quarter, the HMI segment sales decreased by $19 million or 23.7% as compared to the prior year fourth quarter. Sales increases in the first and second quarters at HMI were offset by the sales volume lost during the second half.

Driven by higher freight costs, exit costs from the RTA furniture category and significant charge-back from the Clubs distribution channel, HMI reported a $21 million loss for the year. Higher freight costs adversely impacted gross margin by 530 basis points in fiscal 2022 and were the primary driver of increased product costs.

Current and expected future freight costs, which will have an adverse impact on potential profit margins, caused us to rethink our entry into the RTA furniture products category. Consequently, HMI exited the RTA category and incurred onetime order cancellation costs of $2.6 million. In addition, due to continued poor profitability and excess charge-backs of $2.9 million in the year, HMI made the decision to exit the Clubs channel. Exiting these 2 businesses has also resulted in write-backs to dispose of obsolete and excess inventory.

Although these actions adversely affected our earnings and contributed to the operating loss in the segment, we are now freer to position our working capital and resources on the solid businesses like Pulaski, Samuel Lawrence, ACH and PRI, with a goal to be in stock in our new 800,000 square foot warehouse to service growing channels such as brick-and-mortar retailers, the interior design trade and e-commerce while still growing our mega accounts as appropriate.

The Domestic Upholstery segment's net sales increased $18.6 million or 22% in fiscal 2022 due to double-digit sales increases at all 3 divisions. For the fiscal 2022 fourth quarter, Domestic Upholstery sales increased $3 million or about 13.5%. Domestic Upholstery achieved year-over-year sales increases during every quarter of the fiscal year.

However, gross margins decreased as compared to the prior year and prepandemic levels as this segment faced manufacturing constraints, which adversely affected profitability, including foam shortages early in the year, higher raw material and freight costs and labor shortages and inefficiencies.

The segment reported operating income of $4.3 million or 4.2% operating margin as compared to the 12.4% operating loss in the prior year, which was attributable to a $16 million noncash intangible asset impairment charge. Incoming orders increased by 38%, and this segment finished the year with an order backlog 122% higher than the prior year when backlog levels were already at historical highs. Our manufacturing capacity is increasing weekly, which will help us address this much higher backlog.

In our All Other, net sales increased by $200,000 or 1.7% compared to the prior year due principally to sales increases in our Lifestyle Brands division, a business that started in fiscal 2019 targeted at the interior design channel. Although this business is still small, net sales to the growing interior design channel increased by 80% compared to the prior year.

For fiscal -- the fiscal 2022 fourth quarter, All Other net sales increased by $1 million or 46% as H Contract net sales increased by 44%, which offset sales decreases in the first 3 quarters. H Contract's incoming orders increased 27% in fiscal 2022 and finished the year with a backlog 126% higher than the prior year-end.

And finally, our balance sheet remains strong. Cash and cash equivalents stood at $69 million at fiscal 2022 year-end, a modest increase over the balance at the fiscal 2021 year-end. During fiscal 2022, we used a portion of the $19 million of cash generated from operations to pay $8.8 million in cash dividends and $6.7 million in capital expenditures, primarily on our newly opened Georgia distribution center and enhancements to our facilities and other systems.

While inventories are still not at optimum levels due to service demand and backlogs, we have significant inventory in transit and expect our inventory levels to improve incrementally during the first quarter of fiscal 2023 and dramatically in the second quarter. I also need to add that we spent $25 million of our available cash in early fiscal '23 to acquire the assets and businesses of Sunset West.

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

Thank you, Paul. Incoming orders and backlogs continue to be strong across most divisions. We are concerned about ongoing global logistics constraints and economic headwinds affecting the consumer that could impact short-term demand such as inflation, high gas prices and the war in Ukraine. As we mentioned earlier, we expect production capacity of our Asian suppliers to improve significantly, reaching 100% capacity at some point during the first quarter, although the full financial impact of this improvement in inventory readiness won't be felt until the second quarter.

As the Spring High Point Market concluded last week, our attendance was up 26% compared to June 2021 High Point Market and about 12% compared to the 2021 fall market. We had major new product placements across all brands at Hooker Legacy and HMI with the market as close to normal as we have seen since pre-pandemic.

