Hooker Furnishings Corporation (NASDAQ:HOFT) Q3 2023 Earnings Call Transcript

Hooker Furnishings Corporation (NASDAQ:HOFT) Q3 2023 Earnings Call Transcript December 8, 2022

Hooker Furnishings Corporation beats earnings expectations. Reported EPS is $0.42, expectations were $0.39.

Operator: Greetings ladies and gentlemen, and welcome to the Hooker Furnishings quarterly investor conference call reporting its operating results for the fiscal 2023 third quarter. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Senior Vice President and Chief Financial Officer for Hooker Furnishings Corporation.

fotoknips/Shutterstock.com

Paul Huckfeldt: Thank you Michelle. Good morning and welcome to our quarterly conference call to review financial results for the fiscal 2023 third quarter, which began August 1, 2022 and ended on October 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 filings announcing our fiscal 2023 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 $152 million, an increase of $18 million or 13.6% compared to last year’s third quarter. The increase was attributable to the addition of Sunset West results as well as sales increases across all the other domestic upholstery divisions and higher sales of Home Meridian compared to last year, when container direct business was severely impacted by the temporary COVID-related lockdowns in Vietnam and Malaysia. The higher consolidated revenue was slightly offset by a $1.3 million or 2.4% sales decrease at Hooker branded when comparing to record sales in the third quarter of last year. The company reported net income of $4.8 million or $0.42 per diluted share compared to a net loss of $1.2 million or $0.10 per diluted share a year ago.

For the fiscal 2023 nine-month period, consolidated net sales decreased by $7 million or 1.5% compared to last year’s same period due to decreases in net sales in the Home Meridian and Hooker branded segment, partially offset by higher sales in the domestic upholstery segment and in our H Contract business. Hooker branded sales volumes decreased due to inventory unavailability primarily in the first quarter this year. Home Meridian’s sales decrease was attributable to the absence of sales from the unprofitable clubs channel, which we exited at the end of last year, as well as lower sales in the key commerce channel and lower sales with some retailers who are delaying shipments to help rationalize inventory levels. We reported net income of $13.6 million or $1.14 per diluted share for the nine-month period compared to $15.7 million and $1.30 in the prior period.

Now I’ll turn the call over to Jeremy to comment on our fiscal ’23 third quarter results.

See also Seth Klarman Stock Portfolio and Stan Druckenmiller Portfolio

Jeremy Hoff: Thank you Paul, and good morning everyone. Despite macroeconomic uncertainties and a challenging retail inventory environment, we were grateful that many of the obstacles we faced last year were behind us and we were able to report revenue and earnings which both exceeded the prior year third quarter. Steady order backlog fulfillment, full production capacity, healthier inventory levels and operational improvements fueled these gains, which we expect to build and improve upon next quarter. Year over year profitability gains for the quarter were driven by sales growth and successful mitigation of supply chain bottlenecks that have impacted us for over the last two years. Improving our operational costs and exiting unprofitable businesses at HMI is beginning to show up in our margins and will continue to help improve profitability; however, economic indicators are mixed and there are potential headwinds, including rising interest rates, declining home sales, and consumer confidence.

On a positive note, the recent fall High Point Market was the best attended market since the pandemic and gave us a real momentum boost. The Market attendance exceeded October 2019 by 12%. We found retailers to be upbeat and receptive to new products they can now expect to receive within several months of order for the first time in a couple of years. HMI debuted a remodeled 100,000 square foot showroom, including a 10,000 square foot area showcasing the new portfolio program featuring a breadth of in-stock styles of bedroom, dining, occasional and upholstery across HMI brands, which was very well received. The portfolio’s launch was a successful first step in expanding and diversifying HMI’s customer base to include interior designers and a greater number of independent furniture retailers.

At Hooker Casegoods, we debuted the Charleston collection. The updated traditional styling and finishes were met with enthusiasm from retailers, who believe there is a void for timeless designs in the marketplace, a furnishing style that’s sought after by a significant set of younger consumers in their prime furniture buying years. This collection will be shipped before the next High Point Market in spring 2023, when we look forward to the grand opening of our new Hooker Legacy showroom encompassing an entire floor of the Showplace building in High Point. Now I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

Paul Huckfeldt: Thanks Jeremy. At Hooker branded, net sales decreased by $1.3 million or 2.4% compared to the same period last year. The lower sales were driven by temporary inventory mix issues. Some vendor factory shipments were received in our warehouses as incomplete collections with missing items and retailers delayed receipt of orders until collections and groups could ship complete. This issue has been resolved and we’re shipping more of our backlog now. Our Asian suppliers are improving their lead times and Hooker branded inventories are now about $44 million higher than they were at the end of last year’s third quarter, positioning us well for the holiday selling season. Gross profit increased by about 100 basis points for the quarter, which partially offset that slight sales decline and higher SG&A expenses, which were up due to higher salary and benefits costs and higher commission rates, among other things.

