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Hooker Furniture Corporation (NASDAQ:HOFT)

F2Q09 Earnings Call

September 10, 2008 9:00 am ET

Executives

E. Larry Ryder - Executive Vice President - Finance and Administration, Assistant Secretary, Assistant Treasurer

Paul B. Toms, Jr. - Chairman, President, Chief Executive Officer

Analysts

Analyst for Matthew McCall - BB&T Capital Markets

Todd Schwartzman - Sidoti & Company

Operator

Welcome to the Hooker Furniture’s quarterly investor conference call reporting its operating results for the fiscal second quarter 2009. (Operator Instructions) It is now my pleasure to introduce your host, Larry Ryder, Executive Vice President of Finance and Administration and CFO.

E. Larry Ryder

Good morning and welcome to our quarterly conference call to review our sales and earnings performance for the fiscal 2009 second quarter and first half which ended on August 3, 2008. We appreciate you participation this morning. Joining me today is Paul Toms, our Chairman, President and CEO.

During our call today 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 SEC filings and the press release announcing our second quarter 2009 results. Any forward-looking statements speak 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.

Now let’s get underway with some opening comments from Paul.

Paul B. Toms, Jr.

As we said in our press release last night, the summer business environment proved to be even more challenging than we anticipated resulting in another disappointing quarter with financial performance below what we’ve achieved historically at Hooker Furniture.

As we reported, our net sales for the second quarter of $64.6 million decreased 12% and net income of $2.1 million decreased 57% from the same period a year ago. For the first half net sales of $135.7 million decreased 10% while net income of $4.7 million decreased 49% compared to the fiscal 2008 first half. Our disappointing performance through the fiscal 2009 first half is driven primarily by the decline year-over-year in sales revenue due to the industry-wide business downturn that has been deeper and longer than most people expected. The company’s exit from domestic wood furniture manufacturing also has been a factor in our revenue decline along with lower average selling prices primarily due to the mix of products shipped.

While it is beyond our control to change the difficult economic and industry environment, we’ve been busy this spring and summer addressing everything possible that is within our control to improve profitability and stabilize sales. We believe these measures addressed the challenges we’re facing and position us well to leverage and improve demand environment when that materializes. Key steps, initiatives and measures taken in recent months include:

The difficult but necessary decision in late August to permanently lay off 25 employees in operations, warehousing and administration at our wood furniture division based in Martinsville, Virginia. Those layoffs represented 9.1% of our wood furniture workforce of 263 employees and a 2.6% reduction in our corporate wide workforce of 912 employees including upholstery company Sam Moore and Bradington-Young, although employees at those two divisions were unaffected. This workforce reduction will ensure that we remain competitive and that our infrastructure is in line with the lower sales levels at Hooker today.

Along with the measures we’ve taken to defer, reduce and eliminate non-essential spending, we believe we have right-sized our cost structure to our current level of business. These reductions will help us stabilize and begin to reverse the trend we’ve seen in recent quarters of increased selling and administrative expenses as a percentage of sales which has negatively impacted profit margins.

Also in August we reorganized our upholstery companies Bradington-Young and Sam Moore under the executive leadership of Alan Cole who has been named President and Chief Executive Officer of Hooker Furniture’s Upholstery Division. Alan’s day-to-day leadership at Sam Moore should put our growth strategies there on a faster track.

In July we named Bruce Cohenour to the new position of General Manager for Opus Designs. Bruce will set the overall direction for the youth furniture specialists we acquired about nine months ago in December of 2007. Having an executive of Bruce’s capability with overall responsibility for Opus Designs will help us fully maximize the opportunity that product line represents, to expand our business and reach beyond our core consumer demographic to attract a younger, slightly less affluent consumer.

We continue to make refinements and improvements in managing our supply chain, warehousing and distribution operations. Over the past few months we’ve built a strong inventory position particularly on our best sellers. This inventory availability should help us take advantage of any uptick in business during the fall season. We’re working with our retail customers on promotions for the fall season to stimulate sales. And finally, our fall shipments will be positively impacted from the new business development efforts we’ve had underway for over a year to increase placements with national accounts, key accounts and new distribution channels. We plan to ship an estimated $2 million to $3 million in new business for both Hooker and Opus Designs this fall.

So while the short term picture is quite challenging, the long term outlook for Hooker Furniture remains bright. The company is financially strong with a good cash position and very little debt. We are still investing in our business with around $2.5 million and $3 million in capital expenditures planned for the balance of this year primarily in the area of information systems. We believe that our ability to generate a modest profit despite this prolonged economic malaise continues to validate our business model.

Now let’s take a detailed look at our financial results for the recently completed 2009 second quarter and first half which both ended August 3, 2008.

Fiscal 2009 second quarter net income of $2.1 million or $0.18 a share compares to net income of $4.9 million or $0.39 per share in the second quarter a year ago. The earnings per share decrease resulting from lower net income was partially offset by a decrease in weighted average shares outstanding from the repurchase of 2.5 million shares of common stock since February 2007.

