Hooker Furnishings Corporation (NASDAQ:HOFT) Q3 2024 Earnings Call Transcript

Hooker Furnishings Corporation (NASDAQ:HOFT) Q3 2024 Earnings Call Transcript December 7, 2023

Hooker Furnishings Corporation beats earnings expectations. Reported EPS is $0.65, expectations were $0.26.

Operator: Good day, and thank you for standing by. Welcome to the Hooker Furnishings Fiscal ‘24 Third Quarter Earnings Conference Call. [Operator Instructions]. Please be advised, today’s conference call is being recorded. I would now like to turn the conference over to your speaker for today, Paul Huckfeldt, the floor is yours.

Paul Huckfeldt: Thank you, Lisa. Good morning and welcome to our quarterly conference call to review our financial results for the fiscal 2024 third quarter, which began July 31 and ended October 29, 2023. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We appreciate your participation. During our call, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors which 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 third 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 our fiscal 2024 third quarter of 116.8 million, a decrease of 35 million or about 23% compared to last year’s third quarter, driven by continued soft demand for home furnishings as well as our exit from Accentrics Home product line. Despite the sales decline, operating income and margin both increased due to decreased product costs at Hooker Branded and improved margin at Home Meridian due to the exit from unprofitable categories. Consolidated net income was $7 million or $0.65 per diluted share for the quarter, compared to 4.8 million or $0.42 per diluted share in the prior year period. For fiscal 2024, 9 month period, consolidated net sales decreased by 115 million or 25% to 336 million as compared to last year at the same period.

Consolidated net income was 9.3 million or $0.85 per diluted share compared to 13.6 million or a $1.14 per diluted share in the prior period. Now, I’ll turn the call over to Jeremy to comment on our fiscal 2024 third quarter results.

Jeremy Hoff: Thank you, Paul, and good morning, everyone. On our call today, we’ll discuss third quarter and first 9 months results and how our strategy to reposition the Home Meridian segment from a volatile high risk model with unpredictable revenue and profitability to a low risk, more sustainable profit model that is yielding tangible results. While the housing market slow down, high interest rates and a shift in consumer discretionary spending away from home furnishings continue to challenge, we’re encouraged by positive indicators like the normalization of ocean freight rates, eased supply chain constraints, more stable raw material cost, and increased labor availability. As we have forecasted for some time now, profitability improves significantly as we moved into the second half of the year.

The Home Meridian segment achieved a quarterly operating income for the first time since calendar year 2021, contributing 900,000 to income in the current year third quarter compared to 3.2 million loss in the prior year third quarter. Despite a challenging macroeconomic environment for the home furnishings industry, we’re proud of our team for persevering through some difficult decisions and short-term pain to create a more sustainable and profitable business model for the segment. After spending the last couple of years repositioning HMI to focus on its core products and businesses, it is encouraging to see HMI report a quarterly profit for the first time in two years and contribute to our overall profitability. HMI inventory levels decreased by 15 million as compared to the year-end and 46 million compared to the prior year third quarter.

In addition, we have realigned our inventory mix to reflect our current business plan and reduced our footprint in the Georgia warehouse by 200,000 square feet in the second quarter, and entered into an agreement in the third quarter to reduce another 200,000 square feet by early next year. Liquidating excess inventories, right sizing our overhead and exiting unprofitable businesses has put us in a much stronger overall position. Our main focus continues to be execution of our strategic growth initiatives and the drivers we can control. Demand has decreased versus prior quarters, but consolidated orders are still up 12.7 million or 15.7% for the third quarter. For the first 9 months, consolidated orders increased by 75.8 million or 33.5%. Most of the consolidated increase is driven by Home Meridian segment orders, which were unusually low in the prior year period.