Hooker branded reported $5.2 million in operating income and a 9.5% operating margin for the quarter. Incoming orders in Hooker branded decreased as compared to the prior year quarter as the market is gradually returning to more typical levels of demand. The quarter-end backlog was lower than the prior year-end quarter but was still about three times higher than pre-pandemic levels in calendar 2019. Moving to Home Meridian, segment net sales increased by about $4.4 million or 9.4% as compared to the abnormally low volume in the prior year third quarter when container business was severely impacted by the temporary COVID-related factory shutdowns in Vietnam and Malaysia. In addition, the hospitality division reported strong sales as that sector continues to recover from COVID-related downturns.

The sales increases were largely offset by the absence of the unprofitable clubs channel sales and decreased ecommerce sales. The exit from the clubs channel resulted in significant improvement in returns and allowances and gross margin. Ecommerce sales decreased mostly due to the normalization of post-COVID consumer demand. Gross profit and margin improved significantly due to the absence of excess charge-backs in the clubs channel and order cancellation costs when we exited the ready-to-assemble furniture category last year; however, HMI shipments were lower than expected due to mass merchant retailers with high inventories delaying some shipments. Due to deflated sales from delayed shipments and higher than expected transition and labor costs related to our new Georgia distribution center, HMI reported an operating loss of $3.2 million, a $7 million improvement from the operating loss in the prior year quarter.

As expected, incoming orders and quarter-end backlog decreased significantly due to the absence of club channel orders as well as decreased orders from our retail customers, who are delaying orders to rationalize inventories with current demand. In the domestic upholstery segment, we were pleased to report the seventh consecutive quarter of double-digit sales growth. Net sales increased by $14.1 million or 48% compared to the prior year third quarter. The increase was driven by the addition of Sunset West results as well as organic sales growth at each of the domestically produced factory divisions: Bradington Young, Sam Moore, and Shenandoah, which all delivered double-digit net sales gains for the quarterly and nine-month periods. Gross profit and margin increased due to the inclusion of Sunset West results, favorable sales variances, better overhead absorption on higher sales volumes, and near full operating capacity.

These improvements were partially offset by increased raw material costs such as leather, foam and upholstery materials. For the third quarter, the segment generated operating income of $3.8 million and reported an operating margin of 8.8%. Incoming orders decreased compared to the prior year quarter due to current demand, long lead times, and high backlog, but year-to-date orders were about on the same level as calendar 2019. Quarter end backlog was lower than the prior year quarter end and fiscal 2022 year end, when demand was exceptionally strong and production capacity was constrained. Comparing to calendar 2019, backlog was more than three times higher than pre-pandemic levels. Turning now to our cash inventory and debt position, cash and cash equivalents stood at $6.5 million at the fiscal 2023 quarter end, down $62.9 million from the balance at fiscal 2022 year end due primarily to a $58.9 million increase in inventories as well as almost $10 million of share repurchases.

During the fiscal 2023 nine-month period, we purchased and retired 598,000 shares of our common stock under the $20 million share repurchase authorization approved by our board of directors earlier this year. Through December 7, we’ve purchased 705,000 shares at a total cost of $11.2 million, and even while spending $11 million on share repurchases to date, we’ve been generating cash since last quarter. With lead times shortening as much as they have, we’re aiming to reduce inventories by $25 million by roughly this time next year, which will further enhance our cash position. To improve liquidity, we’ve also implemented some targeted promotions on certain products. Also related to cash flow, let me take a minute just to discuss our capital allocation priorities.

On December 5, 2022, our board of directors declared a quarterly cash dividend of $0.22 per share, which will be paid on December 30 to shareholders of record on December 16. This 10% increase in the dividend is the seventh consecutive year in which we’ve been able to increase our annual dividend. We believe it demonstrates our continued confidence in our strategy and business model, and we believe our relatively stable balance sheet and variable cost business model will allow us to adapt to economic downturns that may be on the horizon. Other capital allocation priorities including rebuilding our cash reserves, fulfilling the remainder of our share repurchase authorization, and capital investments in our soon to be implemented ERP upgrade and other capital expenditures to improve our competitive position, such as outfitting the new Hooker Legacy brand showroom for its opening in April 2023.