Gross profit margin for the quarter decreased to 28.3% of net sales compared to 31.3% in the fiscal 2008 second quarter. The reduction in gross margin was driven by an increase in the delivered cost of imported wood furniture as a percentage of net sales along with higher sales discounting to stimulate sales and substantial discounts on discontinued domestically produced wood furniture. Another factor was higher raw material and overhead costs as a percentage of net sales for our domestically produced upholstered furniture lines.

Since this spring we’ve received cost increases from our offshore suppliers on imported furniture as well as increases in transportation costs, raw materials for upholstered furniture and for other operating expenses. These inflationary pressures along with an increase in selling and administrative expenses to $15.4 million or 23.9% of net sales compares to $15.1 million or 20.5% of net sales for the prior year period resulting in operating income for the fiscal 2009 second quarter of $3.1 million or 4.8% of net sales. That compares to $7.5 million or 10.2% of net sales in the same period a year ago. The company has recently implemented a price increase intended to offset the cost increases from our suppliers and to improve margins compared to second quarter 2009 levels.

During the 2009 second quarter the company recorded a restructuring credit of $258,000 for previously accrued healthcare benefits that are not expected to be paid for terminated employees at the former Roanoke and Martinsville, Virginia manufacturing facilities. In the 2008 second quarter we recorded restructuring charges of $473,000 primarily for additional asset impairment and disassembly costs related to the closure of the Martinsville, Virginia facility.

Moving now to the top line, net sales for the fiscal 2009 second quarter of $64.6 million decreased $8.8 million or 12% compared to the fiscal 2008 second quarter net sales of $73.4 million. As I mentioned earlier the net sales decline was driven by lower unit volume from an industry-wide business slump, lower shipments of domestically produced wood furniture that’s been discontinued and lower average selling prices.

Factors driving the lower average selling prices included a higher proportion of lower-priced imported wood furniture in the product mix and sales discounts extended to dealers to promote sales. Excluding discontinued domestically produced wood furniture, net sales declined 7.7% year-over-year. Nearly 40% of our sales decline for the 2009 second quarter related to discontinued domestically produced wood furniture. This should be less of a factor in the future.

I’d also like to point out that while second quarter unit volumes decreased compared to the same 2008 period across most wood and upholstered product categories, unit volume actually increased for youth bedroom products due to the addition of the Opus Designs product line and for home entertainment and home theater furniture including living room wall systems and consoles. This is gratifying since home entertainment furniture has been a strong niche for Hooker for many years.

Now turning to the financial results for the 2009 first half, net income for the period declined to $4.7 million or $0.41 per share compared to $9.1 million or $0.71 per share in the fiscal 2008 six-month period. Gross profit margin for the first half decreased slightly to 29.2% of net sales compared to 29.9% in the fiscal 2008 first half. Drivers for the slight decrease in gross profit margin included an increase in the delivered cost of imported wood and upholstered furniture as a percentage of net sales, discounts on discontinued domestically produced wood furniture, and higher raw material and overhead costs as a percentage of net sales for domestically produced upholstered furniture.

In the first six months of fiscal 2009 selling and administrative expenses increased $1.7 million or 5.5% to $32.8 million compared to $31.1 million in the fiscal 2008 first half. As a percentage of net sales, selling and administrative expenses increased to 24.2% in the fiscal 2009 first six months from 20.6% in the fiscal 2008 first half. These increases were driven primarily by selling and administrative expenses at Sam Moore which was acquired at the end of the first quarter of fiscal year 2008; costs to operate two new distribution centers during the 2009 first half, one located in Carson, California which opened in January 2008 and one in China which opened in May 2008. Additionally we had increased advertising and promotional spending to market Opus Designs’ youth bedroom furniture.

The company’s operating income for the first six months of fiscal 2009 decreased to $7.1 million or 5.2% of net sales compared to operating income of $13.7 million or 9.1% of net sales in the first six months of fiscal 2008. Net sales for the fiscal year of 2009 first half declined $15.1 million or 10% to $135.7 million compared to $150.7 million for the fiscal 2008 first half. These declines in net sales were partially offset by the addition of net sales from upholstered seating specialist Sam Moore. Net sales for Sam Moore amounted to $13 million for the 2009 first half compared to $6.7 million for the three months during the 2008 period following the acquisition of that company at the end of April 2007. Excluding discontinued domestically produced wood furniture and net sales from Sam Moore, net sales declined 8.8% year-over-year for the first half.

Looking ahead to the next quarter, we anticipate that business this fall will be marginally better than the summer. However the fundamental economic problems that impacted us in the summer such as the troubled housing sector, tight credit, high energy prices and historically low levels of consumer confidence are still in place. For all these reasons we expect demand for furniture to be softer over the next several months than we’ve experienced in recent years. As we’ve discussed, we believe we’re well prepared to deal with that challenge through our improved cost structure and operating efficiencies and the strong inventory position on our best sellers to support any uptick in business this fall.

At this point I’ll call on Larry to take us through the balance sheet and cash flow statement.

E. Larry Ryder

As Paul stated we’re disappointed with our declining sales and profit even in this tough economic environment. We do however still strongly believe that we’ve established the right business model and believe we are working on the right initiatives to further refine our business and position us well when business conditions do improve. We believe our inventory position is appropriate for the current business conditions and we continue to maintain good cash position.