Big Sky, a 60-piece whole home collection with rustic finishes at Hooker Casegoods inspired by the natural beauty of the American wilderness, was the hit of the market. In addition, customers were very excited to see the Sunset West outdoor furniture line shown for the first time at High Point Market. And Pulaski, Samuel Lawrence and PRI had very significant new placements with their major customers.

We continue to be encouraged by long-term trends such as demand for housing, the renewed and sustainable focus on home interiors and exteriors, and the prospect of the 2 largest demographic groups in history entering their prime earning and household formation years. While we have worked through a broad spectrum of challenges during the year, our team has continued to focus on multiple strategic growth initiatives, many of which will positively impact us in the next 6 to 12 months.

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

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

So yes, I do have a few questions here. So first, can you quantify the backlog? And are you seeing any notable order cancellations?

Ended the year at $340 million consolidated backlog. We've seen some cancellations, mostly on the Home Meridian side. Home Meridian's backlog is still pretty healthy (inaudible).

And the reason -- what would you attribute the order cancellations for HMI? Is it just retailers don't want to wait to -- what will best describe the reasons for the order cancellations?

With the -- this is Jeremy, Anthony. With the shutdown of factories, there was a buildup of inventories with many retailers, which caused space issues. Also, their business model is much more of a very far out -- planned on every level. So all those containers are planned out. So we weren't surprised to see some level of cancellation with everything going on.

Got it. Okay. So obviously, HMI, it's been a headache for you guys for a while here. Are you done pretty much now with the costs related to the RTA exit and the Club channel issues? Or will any of that spill over into the first quarter or the rest of the fiscal year?

Yes. So we feel like we got a lot of the things we talked about of the unprofitable businesses. Getting out of those is very much -- we think it's mostly behind us. The only remaining really is about $1.7 million in RTA inventory, which is really low compared to what we would have been if we had canceled all those orders.

And some of that we referred to taking inventory write-down. So we should be reserved for losses on that stuff. So yes, we're winding it down.

Okay. So that $1.7 million, is that going to be all in the first quarter? Or was that already reserved? I just want to get a little bit more clarity about that.

That's not going to -- $1.7 million, I'm not saying that's going to be any type of write-down. I'm just saying that's the level of inventory we have left in RTA, which we continue to sell and not necessarily lose money.

And we reserved against it. So as we sell it off, it shouldn't impact our results.

(multiple speakers) very low and almost gone.

Yes, we're almost out of it.

Okay. Got it. All right. Okay. So prior to COVID and the tariff issues, HMI had segment operating margins typically in the mid-single digits. So is there a viable path to get that back to those types of segment margins? And if so, when would be a reasonable time frame to expect that?

So all the margins that you've seen from HMI obviously included the Clubs channel, it included the RTA mess, included everything that we're talking about that we're almost out of. So when you take those terrible margins out of that overall average, we have these good businesses underneath that, that will now show up.

So I believe we're in a -- we're going to get a pretty respectable margin with HMI within the next quarter or 2 and ongoing from there because we're not going to be in these high-risk scenarios where we're not sure which surprise is coming next.

It was tougher for HMI even starting with the tariffs. It was tougher for them to react to the tariffs, and I think that they've absorbed that now, too.

And to further submit my point, Pulaski, Samuel Lawrence, PRI, they were all hitting budget before we hit the [8 1] factory shutdown. No one could see that because of the reasons I just stated.

Got you. Okay. So now that you're exiting the Club channel business, can you just talk about how much revenue did that contribute to the fiscal year from the Club channel? And now that you don't have those sales, are those lost sales? Or do you expect to at least partially offset that with sales to other customers?

Yes. So it was roughly $20 million. It's been as much as $90 million previous years. We were down to $20 million, and now, of course, we're going to 0. We won't be exactly 0 this year, but we'll be closer -- much closer to getting clear out.

So as far as how we replace that, we believe, #1, it was a capacity constraint for the rest of our businesses. So we feel a lot -- much of that can transfer over to PRI, for example, from a production capacity. So we really -- we don't feel like we're going to lose $20 million in revenue because we got out of Clubs business.

