Hooker Furnishings Corporation (NASDAQ:HOFT) Q2 2024 Earnings Call Transcript

Hooker Furnishings Corporation (NASDAQ:HOFT) Q2 2024 Earnings Call Transcript September 8, 2023

Hooker Furnishings Corporation misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.26.

Operator: Good day, and thank you for standing by. Welcome to the Hooker Furnishings Second Quarter 2024 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Huckfeldt, Chief Financial Officer. Please go ahead.

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Paul Huckfeldt: Thanks, Catherine. Good morning and welcome to our quarterly conference call to review our financial results for the fiscal 2024 second quarter, which began May 1st, and ended on July 30th, 2023. Joining me this morning 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 2024 second quarter results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today’s call.

This morning, we reported consolidated net sales for the fiscal 2024 second quarter of $97.8 million, a decrease of $55 million or 36%, as compared to last year’s second quarter, driven by industry-wide weak demand for home furnishings and the planned exit of unprofitable operations within our Home Meridian segment. Net sales decreased by $30 million in the Home Meridian segment and $18 million in our Hooker Branded Segment, as well as $7.4 million in the domestic upholstery segment. Consolidated net income was $785,000 or $0.07 per diluted share for the quarter, compared to $5.5 million or $0.46 per diluted share in the prior year period. For the fiscal 2024 first-half consolidated net sales were $219 million, down $80 million or 26.8%, compared to last year’s first-half.

Consolidated net income was $2.2 million or $0.20 per diluted share, compared to $8.7 million or $0.73 per diluted share in the prior year six month period. Now, I’ll turn the call over to Jeremy to comment on our fiscal 2024 second quarter results.

Jeremy Hoff: Thank you, Paul, and good morning, everyone. On our call today, we’ll discuss second quarter and first-half results. In addition, we will report on our progress in strengthening our financial position in this challenging environment and strategically deploying capital and other resources to invest in future growth and higher visibility with potential customers. We believe the current industry-wide softer demand is driven by retailers continuing to sell through over inventory positions and a glut of heavily discounted home furnishings in the market. In addition, the year-over-year comparisons reflect our exit from the higher risk non-profitable operations in the Home Meridian segment. We are encouraged that incoming orders have trended higher each month through the summer, compared to prior year, and consolidated orders are up by double-digits versus a year ago.

During the quarter, we bolstered our financial position generating over $51 million in cash from operations and ending the quarter with cash and cash equivalents of $50 million. Additionally, we reduced inventory levels by $70 million from a year ago and completed most of our targeted liquidation sales at the Home Meridian segment’s discontinued inventories. The quality of our inventories is much better than it was at the end of last year and is aligned with expected demand. In addition, our investments focused on building a larger customer base are working. For example, the collective impact of our new showrooms in High Point Atlanta and Las Vegas increased our customer contacts from about 3,000 to around 14,000 annually, quadrupling our interactions with existing and potential customers.

While we expect that the full impact of this investment will be mostly longer term, we’ve already opened 1,000 new accounts in the first-half of the year as visibility and engagement have increased. The transformation of the Home Meridian segment to a sustainably profitable business model is well underway. Most of the excess inventories connected to the business unit closures at the end of the last fiscal year have been sold and the related cost reduction efforts are paying off. In addition, we reduced our Georgia warehouse footprint by 200,000 square feet during the quarter and expect to reduce another 100,000 to 200,000 square feet in early calendar ‘24. Rightsizing our footprint to align with our current demand when we no longer stock significant volumes of inventory for Accentrics Home will not only reduce cost, it will improve liquidity and working capital levels.

HMI recorded a small operating income in fiscal July, and while we continue to expect some short-term volatility in sales and earnings, we expected to achieve profitability in the second-half of this fiscal year. The hard work and difficult decisions we’ve made over the past 18-months are beginning to show benefits. We have reduced our overhead run rate from a high of over $40 million to about $32 million now and expect to be below $30 million by year’s end coupled with improvements in contribution margin, we believe we will have lowered Home Meridian’s breakeven point by over $150 million and we’ll be able to focus on building stable, profitable volume for the segment. During the quarter, we were pleased to have completed the acquisition of Atlanta-based decorative accessories specialist BOBO Intriguing Objects.