We’ve continued this quarter to bolster our financial position, generating about 49 million in cash from operations in the first 9 months of the fiscal year. At the end of the quarter, cash and cash equivalents were at 40 million, an increase of 21 million from the prior year end. Inventory levels decreased by 32 million from the year end, and 69 million from this time a year ago. The recent fall high point market was positive by all measurables across the company. Increased visibility is one of our major strategic objectives, adding 2 smaller showrooms in Las Vegas and Atlanta while moving our largest high point showroom has created an exponentially larger audience for our products on the legacy side of our business, as well as Sunset West.

HMI also had a good market as they focus on strengthening the product assortment for Pulaski, Samuel Lawrence Furniture and PRI. The efforts by our team at HMI to re-energize and reposition the product offerings for growth, received a lot of positive retail feedback in new placements from our major customers. As reported before, the collective impact of our new showrooms in High Point, Atlanta and Las Vegas has increased our customer contacts from about 3000 to around 14,000 annually, more than quadrupling the number of existing and potential customers. In this first half — in the first half, we opened 1000 new accounts, as visibility and engagement increased. This quarter, that pace continued as we added 150 new customers on average per month.

The furniture industry as a whole continues to experience softer business conditions. However, we feel very good about all of our controllables. We’re in a healthy inventory and overhead position. Most of our cost reductions other than warehousing are behind us and we do not expect more personnel reductions. 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, Soft Home Furnishings demand and short-term delays with an impact of about 3 million related to the implementation of our new ERP system over the Labor Day weekend, drove a net sales decrease in the segment of about 17 million or 31%. Without the ERP related delays, we believe sales would’ve been about 26% below the prior year. Despite the sales decline, Hooker Branded reported a solid operating income of 7.3 million and an operating margin of 18.6%, an improvement compared to the 5.9 million and 10.3% in the prior year quarter. For fiscal 2024 9-month period, net sales decreased by 35 million or 23% due to decreased unit volume. Sales decreases underscore the softer demand for home furnishings.

Gross profit and margin both increased for the fiscal 2024 third quarter despite the decline in net sales, these favorable outcomes attributed to significantly decreased product costs driven by lower ocean freight rates. In addition, warehousing costs were lower due to lower demurrage and drainage expenses, as well as lower labor and compensation expenses due to the reduced shipping activities. The higher-than-average gross profit margin of 45.6% for the quarter is expected to be temporary and as a result of the timing of reduced freight and product costs and recent price reductions across the segment. While price decreases and promotions were implemented in August, the majority of inventory sold in the quarter still carry higher selling prices, which were implemented in the prior years to address massive freight cost increases, which resulted in unusually high gross margins.

We expect Hooker Branded margins to normalize the historical levels in the coming quarters. Incoming orders increased by 7% compared to the prior year’s third quarter, and this year’s second quarter. Although quarter end order backlog was lower than the prior year quarter end, it increased from this year’s second quarter and remained nearly 70% higher than pre pandemic levels at the end of the fiscal 2020 third quarter. At Home Meridian, Home Meridian segment net sales decreased by 6.9 million or 13% compared to the prior year third quarter, but increased compared to the first and second quarters of the current year. Sales decreases in the e-Commerce channel previously served by Accentrics Home accounted for over 40% of the overall decrease in the segment due to our exit from that line.

The remaining decreases in the segment were driven by sales decreases at Samuel Lawrence Furniture, PRI and Pulaski, all divisions observe independent furniture stores and major retail chains. These decreases were partially offset by strong sales at Samuel Lawrence Hospitality, which reported sales increases of 152% and 46% for the third quarter and 9 months respectively. Despite the net sales decrease, HMI gross profit and margin increased by 940 basis points or $3.4 million in the fiscal 2024 third quarter. This increase was attributed to improved margin as we exited from unprofitable sales channels and product lines. Decreased product costs and increased profitability in our hospitality division also helped. Furthermore, decreased costs in the Georgia warehouse and decreased wage expenses due to organizational and personnel changes all contributed to the increase in gross profit margin.