Okay. Got it. Yes. And so -- and just in terms of the cost issues, obviously, you called out the freight costs, which have been impacting not just you guys, but the entire industry. Since the fiscal year-end, have you seen any changes to the costs, whether it's ocean freight or anything else that you want to call out?

I would say we've seen a little bit of relief but not enough to really talk about in that positive of a way is how I would summarize it. We're -- and this usually isn't a good strategy, but we're hopeful that the costs are going to come down as the year progresses. But right now, the logistics, the freight situation, all of those things are still very difficult. I will say the entire year, fiscal year last year, we mitigated and managed through that very well from a profitability standpoint for the overall company until we hit [8 1] factory shutdown. So I feel -- our team feels positive and optimistic about what we're able to do if we just have the factories running like they are now and soon to be 100%.

Got it. Okay. And then -- so given the timing of your call today, I mean, you're only about 2.5 weeks from finishing up the first quarter, what can you tell us about current quarter revenue and bottom line trends if you -- I know you guys don't give guidance, but I mean, just kind of -- if you could give us some more color as to what you're seeing thus far, that would be very helpful.

I don't think we can give a really good answer on the quarter yet on where we think it's going to be. Paul?

I'd have to agree. I mean it's only 2.5 weeks, but by the time we pull this all together, I think it's probably in line with what we're hoping, but I can't say much more than that at this point.

Okay. That's fair. Okay. And then obviously, you guys have a strong balance sheet, generating positive free cash flow. So how should we think about your cash flow priorities? Particularly interested in your outlook for potential share repurchases.

We get this question all the time. I think with the uncertainty still in the economy right now, I think we're cautious about committing cash. I know that our stock -- we genuinely believe our stock is a terrific buy. But I think we're also cautious. Caution has been the theme of this company for 98 years. And I think that right now, our first priority is to bolster the balance sheet. We just spent $25 million on what we think is a great acquisition. And we talked about that before. And I think that the first step is to bolster the balance sheet in case -- just in case some of these macroeconomic events don't settle down in the near future. Between the war and the freight issues, as Jeremy said, we think that freight stabilized. But I think that right now, the primary objective is to make sure we have a strong balance sheet to get through whatever may materialize in the coming months.

Our next question comes from Sandy Mehta with Evaluate Research.

Two questions. Could you talk a little bit about price increases? Everybody in the industry is increasing prices. And what is the elasticity of demand in terms of our consumers accepting the price increases?

And housing prices have gone up a lot. Is there a crowding-out phenomenon that people are spending as much money or their budget on the house that the furniture purchase will happen, but it may be deferred. Maybe some comments on that, please?

The first part of the question, we believe that the price increases have obviously been ongoing and for a while, it seemed like -- particularly in raw materials as it relates to our domestic manufacturing, it seemed like daily things were going up in different ways. We've obviously reacted to those from a price increase standpoint.

And really, if you look at the difference or the delta between raw materials and factory increases versus how much of our increases have been freight, it's dramatically increased on the freight side of the equation versus what has happened on actual inflation for manufacturing cost and raw materials and whatnot, driving prices up.

So regarding the inflection point and where that starts to hurt us from a demand standpoint, I really can't pretend to know that. I know that this is a -- these issues are across not just our industry but across the world, obviously. And we feel as though we're competitively in line across the board as far as who we would compete with and what they've had to do and how they've had to react. We, of course, get intel from seeing prices go up out in the market, and we understand where we're priced as it relates to where others are.

So I think that we've done what we have to do for the cost that have been coming in from every direction. But I don't know if I can give you a really great answer on where demand will go due to the pricing.

I'll say that our price increases have only been to try to keep pace with our cost increases. We certainly -- we're not using this as an opportunity to expand margin. And in fact, sometimes our price increases trail, which I think we referenced in the call.

Correct. Did that answer your question, Sandy?

Yes. And is there a crowding-out phenomenon that -- with home prices still rising, that people, their budgets for the furniture, while they will spend, but maybe it's deferred or that gets squeezed out a bit -- a little bit.

