Stanley Furniture Company, Inc. (NASDAQ:STLY)
Q4 2015 Earnings Conference Call
February 24, 2016 09:00 AM ET
Anita Wimmer - VP of Finance
Glenn Prillaman - President and CEO
Dillard Watt - Stifel
Greetings, and welcome to the Stanley Furniture Company announces the Fourth Quarter and 2015 Operating Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Ms. Anita Wimmer, Vice President of Finance for Stanley Furniture. Thank you, Ms. Wimmer, you may now begin.
Thank you, Manny. Good morning. Glenn and I appreciate you taking the time to join us for our fourth quarter and total year conference call. Here in the call, we may make forward-looking statements that are subject to risks and uncertainties. A discussion of factors that could cause actual results to differ materially from our expectations is contained in our SEC filings and the press release announced in our results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any of these statements to reflect events or circumstances after this morning’s call. I’ll get it started by going through the financials and then I will turn the call over to Glenn.
Net sales for the quarter were $13.8 million, down 13.9% compared to the prior year fourth quarter. Total year sales were $57.4 million, down 5.4%, compared to prior year.
Gross profit as a percentage of sales improved in the fourth quarter to 25%, compared to 23.3% in the prior year fourth quarter. Total year gross profit improved to 23.9% from 19.8% in the prior year. Prior-year margins included a restructuring charge of $354,000 for future lease commitments for our warehouse that was no longer being utilized. Excluding this prior-year one-time charge, margins still improved due to less discounting and lower operational support cost, partially offset by the negative impact of lower sales.
SG&A for the fourth quarter was $2.7 million, or 19.9% of net sales, compared to $3.1 million, or 19.5% of net sales in the prior-year fourth quarter. Total year SG&A expenses were $12.7 million, or 22.1% of net sales compared to $14.9 million, or 24.6% of net sales in 2014.
The lower SG&A expenses in the fourth quarter were primarily due to decrease in commissions driven by lower sales. The $2.2 million decline in SG&A spending for the year resulted from the rightsizing of our organizational structure to support lower volume levels after we exited our Young America product line and related domestic production.
With new initiatives in marketing and advertising, we project our SG&A spending to range between $3.4 million and $3.7 million a quarter and will vary within this range based on sales levels and the timing of marketing and advertising expenses.
Operating income for the fourth quarter was $713,000 compared to $599,000 in the fourth quarter of 2014. Even with 5.4% decline in net sales, operating income improved almost $4 million during 2015 due to initiatives taken at the end of 2014 and early in 2015 to align our organizational structure with lower sales volume.
As a reminder, we incur interest expense as a result of loans taken against cash surrender values of company-owned life insurance policies used to fund our legacy deferred compensation plan. As the company pays down these policy loans, it reduces its interest expense, and to a lesser extent, its growth in cash surrender value, which is a component of benefits and cost of goods sold and SG&A.
During 2015, the growth in cash surrender value, net of deferred compensation plan expenses was $1.2 million compared to $2.4 million in 2014. Interest expense on loans against these corporate-owned life insurance policies was $948,000 in 2015 and $2.9 million in 2014. These decreases are a direct result of use of excess cash to pay down policy loans.
Subsequent to year-end, we liquidated two life insurance policies and used $2.5 million of the proceeds to pay down policy loans further. As of today, we currently have $3.1 million on policy loans and assuming a no preferred loan payments in 2016, operating income will include approximately $780,000 of cash surrender value, net of claim expenses and interest expense will be approximately $400,000.
As disclosed in our SEC filings, these corporate-owned life insurance policies are held by Genworth Life Insurance Company, which was recently downgraded by all rating agencies after the year-end release. The Board and Management continuously monitors the liquidity risk to these policies held at Genworth and will seek expert advice on such risk as being the progress.
Net income from continuing operations for the fourth quarter was $919,000 or $0.06 per share. Included in the fourth quarter net income was $407,000 net of taxes of CDSOA proceeds. Total year net income from continuing operations was $5.3 million, or $0.37 per share. Included in the total year net income from continuing operations was $5.2 million net of taxes and CDSOA distribution.
At December 31, 2015, we had $6.5 million in cash, $663,000 in restricted cash, and $22.3 million in net cash surrender value on corporate-owned life insurance policies. Capital expenditures were minimal in 2015 and we project no major expenditures in 2016. Year-to-date depreciation and amortization was $470,000 and is projected to remain at the same level in 2016.
As a reminder, we continue to remain debt free. We do expect to use some of our excess cash to build inventory during the first half of 2016 and repurchase stock.
And now I will turn the call over to Glenn.
Good morning, everyone. We are pleased to report another quarter of profitability and also for the total year. We are excited about several developments we have underway and what I would like to do this morning is inform you of where we are with two major growth initiatives and how we are establishing a truly differentiated position in the marketplace for Stanley. Then I will open it up for Q&A.