For the fiscal 2024 9 month period, gross profits slightly decreased driven by sales decreases while gross margin increased by 530 basis points due to the factors I’ve just mentioned. As well as the absence of the warehouse transition and startup costs incurred in the prior year first quarter. Home Meridian recorded a quarterly operating income of $900,000 compared to a $3.2 million operating loss in the prior year third quarter. The liquidation of inventories that were written down at in the fourth quarter of fiscal 2023 were essentially completed during the quarter and we had an immaterial impact on gross profit. Incoming orders were 19% higher than the prior year third quarter, but lower than the first and second quarter orders as our retail customers are matching their inventories and orders to current soft demand for home furnishings.

The quarter end backlog was lower than the same period a year ago. At domestic upholstery after 2 years of sales growth, domestic upholstery net sales decreased by 11 million or 25% in the fiscal 2024 third quarter due to lower demand. All four divisions reported sales decreases for the quarter and the 9 month period. Gross profit and margin both decreased in the fiscal 2024, third quarter and 9 month period driven by net sales decreases. Direct material costs were below prior year periods due to more stable raw material costs. However, these decreases were more than offset by under absorbed indirect costs, which were higher compared to the prior year third quarter and 9 month period, primarily due to indirect labor costs. Incoming orders increased by 39% in comparison to the third quarter of the prior year as Bradington-Young, HF Custom and Shenandoah all recorded increased orders.

Sunset orders remained flat as compared to the prior year third quarter. Quarter end backlog for the segment slightly decreased from the second quarter end. As Bradington-Young’s backlog was 2.5 times that of pre-pandemic levels. While backlogs at HF Custom and Shenandoah decreased to levels comparable to the fiscal 2020 year end. One of our core values at Hooker Furnishings, is maintaining a strong balance sheet and financial position. As Jeremy mentioned earlier, we generated 49 million in cash from operations during the first 9 months. That cash funded $12 million of share repurchases, $7 million of cash dividends to our shareholders, 5.7 million of capital expenditures, including the investments in our new showrooms, 3.8 million for the development of our cloud-based ERP system and 2.4 million to acquire BOBO Intriguing Objects in the second quarter.

On Tuesday, we announced our quarterly dividend of $0.23 per share, a 4.5% increase over the previous dividend, which will result in annual dividend yield just under 5%. This increase represents the 8th consecutive year in which we increased our dividend, reflecting our confidence in our business model and our commitment to providing a return to our shareholders. Also relating to shareholder value, during the third quarter, we completed the share repurchase program which began in the second quarter of last year. Over that time, we spent a total of $25 million in a little over a year to purchase and retire 1.4 million shares of our common stock. With that, I’ll turn the discussion back to Jeremy for his outlook.

Jeremy Hoff: While economic indicators remain mixed and furniture retail traffic is down about 15% from January through October 2023, the long-term outlook has improved. Reduced housing activity, high mortgage and interest rates are still challenging, but several positives have emerged since last quarter. Core inflation is at its — at the lowest level since 2021, the US economy grew nearly at 5% last quarter. Unemployment remains at record lows and the risk of recession appears to be moderating. As we look to the next quarter, we see flat sales for our Hooker legacy brands, but a continued short-term reduction for HMI sales until the new retail placements begin to generate more sales sometime in the first quarter next year.

Early indications in the fourth quarter signal that incoming order activity is returning to better levels, we experienced most of this year. We believe our growth initiatives will continue to gain traction in the first half of 2024. Our focus on reducing cost, keeping our balance sheet strong and judiciously deploying capital along with our investments to promote higher visibility and future growth, continue to put us in the strongest possible position to leverage your return of furniture demand to more typical levels. This ends the formal part of our discussion. And at this time, I will turn the call back over to our operator, Lisa, for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today will be coming from Anthony Lebiedzinski of Sidoti.

Anthony Lebiedzinski: Nice to see the bottom-line out performance and certainly a stronger balance sheet from a year ago. So, as far — so I guess, HMI certainly big improvement of profitability versus a year ago, the gross margin there was about 20%. So is this how we should think about segment gross margins going forward, or was there anything unusual in the quarter that maybe this pace of gross margin expansion is not sustainable?