We haven't seen that yet. Yes, housing prices are still high. There's still a huge demand for housing. And yes, you're right. Everything is a lot more expensive. Furniture is more expensive, too. But I think that with the housing demand and, I think we referenced in our call, millennials and Gen Z entering prime earning years and household formation, we still think the demand is going to be there. People may adjust their purchasing patterns, but we haven't seen any evidence of that yet, but I'm sure there's an inflection point somewhere.

And also, I would mention that our team, I believe, basically pretended like we weren't in the high demand environment we've been in, and we've been working on a lot of initiatives that are going to actually hit us in a positive way in the next 6 to 12 months. So we believe that gives us a lot of reasons to be optimistic when you look at everything we have going on that's going to help the company from a market share standpoint as well.

Our next question comes from Barry Haimes with Sage Asset Management.

Had couple -- 3 questions. One is you talked about Vietnam and Malaysia, but could you just remind us of your sourcing countries kind of by percent just to get a feel for where the product is coming from?

We can give you kind of a general answer on that. Is that all right? I'm going to give you...

Yes, yes. No, just trying to get a sense -- correct.

Vietnam is obviously a major part of our sourcing. And then you would get...

75%.

Yes, 75% would be roughly the Vietnamese number for how much products we have being sourced out of that country. And then it would be split between China and Malaysia. Malaysia is probably second. And then you get into China, Mexico, India, we even have some Portugal. There are some things we're looking at Eastern Europe, which, of course, we're rethinking that entire thought process. But that's really where we're dominant. And of course, our domestic U.S. footprint is significant to us as well.

Got it. That's very helpful. And then secondly, we talked a little bit about the freight cost. And since it generally went up as we went through last year, if we look at kind of budget all of this year versus last year, any feel for what percent increase we should be baking into our thinking?

So you're asking what -- maybe what we averaged last year versus what we maybe think we'll average this year percentage-wise?

Correct. Yes. And I know we're off the peak, for example, in terms of spot rates and such, but the contract rates, I believe, for this year are higher than last. So when you shake that all out -- again, I'm just kind of looking directionally. Should we be looking for double digits, high single -- any kind of feel for kind of year-over-year freight?

Well, if you just simply go by contract rates, which the history thus far in this whole challenge has been the contract rate, you have that, and of course, you can't get enough capacity on the contract rate and you end up getting spot rates that average that number up for the overall company. So we're not sure, and I don't think anyone is sure whether the contract rate is going to average up or average down this year, meaning are spot rates -- is it going to start to come down and spot rates are going to drive the entire company average down.

So I start the -- the answer to that question has to start with we aren't sure which direction that could go average-wise. But if you simply go by contract rates, we're going to average probably in the neighborhood of 40% more on a contract rate basis than we did last year.

Got it. So again, just one follow-up question on that. Again, without predicting this year, if we look at last year in terms of what percent was under contract versus what percent you had to be in the spot market, any again, rough feel for that?

Paul, I would say it was almost 50-50.

It was 50-50.

Yes. It was 50% of each last year.

Got it. Okay. That's very helpful. And then my final question is -- I totally agree with you guys that the demographic outlook is positive, but one possible offset could be demand pull forward as we went through the pandemic and everyone focused on home and consumer durables and couldn't travel and so on. So as you guys are thinking about your business, how do you think about that? Is there any way you can try to keep your finger on the pulse? Do you get POS data from any of your customers? Anything you can share on how you're thinking about that would be great.

Our thoughts on that is, of course, we acknowledge a COVID bubble of demand, which I don't think anyone believe would be sustainable at that level. And candidly, I don't know of a company that was able to supply at that level effectively either. So our team has been watching closely versus 2019 pre-pandemic to see where we are -- where we believe we are from a market share standpoint and again, trying to build on these strategic initiatives that we feel are going to help us gain market share towards our organic growth as well.

On the defensive side, we have an S&OP process. So we're constantly monitoring incoming orders and incoming demand and shipments. So I think we're not going to get caught with too much inventory. We make -- if things -- if business slows down, I think we have enough systems in place that will catch that. So we won't get caught -- we may have a little bump in inventory, but we're not going to get caught with excessive -- massive excess inventory.

Great. And just one follow-up on that. What is your normal sort of supply time line coming from Asia to the U.S.? You -- now as you've given order to the Asian factory, when is it sort of ready to be delivered in the U.S.? How long is that time frame?