That said, we do have two major strategic growth initiatives that are very close to fruition. We have another quarter of heavy-lifting to do we think in the first quarter and that’s going to allow us to establish the stability our customers want to see and then it becomes more obvious that we are executing our new plans. Of course we see the company’s future state coming in above this before others, so we are anxious to begin improving as the business model works.
Now, for the first initiative. We said in the release we’ve established a strategic manufacturing alliance with a reputable cost efficient producer in Vietnam, Starwood Manufacturing Corporation. Starwood is manufacturing Stanley’s more recently introduced products in a standalone facility designed by Stanley specifically for our products. The factory was constructed by Starwood over the last half of 2015 on its existing manufacturing campus outside Ho Chi Minh City.
Since we began heavily sourcing overseas about 15 years ago and all the way up until we closed our last domestic factory less than a year and a half ago, we’ve been seeking a true business partner in Asia. We’ve been in the route of working with multiple vendors, but we could not become important enough to any one in order to truly differentiate the product value, customer service and/or product quality. And as proud as those goals sound in our industry, there remain the variables that separate one company from another from our customers’ perspective.
We’ve determined that there is a better sourcing strategy for Stanley, even our size and our price segment in the industry. The fact is that Stanley is a company with a long heritage of manufacturing. We have a management team that has retained the related skills, some of that team is on the ground in Asia and has been for years and we have an established brand and trusted reputation with overseas factories throughout Southeast Asia. So rather than continuing to work on a strategy that sometimes spreads ourselves too thin across too many vendors, we are partnering with a manufacturer in a strategic alliance who shares our views on the industry and its future direction in overseas manufacturing.
Our new sourcing strategy differentiates Stanley in the marketplace. It allows our customers to enjoy the value associated with buying directly from our manufacturer while still enjoying the benefits of doing business with a company with a well-known brand that understands customer’s specific need and the needs of the US consumer marketplace.
Our strategy has allowed lower costs already and that’s allowed us to add those savings on to our customers in lower product costs. And that’s evidenced by the lower wholesale prices on the same quality goods as we introduced prior to the shift into Starwood. The bigger benefits we believe is still to come. Our strategy should allow us to lower lead times for improved customer service and provide customers with more consistent product quality as we market and distribute a broader product line to increase revenues.
I think the majority of the benefits to our business begin in Q2. Orders for new product introduced in 2015 in place at retail in Q1 will begin to demonstrate to the consumer the improved value on our Stanley adult product line. And then additionally, our new nursery and youth product line should be on enough floors for us to start getting retail traction there as well.
Now that brings me to the second major growth initiative and that is the launch of the nursery and youth product line brand at Stone & Leigh, a name which we call directly from the heritage of the company. This effort represents the beginning of one of the industry’s few consumer-facing brands in the nursery and youth category. We know this product category and the customer base well as we’ve been part of this sector of the industry for over 50 years. However, we know that the way the consumer shops has changed and this is especially true for the way the millennial consumer shops.
We have built the beginnings of a brand that in conjunction with the customers in traditional channels that choose to partner with us and compete directly with the large vertical lifestyle brands that so dominate this part of the industry. We have email, direct mail and online advertising campaigns underway and they are designed to drive younger consumers into retail stores that carry the Stone & Leigh brand.
I’ve heard almost all of our previous retail customers in the nursery and youth business say that they have seen their sales drop dramatically since we exited the category. Many have wondered whether or not they could even stay in the category and some have not. Our knowledge and experience with this product category combined with both a direct-to-consumer marketing plan and the benefits of a new overseas manufacturing alliance provides Stone & Leigh customers with a recipe for retail success and they buy the furniture as they see it displayed in our visual creative. And they make their stores look like our visual displays and then we begin to execute a modern marketing model for the consumers’ co-branded omnichannel shopping experience. It is a simple one, two, three process and the customers that have seen that process are coming on board, we are happy to see that.
We look forward to doing business with old and new customers alike. We’ve looked to a company with a plan like this for successful retail in the category. So those are the two major strategic growth initiatives and the plan is right for the market, we just have to execute our plan in partnership with Starwood and our customers. When we do, we can definitely grow our company and help our customers achieve their goals. In summary, I want you understand where we are in our efforts to build on the improved financial performance of the Company. From a customer’s perspective, here is what they can expect. We’ve certainly experienced multiple delays with expected stock availability days for almost everything we introduced in 2015.
The construction and staffing of the new factory took longer than we or Starwood expected but it is now fully operational and producing our newer products. We’re increasing the staffing in the newly constructed factory. Now with the Vietnamese Tet holiday is over and the available labor force returns to work this is normal every year after the celebration of the New Year throughout Southeast Asia. We have the capacity certainly to support aggressive growth. We now have quite a bit of customers’ floor samples on the way to their stores. There is a lead time associated because of transportation, we’re seeing wholesale shipments turn into retail but our customers are anxious to keep going because they've seen the value in these newer introductions whether it be the Stanley line or the Stone & Leigh line and they’ve seen that in all markets from last year, High Point and Las Vegas.