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

Jeremy Hoff : Thank you Paul. Current economic indicators are mixed and we are closely monitoring potential disruptors, including rising interest rates, consumer confidence, and a slowing housing market. At the same time, we see reasons for optimism as the U.S. enjoys healthy employment levels, rising household incomes, and continuing strength in consumer spending. Our backlogs on the legacy side are still much higher than pre-pandemic levels and our recent entry into outdoor furniture with Sunset West is performing above expectations. We believe the environment in the home furnishings industry is shifting from a reliance on historic demand to a dependence on market share, and we believe that many of our initiatives will help us gain market share, including the launch of portfolio and our new showroom next spring.

Strategically, we believe we are well positioned to capitalize on this change. Despite our relative optimism, we are paying close attention to economic indicators and retail trends to ensure that our inventory planning and cost structure are appropriate to the short to midterm conditions, while continuing to invest in our longer term strategies. Typically our earnings calls focus on financial highlights; however, we are grateful as an organization to be in the position to support charitable organizations throughout the communities we live and work and where great needs exist. Most recently, we had the opportunity to partner with two key retailers in Florida to send over 1,200 beds and supplies to help with relief efforts for Hurricane Ian. This spirit of giving back is embedded in our culture and has been for almost 100 years.

Our employees take this part of our culture seriously and dedicate a significant amount of their own time and resources to many of these efforts. We believe this is a key differentiator for us as a company, which is why I wanted to mention this in our call today. This ends the formal part of our discussion, and at this time I will turn the call back over to our Operator, Michelle, for questions.

Q&A Session

Operator: Our first question comes from Andrew Lebiedzinski with Sidoti. Your line is open.

Anthony Lebiedzinski: Yes, good morning. Thank you for taking the questions, and I’m actually Anthony Lebiedzinski, not Andrew. First on Hooker branded, just wanted to get a better sense as far as the inventory mix issues. Any way that you guys could quantify what the impact was, and I know you said you’re shipping better in 4Q, so do you expect to get most of that back in 4Q, whatever you lost because of these mix issues, or do you think that will spill over into the first quarter of next year?

Paul Huckfeldt: I think we’ll get a lot of it back. We’re shipping considerably better than we were through most of the quarter. Jeremy?

Jeremy Hoff: As far as quantifying, I think it’s a little tough to do, although I know that, for example, the category of furniture on hold due to waiting on other orders to ship, I believe was somewhere in the $5 million to $7 million neighborhood, so that’s kind of–that would probably be one number we could somewhat quantify. And yes, we’ve actually been in–it’s a weekly process at this point, and we feel like we’ve managed through it and we feel like we will get that back in the fourth quarter.

Anthony Lebiedzinski: Got it, okay. Thanks for that. Then I know you guys talked about the backlog being up overall versus pre-pandemic. Any way you guys could quantify what the consolidated backlog was at the end of the quarter, and how does that compare to the third quarter from calendar ’19?

Paul Huckfeldt: Consolidated backlog was $137 million now and $126 million in ’19.

Anthony Lebiedzinski: Okay, got it. Thanks for that. And then–

Jeremy Hoff: And that is obviously consolidated. The legacy side gets much more pronounced as far as how much larger it is.

Paul Huckfeldt: Right, branded is 35 versus 11.

Jeremy Hoff: Right.

Anthony Lebiedzinski: Oh wow, okay, so that’s a meaningful difference. All right, thanks for that clarification. Then for Home Meridian, you said that some customers are delaying shipments. Obviously we all know that there’s a lot of inventory out there in the retail channel, so do you think these are mostly firm orders or could some of these get cancelled, and I guess what’s your view as to when you think that inventory levels at the retail partners that you’re dealing with–I mean, when do you think those will be more normal?

Jeremy Hoff: First of all, the first part of the question, we do believe those are firm orders. We feel like we went through the process of rationalizing our backlog with all of our major retailers, and what we have left is solid, so that’s how we feel on that question. Secondly, a lot of that is starting, because there is a fairly decent retail environment going on out there. You can’t feel it on the order side because of what’s going on with inventories, but we are hearing that the inventories are starting to correct themselves to the level that it’s going to finally break through. We don’t really know, but we feel like it’s definitely getting better, kind of on a weekly basis.

Anthony Lebiedzinski: Okay, that’s good to hear. Then as far as the distribution center in Georgia, I know you talked about some labor costs and some inefficiencies there. When would you expect that facility to be operational as far as just the–from an efficiency standpoint, when should that be fully efficient to your standards?

Jeremy Hoff: We feel like we’ll make significant steps at the end of the first and into the second quarter, and I think we’ll make more significant steps actually into the third quarter too because as we rationalize our inventory more and more on that side of the business, we’re going to be able to reduce our costs pretty significantly.