This acquisition broadens our product diversity to include lighting, decor, textiles and wall art. Adding BOBO to our brand portfolio positions us as an even more valuable and comprehensive partner for our customer base. Like last year’s Sunset West acquisition, we intend to scale BOBO using our existing sales, marketing and operations teams to make it a material part of our consolidated sales in the medium to longer term. Now I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

Paul Huckfeldt: Thanks, Jeremy. Beginning with Hooker branded. Net sales in the segment decreased by $18 million or 34% in the fiscal 2024 second quarter, due to decreased unit volume. Furthermore, discounting was 240 basis points higher than the prior year quarter, which was unusually low. For the fiscal 2024 first-half, Hooker branded sales decreased by $18.5 million or 19%, compared to the prior year six month period. Sales decreases in both periods underscore the softer demand for home furnishings. Despite a decrease in net sales, gross margin increased due primarily to favorable product costs from lower freight rates and to a lesser extent decreased warehousing costs. The segment reported operating income of $3.2 million and an operating margin of 9.3%, compared to $6.1 million and a 11.5% in the prior year’s second quarter.

While the order backlog was lower than the prior year quarter end, it remains 40% higher than pre-pandemic levels at the end of the fiscal 2020 second quarter. Incoming orders increased by almost 19% compared to the prior year quarter, a significant portion of Hooker branded’s backlog consists of orders from new products received late last year and earlier this year, which are expected to ship in the second-half of this year and position the segment positively for upcoming quarters. Turning to Home Meridian, net sales decreased by $30 million or 51% in the fiscal 2024 second quarter, due to reduced demand for Home Furnishings and the absence of sales from exited higher risk, unprofitable operations. Sales decreases in the major furniture chains accounted for about 70% of the decline and the e-commerce channel accounted for about 15% of the decrease.

Gross profit and margin both decreased in the 2024 second quarter, resulting from the net sales decline and under absorbed operating costs. Product costs decreased as a percentage of net sales, due to lower freight costs, but fixed costs due to warehousing rent and labor expenses adversely impacted the gross margin, due to significant lower net sales. For the six month period, Home Meridian sales decreased due to these same factors. As Jeremy mentioned earlier, we reduced our Georgia warehouse footprint by 200,000 square feet during the quarter and expect to further reduce that in the future, bringing total square footage to around 500,000 square feet in early calendar 2024 versus a 1 million square feet a year ago. This rightsizing will reduce costs and improve liquidity and working capital.

Due to the significant sales decline under absorbed operating costs, Home Meridian reported a $3.3 million operating loss for the quarter. However, its first-half operating loss was consistent with management’s expectations. Quarter end backlog was lower than the previous year’s quarter, and fiscal 2020 second quarter. This decline is attributed to the absence of orders from the exited operations, as well as a reduction in incoming orders from our retail customer, who are still carrying excess inventories ordered during the previous year. In domestic upholstery, net sales decreased by $7.4 million or 19% in the second quarter, due to sales decreases Shenandoah and HF Custom formally known as Sam Moore, partially offset by a 10% increase at Sunset West.

Bradington-Young net sales were about the same as the prior year second quarter. Despite the sales decrease, gross margin was 200 basis points higher than the prior year, due to decreased direct costs, including more stable raw material costs and lower direct labor costs, due to reduced production at HF Custom in Shenandoah, partially offset by under absorbed indirect costs. For the fiscal 2024 first-half, net sales decreased at HF Custom, Shenandoah, and some Sunset West. Bradington-Young reported a small sales increase in the six month period. Incoming orders increased by 36%, compared to the prior year quarter. However, orders in the prior year period were relatively low due to higher backlogs and longer lead times. Quarter end backlog for Bradington-Young remained 3 times that of pre-pandemic levels at the fiscal 2020 second quarter.