For our investors, I would like to guide you with the following. Order rates and shipments are currently below desired levels due to the new product orders throughout 2015 not yet reaching the retail marketplace in terms of the impact sales due to the construction of the new facility at Starwood. This is a short-term issue. As I said in the third quarter release, had we shipped year-to-date new product introductions on a normal calendar schedule, sales would have been up double digits. Our customers like our new product but the multiple delays associated with the construction of the new factory in Vietnam hasn't allowed us to have the retail consumer a way in.
Because of the window of time associated with getting product from Asia to retail here in the US, we expect lower revenues to continue through the first quarter which could drive a slight short-term operating loss. After that, we expect to see a recovery of order rates in the second quarter as customers see our improved stock levels and new product begins to gain retail traction. Regardless of the short-term forecast, the Company remains very healthy financially. Our strategy is both understandable and sound. Management is energized and focused on executing what is a differentiated sourcing plan. This would force the introduction of more marketable product. Lastly, our Board remains very engaged and confident about our plans. The new Board Members are contributing to the Board’s over side of management and the Board is regularly validating the Company’s strategy. The confidence of the Board in the Company's direction is evidenced by our resuming company stock repurchases under that plan.
With that Manny, let's open up the call for Q&A.
[Operator Instructions] Our first question is from Dillard Watt of Stifel. Please go ahead.
Glenn, just wanted to see if you could talk a little bit about orders. You talked about you feel pretty confident that you’ll get the orders to rebound once you get everything placed on the retail floor. So, look to maybe if you could give a little bit of timeline of when you expect all your floor samples to be placed and what gives you that confidence of seeing a rebound in orders?
Sure. Well, a couple of reasons. Let's talk about the adult line first. Throughout 2015, we introduced products that was, you can call it more marketable, you can call it better valued, but the fact is, retail prices on the product we introduced on 2015, in 2015, starting in January, are going to be somewhere around 20% lower than what we've had in prior years and if anything, we've developed products that's had a more stylish and better quality levels. So, our customers have seen that and we speak with them face-to-face at markets and on the road constantly and they like the product.
So they just need to get it at retail and the timing of that is two-fold. They're going to get what's been ordered in the first quarter and get that on the floor and that's already on the water, if not having already shown up at retail. There is just some lag time between when it gets there, when it gets on the floor and starts to get traction. That's probably 30 days of beginning some right now. We're really not going to see retail until second quarter.
And then they're going to come back in a market and see that product, that same product again, maybe if they didn't order, but now we're going to see stock in our warehouses to that product, which is going to give them the confidence to order it, because it was good value in the first place. The other reason that I think the orders are going to come -- begin to come in second quarter is the Stone & Leigh line. Our catalog is ready, our website is launched and it's getting tweaked, but it's pretty much ready to go.
We'll be fully e-commerce enabled on that website and we'll be executing what is really a unique marketing model with direct mail, email and online advertising. And that will be fully operational in the second quarter as well. So the products are great value. We have a product line extension that we're familiar with, it's getting launched and as that product shows up in the first quarter, retail traction should commence.
So you’ll be -- so the Stone & Leigh will be seeing retail floors kind of in the similar time as the adult line. Did I hear that correctly?
Yeah. It's already hit a few retail floors, but it's going to really start to expand as you get in to the second quarter.
Okay. And you mentioned that you're -- in the adult line, you're going to be stocking some inventory in your warehouse. Can you talk a little bit, I guess domestically, can you talk a little bit about what your philosophy is with that, any details you can give will be great?
I’m not sure I understand where you've come from there.
You said that you’ll see stock in your warehouse, and I’m just trying to understand what you're saying there.
Oh, yeah, sorry. It's -- when you go for as long as we have constructing a factory here over the last six months and your customers order something from 2015 and haven't seen stock on it yet, they doubt you a little bit, they haven't know about this factory. Now, they know about it, it's very understandable to them. They're excited about actually not dealing with the middleman, but dealing with the true manufacturer and that's what they're doing when they're buying from Stanley out of Starwood, because it's our management team on the ground and in that factory, managing the processes. So when they see, they kind of see the products in the warehouse, whether that be domestic warehousing or Asia warehousing, that's what they need to see and that gives them great confidence.
Got it. All right. Thank you very much.
Thank you. [Operator Instructions] Okay. It doesn't appear that we have any further questions. I'd like to turn it back over to management for any additional comments.
Thanks, Manny. I do want to thank Dillard Watt for your question. I want to reiterate our belief in the company's plans to depreciate our receipts, that's extremely important. I think we're going to see lower lead times, more consistent quality and better product value like we've already seen and customers are excited about this, because they’re excited anytime they can deal directly with the factory and they know that the people they're talking to have some trouble over those things. We have lot of opportunities ahead in attracting what is really an elusive millennial consumer for many of our customers and traditional channels and we just got to execute our overseas operations, plans and everything to produce growth that Stanley should begin fall into place. So we thank you a lot. We're looking forward to the future. Hope you have a great day. Thanks, Manny.
Thank you. And ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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