Paul Huckfeldt: That’s close to our targets. There’s a little bit of fixed cost in there with our warehousing costs, but so that could dip with sales decline a little bit, but that’s the ballpark in a normalized environment, I think that is what you should be thinking about.

Anthony Lebiedzinski : Okay. So that’s certainly better than it used to be historically. So that’s encouraging.

Jeremy Hoff : Well, the gross margin historically been getting covered up by the bad businesses that we exited.

Anthony Lebiedzinski : Correct. Right. Okay. And then, the gross margin at the Hooker branded was unusually strung on, as you pointed out. Do you think you’ll see any sort of benefits from the higher priced products in the fourth quarter, or do you think you’ve pretty much flushed out the, all of that in the third quarter?

Jeremy Hoff : We believe that, we flush — we have flushed a lot of that out, but we still think there may be some benefit left partially in the fourth quarter.

Paul Huckfeldt : Should normalize customer.

Jeremy Hoff : Yes.

Anthony Lebiedzinski : Got it. And in terms of your outlook, so for the fourth quarter, you gave us some quantifiable numbers for the hooker branded. You think sales will be kind of flat, down at HMI, there was no mention really about domestic upholstery, so I guess, with the orders coming in 16% higher, which is encouraging, but the talk of software demand. So in total, how should we think about the fourth quarter revenue? I guess if we put all the pieces together?

Jeremy Hoff: So, I’ll speak to that somewhat generally, but and then Paul can fill in the blanks, but have to remember the backlogs that we were coming out of from last year versus this year and our order, so they were extremely high. And so, the order rate was extremely low against a lot of those businesses. So these high percentages of order rates up are just really filling the backlogs back up for probably closer to a normalized business level versus the increases it looks like in the order rate. Does that make sense?

Anthony Lebiedzinski : Yep. Sounds good. And then lastly, before I pass the call to others, so as far as the buyback you completed the repurchase authorization, what is your appetite for doing another share buyback, or would you say your preference would be to pay off whatever debt you have given the higher interest rate environment?

Jeremy Hoff: I think right now our objective is to make sure that we’re right about the economy and maybe keep it, maintain the strong balance sheet and fund organic growth. I mean, if you’ve looked at our investor presentation, we’ve got a lot of pretty aggressive growth targets. We’ve got some specific strategies, and I think our primary objective now is to fund those organic growth strategies. We’ve got Bobo and we’ve got Sunset West that we’re expect to grow pretty significantly. So I think for the short term, those are our higher priorities than another share buyback. And of course, maintain our dividend we’re very proud of the dividend and we just increased the dividend again for the eighth consecutive year. So, I think those are all higher priorities than another share repurchases.

Operator: Our next question will be coming from David Storms of Stonegate.

David Storms : So just wanted to start with some of the normalization and demand and kind of how you think about productivity and capacity specifically in like the home Meridian segment? I noticed that orders were up, but backlog was down. Is this just efficiency is going way up or is there more capacity that you could get out of that segment?

Jeremy Hoff: Really, the timing of the order rate increasing on the HMI side didn’t happen until later in the third quarter, which created a lower backlog situation as you mentioned. And that is why we’re saying a lot of the placements we have out there, we have a lot of good indicators that those are working and we’re starting to get significantly increased orders on the HMI business, and that’s why we believe the backlog will spend its time getting larger during the fourth quarter. And that’s also why we believe the first quarter will be significantly better for HMI in the first quarter.

David Storms : We have the Lunar New Year will change some of the shipping patterns too.

Jeremy Hoff: Right. But as it relates to backlog and as it relates to orders, it’s really the timing of when those orders really improved on the HMI side. Is that helpful?

David Storms : Yes, it does. Thank you. And then just when we’re thinking about the increased visibility you have going forward as you open up your new showrooms and such, what kind of runway do you think there is for that to improve demand and then ultimately turn into new orders?