While the backlog at HF Custom and Shenandoah decreased to levels similar to fiscal 2020. All other net sales increased in both the second quarter and first-half, driven by higher sales at H Contract as the senior living industry continues to recover after the COVID pandemic and to a lesser extent, the addition of BOBO net sales. Gross profit and margin also increased in the [Indiscernible] On the balance sheet, we made considerable progress in our cash and inventory position and in strategic capital investments. Cash and cash equivalents stood at $50 million at the fiscal 2024 quarter end, an increase of $31 million from the prior year. Inventory levels decreased by $35 million from year-end $70 million from a year ago. During the six month period $51 million of cash generated from operating activities, funded $8.7 million in share repurchases; $4.9 million in cash dividends; $4 million in capital expenditures, including investments in our new showrooms; $2.6 million for the development of our cloud based ERP system as well as $2.4 million for the BOBO acquisition.

Since the share repurchase program began in the second quarter of last year, we spent approximately $22 million purchase and retire 1.3 million shares of our common stock as of the end of this quarter. In addition to cash balances an aggregate $27 million was available under our existing revolver at quarter end. For the remainder of the year, we plan to continue to strengthen our balance sheet, continue our share repurchase program as appropriate and continue to invest in organic growth opportunities, which we believe will position us favorably as business continues to improve. Now I’ll turn the discussion back to Jeremy for his outlook.

Jeremy Hoff: We believe there are mixed signals in the economy, a housing shortage and the over 20-year high on fixed mortgage rates has slowed down housing activity. The continued rise in interest rates has suppressed customer — consumer confidence. However, overall retail spending and activity in the manufacturing sector and new business startups is healthy, while the unemployment rate remains near a 30-year low. As we anticipated, the first-half of the year was difficult as the industry worked through bloated inventories and changing consumer spending habits, we expect demand and business to pick up in the second-half for several reasons. First, consolidated orders are up in the mid-double-digits over this time a year ago, with orders trending up in each segment for the past few months.

Secondly, a significant portion of Hooker Branded’s backlog consists of orders for new products launched at the High Point market and are expected to ship in the second-half of this year. Thirdly, in the second-half, Home Meridian expects to ship over 1,000 retail floors, what we believe to be the largest number of new product placements in its history. We believe all the right pieces are in place to return Home Meridian to profitability in the second half of the year. While we are focused on reducing overhead cost, keeping our balance sheet strong and judiciously deploying capital, we have continued to invest significantly in initiatives that promote higher visibility with potential customers and ensure future growth and believe these things will put us in the strongest position as demand continues to improve.

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

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Anthony Lebiedzinski: Good morning and thank you for taking the questions.

Jeremy Hoff: Good morning, Anthony.

Anthony Lebiedzinski: Alright, so first — hi good morning. So first, just curious about the cadence of sales from May through July, if you could comment on that. And then can you give us an early read on Q3? And I’m curious to hear your thoughts as far as how — what are you hearing from your retail customers about Labor Day, which is an important holiday for the furniture industry?

Jeremy Hoff: Sure. When you say cadence of sales, you mean shipments or orders?

Anthony Lebiedzinski: The shipments.

Jeremy Hoff: Okay. Just making sure we’re on the same page. So as far as shipments, obviously, our backlogs got to a level that wasn’t really great for sustainable shipments throughout the quarter is how I would summarize it. As the quarter progressed, orders increased, as we mentioned, and our backlogs are improving, but that debt the timing issue on all of that definitely affected us for the quarter. Our feedback from Labor Day has been really positive. I would say, in almost every area that we’ve checked, the reports back were either they were above last year or they were just barely — they were either at it or just below last year, which last year was really big. So we think that’s really a positive sign for us overall.

Anthony Lebiedzinski: That’s good to hear, Jeremy. And then so nice job with your own balance sheet improvements with lower inventories and improved cash position. So do you think you can make further progress with inventories? Or do you think that as quarters pick up further that you’re kind of — this is maybe the low point of inventories. Just maybe if you could just help us understand like where do we — where do you think inventories go from here?

