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Stanley Furniture (NASDAQ:STLY)

Q4 2013 Earnings Call

February 04, 2014 9:00 am ET

Executives

Micah S. Goldstein - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Secretary and Director

Glenn Charles Prillaman - Chief Executive Officer, President and Director

Analysts

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Greetings, and welcome to the Stanley Furniture Fourth Quarter and Total Year Operating Results Call for 2013. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Micah Goldstein, Chief Operating and Financial Officer for Stanley Furniture. Thank you, Mr. Goldstein, you may begin.

Micah S. Goldstein

Thank you, Kevin. Good morning, everyone. Glenn and I appreciate you taking the time to join us.

During the call this morning, we may make forward-looking statements that are subject to risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from expectations is contained in our SEC filings and the press release announcing these 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 the call.

We're going to change our order up a little bit this morning, and I'm going to go ahead and cover the fourth quarter results and then the full year results, and then I'll turn the call over to Glenn.

Net sales for the quarter decreased to $22.7 million. Gross margin decreased compared to the prior-year period, as well as the sequential quarter, and I want to walk you through both of those comparisons now. And then I'm happy to answer any follow-up questions when we start the Q&A session.

When you look at the decrease compared to the prior year, it's mainly attributed to the increase in promotional spending, lower sales and, because the new introduction didn't ship, we had a mix shift away from the Stanley brand. We're also being impacted by inflation on both brands, labor increases from Asia that were not in last year's number, as well as increased lumber cost domestically.

When you turn to look at the gross margin change on a sequential-quarter basis, if you remember from our last call, we guided an expected growth and we didn't see that. As a result, we had to make some adjustments to our inventory reserves to make sure they're fairly stated. We also had lower sales, higher promotions and the same unfavorable mix that got us on a year-over-year basis.

SG&A for the quarter included $238,000 of restructuring related to the final relocation expenses from our corporate office and showroom consolidation. Amortization and support of our new enterprise solution along with favorable bad debt adjustments in the fourth quarter of last year contributed to the year-over-year interest -- or year-over-year increase in this expense. As a result of these items, our operating loss for the quarter, net of restructuring, was $3.7 million, also equals our cash loss for the quarter.

Switching to results for the full year. Net sales fell 1.6% to $97 million and the mix of sales were 60-40 in favor of our Stanley product line. Gross profits slipped from 12.4% in 2012 to 10.1% in 2013. Contributing to this decline was higher promotional spending during the year, inflation on sourced products early in the year and our decision to delay pricing action until after go live of our new enterprise system midyear and higher prices for raw materials used in our domestic operation. While we didn't feel able to take wide-scale pricing action in Young America, we did take action on a number of SKUs late in the year and we continue to work hard to lower costs while maintaining product quality.

SG&A expenses for the full year of '13 were $20 million, which included $770,000 of restructuring related to the corporate office move. This full year number also includes $350,000 for amortization related to our new enterprise solution. Other increases for the full year include the marketing expenses related to a full year of attending 4 markets compared to 2 markets in previous years. We're expecting SG&A to stay around $5 million on a quarterly basis and will obviously drop as a percentage of revenue as we leverage the fixed component of these expenses.

Our balance sheet remains healthy and we remain debt free and our final year of transformation we invested in our office and showroom consolidation, a new enterprise solution and some minor spending in Robbinsville.

Inventories increased in Q4 but came down slightly for the year. Our inventory remains adequate, we believe, to support growth and we don't anticipate this being a drain on cash in 2014. Other sources of working capital should remain stable.

We've been successfully using extended payment terms to place new products and that will likely continue in 2014.

A few other brief points of interest before I turn the call over to Glenn. First, we expect to file our 10-K later this week, which will have the latest information on the CDSOA litigation. Second, we have approximately $1.5 million of capital expenses planned for 2014. These expenses will occur mostly in the back half of the year. Third, we're expecting depreciation and amortization to be about $2.5 million for the full year of 2014, $1.9 million for depreciation and about $600,000 for amortization. And last, we expect the interest expense related to our legacy deferred comp plan to be about $3 million this year. You've got to remember that this is noncash and that the increase in policy loans is netted against the increase in cash surrender value of the underlying policies.

Glenn?

Glenn Charles Prillaman

Thanks, Micah. As Micah outlined -- good morning, everyone. As he outlined, the fourth quarter was disappointing financially. We were not able to show the growth we expected. Retail activity in the last 3 months of the year proved to be weaker than anticipated and, unfortunately for everyone, we think this is primarily the case across most of the wood segment of the industry. With that being said, we are making progress and we do have some very good things going on in our business.

Operations in Robbinsville supporting our Young America brand continued to improve even as that factory operates on low unit volumes. We operated on schedule throughout the quarter and we have now pleased customers with timely, dependable deliveries for several months.

Last year, specifically, in spite of widespread pessimism towards our plan to manufacture domestically, we demonstrated the potential of our Young America brand through revenue growth. Now that revenue growth was slight but it was growth. And when you consider our revenue losses in previous years, all that we went through last year, which was the final year of our multiyear effort to reposition the company, and what we believe other companies in this segment would report if they did report, this slight growth in the Young America brand, we don't believe, is insignificant. It's not what we need but given what's happened in the recent past, it's a start.