So first of all, it depends on the factory, and it depends on the country, and it depends on a lot of different things. But in general, lead times have started to come down. We just actually recently got word of this, and it's very positive because that ascertains the amount of safety stock that we have to obviously carry. So factories are starting to definitely improve their capacity and our lead times. I mean we could have been -- on a lot of our factories, we could have been a year out or over a year out on a lot of things, whereas we're seeing more in that 5- or 6-month type arena at which we can very well -- we can handle that. That's a little more in our historic wheelhouse.

I think our average lead times were up -- including those year outs and some of the bigger suppliers, were up around 9 to 10 months, and they're down to 6.

Right. And some were over a year.

Yes. Yes.

Our next question comes from John Deysher with Pinnacle.

Most of my questions have been answered, but I just have a couple. The $5 million nonrecurring expense in the fourth quarter for the wind down of the RTA, what was that for the year? It was $5 million for the fourth quarter, but what did those issues -- how did they impact the year?

Most of those happened in the fourth quarter -- or third or fourth quarter. It's about $2.5 million for the -- get out of the RTA business. Another $2.5 million of charge-backs from -- in the Clubs channel or 2 -- almost $3 million in the Clubs channel. The rest of it was inventory write-downs and reserves, which we took at the end of the year.

And let me be clear, we say onetime charges. These are unique charges. I mean technically, we can't call them -- we shouldn't call them onetime charges, but they are unique charges that we don't -- we're getting out of those businesses. So we should -- these are costs of exiting this business.

Okay. So there was nothing in prior quarters related to these?

The RTA exit was within the third quarter.

And I'm sorry, I just don't recall what the charge was for the...

$2.5 million of exiting the RTA business was in the third quarter.

Sorry, what was the amount?

$2.5 million.

In the third quarter. Okay. So -- and then there was $5 million in the fourth quarter for everything?

Yes. The rest of that was inventory write-downs.

Okay. Got you. And all of that ran through the gross margin line, correct?

Yes, yes.

Okay. Good. Now that you've completed the Savannah warehouse and the showrooms, what would you guess is your CapEx budget for the coming fiscal year?

We haven't completed the showrooms, but we've started the showrooms. But next year, I would say that the CapEx budget is probably in the $8 million range with -- ERP and showrooms are going to be the biggest piece of that next year. And then we should return to, I would guess, 6 -- subsequent to that, probably in the $6 million -- $5 million, $6 million range after next year.

Okay. Great. That's helpful. And I guess, finally, the acquisition of Sunset West, that seems like a new segment for you. Can you give us some color there as to the seasonality of that business, what kind of revenues it generated at least for the most recent fiscal year? Will it be a separate segment to report going forward?

So I believe -- as far as segment reporting, I believe it's going to be under Domestic Upholstery because they have domestic cut-sew operations. And the seasonality of it actually in the outdoor category has changed to very much a year-round business. Obviously, I don't mean you're going to be in Minnesota and selling a bunch of outdoor in the winter. But there are a lot of states that do sell outdoor year-round, and some of those would probably surprise you. But -- so we don't think there's a big seasonality component in that business. It's pretty consistent.

As far as -- one of the big whys for us was you've got a relatively smaller company that has a great look, a great customer base, a higher margin profile that we're able to bolt on a lot -- to a lot of our scale and operations from logistics to warehouse and to showrooms. So that's why they were -- it's the first time that they've been able to show at the High Point Market, which was really pretty dramatic from the response -- from a response standpoint.

So we feel like our ability to grow that business and make it incredibly accretive for us is really in our wheelhouse, and it's the biggest reason we did it, is we felt like we could make it accretive. As far as the scale, so it's roughly $25 million business today, but we believe that's quickly going to change.

Okay. Great. And where do they -- do they manufacture onshore? Do they import? How is their sourcing?

So they import a lot of their frames and things that they're utilizing, tables, frames for sofas, things like that, but they domestically do the cushions and the cut. So they do that domestically in California.

Okay. So they have a separate plant.

That's correct.

Okay. Great. Do you know -- who is the seller?

It was the founders. It was a partnership.