Jeremy Hoff: We think inventories are going to stabilize from here. We believe we — this is as healthy of an inventory position that we’ve been in since I started, particularly with the ACH that we’ve gone through the Accentrics Home and everything that’s been public. But from our standpoint, what I would really say is I feel the best about all of our controllables as an overall company as I have since I started. So — and it has a lot to do with the balance sheet. It has a lot to do with the inventories. We’re in a great position from a demand standpoint as it relates to our inventories and our order rates are significantly up. So all the things we believe we can actually affect, I feel really good about.

Anthony Lebiedzinski: Got you. Okay. And then so as order rates improve, as you talked about double-digit order increases that you’ve seen, does that imply that you’ll see shipment and sales increases in the back half of the year? Or do you think there will still be somewhat of a disconnect there? And my question is on a year-over-year basis, by the way.

Jeremy Hoff: I would say year-over-year, we’re going to compete pretty well in the second-half versus what we did in the first-half. I’m not ready to say that we’ll beat the second-half last year, because it was a pretty substantial shipping half, because we were still somewhat inflated from sales from pandemic. But I do feel like it’s going to be a little bit a tale of two-halves for us, and we’re going to have a lot more positive shipping and order rate throughout the second-half.

Paul Huckfeldt: And we’ve reduced the operating costs.

Jeremy Hoff: Yes, right. So we’re really going against a whole different denominator throughout that half as well.

Anthony Lebiedzinski: Understood. Okay. Got you. Yes, I know it looks like you’re making further progress with Home Meridian overhead and in their warehousing space. So it looks like Sunset West was one of the key highlights in the quarter here. What’s driving that? And do you think that growth is sustainable?

Jeremy Hoff: We do. It’s actually one of our larger growth initiatives with that throughout the whole company. And we see it as on several levels, a big opportunity. One is when we bought the company, they’re very West Coast centric. So our ability to expand their distribution throughout the U.S. with our sales team throughout our territories, as you know whether you’re talking Florida, South Carolina, Texas, anywhere throughout the U.S., we definitely have more representation and stronger relationships than what they had before we bought them. Number two, being able to position Savannah with Sunset West also doing some cuts so cushion stuff and things we need to do out of our HF Custom facility in Bedford, we’ve created the supply chain really on both sides of the U.S., which is going to really feed growth in the eastern half of the United States, due to the cost savings of freight and really just the visibility, again, before we bought them, they didn’t have a high point showroom.

Now they’re in, of course, our show place. They were in Chicago for the casual show there. Now they’re in Atlanta. Their visibility has gone up exponentially and their ability to ship from both sides of the country. So all those factors are going to contribute in a pretty major way to their growth.

Anthony Lebiedzinski: That’s good to hear. And then — so you made a small acquisition in the quarter. Just curious about your appetite for additional acquisitions?

Jeremy Hoff: We’re always open-minded in what comes along. We’re pretty candidly, we’re pretty particular at this point. It has to really be a white space. We don’t want anything that will cannibalize what we currently are focused on within our — throughout our portfolio. However, in this instance, for example, BOBO, our number one question when our customers look at Hooker case goods is who did this lighting, can I buy the lighting? And the number one reason we bought BOBO is so that we can change the note to a yes on that question.

Anthony Lebiedzinski: That makes a lot of sense. Okay, I guess — and then my last question as far as the buyback. So you guys have certainly done a good job of having a well-balanced, I think, capital allocation between dividends and buybacks. So do you guys have much left on the buyback? Or have you exhausted the repurchase authorization? If you can give us an update on that, that would be very helpful.

Paul Huckfeldt: We have — as of the end of the quarter, I think we had about $2 million — $2 million, $2.5 million left. It’s — since then, yes, since then, we purchased another $1 million or so. So it’s — we have just a fairly small amount left on that repurchase, which will continue — we’ll continue to execute that in a 10 (d) 5-1 plan. I think it’s worked really well. But we have to balance that with bolstering the balance sheet. The economy is still a little bit uncertain. So we’re trying to balance that — our capital allocation strategy along with maintaining a strong balance sheet.