Looking forward into this year, we continue to believe we can compete globally, and Young America brand can continue to occupy meaningful space and grow in the children's furniture marketplace. We can point to specific examples in our traditional distribution channels, where our customer is executing our formula by showing our product, supporting it with point of sale and consumer advertising efforts and telling our differentiated story. Where we are doing this, orders are growing steadily.

As the quarter ended, we made progress selling a leading national lifestyle retailer. We've made progress with a large regional chain. Sales projects that have begun since the quarter ended include us becoming a more important vendor, and again, with -- this is with the Young America line, to the smaller specialty retailer through private label products. And we're exploring an opportunity with a large national chain.

These opportunities turning into sales over the coming quarters should begin to validate our investments in the flexible domestic manufacturing platform, which supports Young America and gives us a long-term operational competitive advantage in the marketplace. When the salient features of Young America brand are paired with an effective retailer in any market, we are showing the ability to outpace competitors even when they're selling from lower-priced segments.

There are good things happening in the Stanley brand as well. Our newest collection and our largest introduction from last year shipped this past month and early feedback from customers is very good. The problems we had with the supplier in launching the collection have been resolved. We also have some channel development going on with the Stanley product line, and we see opportunities to grow with both the traditional and emerging retailer, as well as the interior design community.

We have an aggressive product introduction plan scheduled this year for both brands and we have already shown new products in both brands last month at the Las Vegas Market.

Lastly, let me say our team has overcome a lot. We are positioned to achieve profitability through growth and the changes that have inhibited growth are now in the past.

Looking forward, I expect the first half of this year to validate the work our team has put into repositioning the company. Specifically, the first quarter of last year was a relatively strong sales quarter. We had not launched our new operating system and we were gaining momentum. Based on what we see in retail right now, even though we can show significant progress sequentially, I'm not sure we can show a positive comp in Q1 over prior year but I believe we should begin comping well beginning in Q2.

With that, I'll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from John Baugh from Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Glenn, I was wondering if you could just take a stab, you mentioned several channel developments in both lines. And I recognize that they're all in various discussion stages, maybe in action stages with a few, but if we just looked at the channel opportunities you're working on, would there be any range of revenue you'd be willing to hazard a guess on in calendar '14 that you might see come to fruition from all of these various initiatives?

Glenn Charles Prillaman

John, I wish I could. I just -- it's very difficult to predict sales right now, because while you -- we should very well gain through channel development, there may be some bleed in certain channels as well. But obviously, we wouldn't be going after it if we didn't think it's going to produce net growth. It's just very difficult to say what that number's going to be in '14.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Do you think it's a net positive? In other words, let's just exclude what the macro does and overall, but in terms of your bleed versus your gains, do you think it's a net positive?

Glenn Charles Prillaman

Yes. Absolutely.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on Robbinsville, any flavor -- you gave us the feel for the year of the sales mix. Any feel for the year of -- on an EBIT basis or a gross margin basis, how much the Robbinsville factory is dragging results and then sort of how that youth line may look? And I understand you have a difficult first quarter comparison. How the first quarter might line up, not just in that segment but I guess as overall in terms of both the revenue and EBIT basis?

Micah S. Goldstein

John, I think we stand firm with the comments that we've made earlier. We need about $30 million on a quarterly basis to achieve breakeven at our current mix of sales. So Robbinsville is definitely, as we've said openly, less profitable than the Stanley brand. It's not covering its overhead and, as sales grow, the investments that we made there are very leverageable and a higher percentage of each dollar will drop to the bottom line. Without growth, that factory and that brand will continue to be a drain on the overall corporation. In terms of total year results, our total results for the first quarter is really going to depend on what sales do. As Glenn said, we're expecting sales to be better than they were in the fourth quarter and probably not as good as they were in the first quarter of last year. And as our sales grow from where we are now, our losses will narrow.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And Micah, any guess on cash use, it's for '14? It sounds like from a working capital standpoint, it's relatively neutral. You pick up $1 million positive CapEx versus D&A and then the rest is what you assumed for operating income, correct?

Micah S. Goldstein

That is correct. Obviously, there could be some fluctuations and that with timing of when inventory shows up but, yes, we're introducing a lot of new product this year and so there is -- depending on the timing of shipments out of Asia, there could be a little blip in inventory as that stuff hits the water before we actually ship it. But we are not expecting any changes in working capital, and our cash use should be equal to our loss. And the investments that we plan to make from a capital standpoint, those decisions that we make will be largely dependent on how things go in the first and second quarter. We're not locked in to any spending at this point.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And then, lastly, how do I think about -- you've got the net cash, I think it was $19 million, if I'm not mistaken. What amount of cash beyond that or do you have to operate with? I mean, how much can you burn through before it gets to be an issue, basically?

Micah S. Goldstein

Yes. $19 million is the number that's on our balance sheet at year end and we've -- I think, we've been pretty clear that when we believe our plan or our strategy is not working, we've got a tough decision to make and I think that we will have ample cash to get us to that decision point.

Operator

[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to management for any further or closing comments.

Glenn Charles Prillaman

Thank you, Kevin. After 4 straight years of unprecedented change to reposition the company, as we've said, growth is how we prove the strategy works. And thank you for joining the call with us. We're very glad to have the massive changes behind us and have these initiatives for growth underway and look forward to reporting growth in the future. So thanks for joining us and good morning.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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