There were 3 partners.

Okay. So it was the founding family plus 2 other partners?

Correct.

And no private equity involved?

That's correct. And family -- the founding member has stayed with us and works for us today.

And he's under -- that's Wes Stewart?

That's correct.

And he's on an employment contract?

Yes.

That's correct.

Okay. Good. That sounds like a winner.

We believe so, too.

(Operator Instructions) Our next question comes from Jeff Geygan with Global Value Investment Corp.

A couple of quick questions. Regarding your accelerated or elevated level of freight cost, how much of that have you been able to pass on to your customer?

I would say across our businesses -- okay. To start with Hooker Branded, we were able to pass on most, if not all of it. We were a little bit -- we've been a little bit behind due to our philosophy of protecting the backlog on Hooker Branded, mainly because that's a mostly sold order backlog. So when you affect that with the price increase, you're actually affecting an actual sold order to customer that one of our partners has already priced. So that's the reason for our philosophical difference on that.

Number two, on the other side of the business, we were definitely -- we were probably in line for most of the year in most of the brands of HMI; one that was not -- one that did not keep up with ACH, which fell drastically behind and really created what's the PPV, purchase price variance -- created high levels of purchase price variance where you had these high levels of freight coming in where the pricing was not adjusted appropriately, and it really hurt us.

With regard to your inventory level at $75 million at year-end, what is your objective inventory level?

We probably could do with another $10 million. I think on the HMI side, I think we just need to redeploy inventory dollars. On the Hooker side, I think if we have another $10 million, we can better service our customers.

Okay. Jeremy, you said the Sunset West would be incredibly accretive. How are you measuring the accretiveness?

Really, we're measuring that by what we believe we can increase operating income, but profitability of that company is really how I'm thinking about it.

And we think we can leverage sales.

We believe we can grow it in revenues. But as far as what I consider accretive, definitely a profit.

Appreciate that. How is its margin profile compared to your business overall?

It compares much more -- it aligns with the Hooker Branded segment closely.

Great. And last question. In your prepared comments in your press release, you used the term transformative strategic initiatives, although you've talked about a lot of things that are changing with your business. What specifically were you referencing in making that statement?

Well, transformative, really, when you look at the Hooker Legacy company, it's going from what's called the main building in High Point showroom, which doesn't have the higher ceilings, it doesn't have the natural light, it doesn't have the audience that we feel we will get in the Showplace showroom.

Showplace, we believe, will have -- it could be as much as 10x the exposure, particularly in the interior designer channel, which will give us -- it will feed into our desire to do more business in that channel. We also believe it will be great for our brick-and-mortar channel. And as you know, e-commerce really isn't as dependent on showroom, but we believe that's going to help us in a pretty major way. So that's why it categorizes as transformative.

On the other side of the business portfolio is a new initiative that we're working through on the HMI side. HMI, historically, really went to a -- we're going to sell megas, and we're not going to focus on a lot of the other brick-and-mortar retailers. So we're changing that approach. We still want to grow our mega business. We have some really good customers on that side of the business that we're going to continue to try to grow. We do projects. There's a lot of things going on in that arena.

But portfolio is -- we're going to really combine the power of Pulaski, Samuel Lawrence, ACH and PRI to really show what these companies can do together from a presentation standpoint. And all in stock in Savannah and at a 90-plus percent level of inventory able to ship right away is a very new scenario for that company, and it will grow incremental business in a very different way than what we're focused on now.

Appreciate that. As a follow-on, how, if at all, will this transformative change affect your capital allocation priorities?

We don't believe it's going to necessarily raise our working capital significantly because the -- for example, portfolio that I just spoke of, that's more of a working capital shift. So much of our working capital was in ACH and driven towards really just e-commerce. So we're shifting a significant portion of that to the other companies like Pulaski, Samuel Lawrence in order to drive their business through different channels versus just e-commerce. So it's going to -- it's really going to shift versus increase.

Beyond updating showrooms, that's really the only (multiple speakers).

Correct.

That concludes today's question-and-answer session. I'd like to turn the call back to Jeremy Hoff for closing remarks.

Thank you, Liz. I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fiscal 2023 first quarter results in June. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.