Since the end of the last fiscal year the company has redeployed more than half of its available cash and cash equivalents. Cash and cash equivalents declined by $17.3 million since February 3, 2008. We used this available cash plus $1.9 million in cash flow from operations to fund the repurchase and retirement of common stock of $14.1 million, payment of cash dividends of $2.3 million, scheduled principal payments on our long-term debt of $1.3 million, capital expenditures of $1.3 million, and additional expenditures in connection with the acquisition of the Opus Designs youth product line of $181,000.

Our cash generated from operations during the first six months of fiscal 2009 decreased $1.9 million compared with $23.8 million generated during the six month period ended July 29, 2007. The decrease was primarily due to a decrease in cash received from customers, higher payments made to suppliers and employees, and a decrease in interest income earned partially offset by a decrease in income tax payments. The decline in cash received from customers is primarily attributed to lower net sales. Payments to suppliers and employees increased as a result of higher inventory purchases and the Sam Moore operation.

During the prior year quarter inventory levels were higher than in the 2009 first half. Consequently last year’s purchases were lower. Also payments to suppliers and employees for the 2008 first half only included the operating costs of Sam Moore for the three-month period following its acquisition in April of 2007. Working capital decreased by $13 million or 12.7% to $89.3 million as of August 3, 2008 from $102.3 million at the end of fiscal 2008 primarily as a result of a decrease in current assets.

The company ended the fiscal 2009 second quarter with $15.8 million in cash and cash equivalents which compares to $33.1 million at the end of the 2008 fiscal year. Inventories were $57.8 million, a 14.4% increase from $50.6 million at the end of the 2008 fiscal year. The increase in inventories was largely due to an increase in imported wood furniture inventory in preparation for the fall selling season, lower sales than anticipated during the summer, and an increase in raw materials related to Bradington-Young’s leather upholstery lines. At the end of the 2009 second quarter assets totaled $161.2 million decreasing from $175.2 million at February 3, 2008 primarily due to decreases in cash and cash equivalents and accounts receivable partially offset by an increase in inventory and cash surrender value of life insurance policies.

The company’s long-term debt including current maturities decreased to $6.6 million at August 3, 2008 from $2.9 million at February 3, 2008 as a result of scheduled debt repayments.

Shareholders’ equity at August 3, 2008 decreased to $129.2 million compared to $140.8 million at February 3, 2008 due to common stock repurchases and dividends paid partially offset by net income earned for the period. During the 2009 fiscal year the company has spent $14.1 million to repurchase 798,000 shares of the company’s common stock. Since February 2007 the company’s Board has approved and the company has spent $50 million in total authorizations to repurchase 2.5 million shares of the company’s stock. We believe that the repurchase of Hooker shares has represented prudent use of the company’s excess cash and has enhanced shareholder value.

That concludes our formal remarks.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Matthew McCall - BB&T Capital Markets.

Analyst for Matthew McCall - BB&T Capital Markets

I had a quick question on the domestic wood business, the more aggressive discounting there that impacted the margins. How much business is still there to work through? I kind of thought that was pretty much all behind you guys.

Paul B. Toms, Jr.

Right now the remaining domestic wood inventory represents about 1.5% of our finished goods inventory. At selling price at cost it’s higher than that, maybe a little less than 3%. It’s not a significant amount but it’s still there and we are working through it. I feel like we’ll work through it by the end of this fiscal year. But if you were to compare back to prior periods, I think in the second quarter of last year there was about $4 million in volume and there was $7 million in volume in the first quarter. So the fact that we’re selling smaller amounts of it this year and we’re selling it at a more discounted value makes the comparisons very difficult on that particular product.

Analyst for Matthew McCall - BB&T Capital Markets

I know you commented that your youth furniture line was up year-over-year driven primarily by Opus. Did you comment on what level of contribution Opus had to your top line? Is it still running at about that $7 million annual run rate? Is that right?

Paul B. Toms, Jr.

That’s for the first half; maybe slightly less. But I think we anticipate for the year it’s going to fun right at $7 million or $7.5 million annualized.

Analyst for Matthew McCall - BB&T Capital Markets

What about Sam Moore? Did that show any growth this quarter? Was the first half growth primarily the inclusion in Q1?

Paul B. Toms, Jr.

Sam Moore on a versus prior year basis is experiencing the same sorts of sales declines as Hooker and Bradington-Young.

Analyst for Matthew McCall - BB&T Capital Markets

I’m trying to figure out the back half. Is the seasonality that we saw in the second half last year still be applicable to this year do you think? It looks like your inventory ramp at the end of Q2 was similar to the levels that you had on the books last year. A little bit higher. Should we expect 52% to 55% of full-year revenue to show up in this second half again or do you think Q3 may be a little weaker given your comments over the next couple of weeks?

Paul B. Toms

We think the third quarter is going to be better than the second quarter just for seasonality. I think the demand compared to a year ago, same quarter last year, is probably off proportionately but the third quarter is typically our strongest quarter; the second quarter is typically our weakest. So I think you will see some improvement quarter-over-quarter and I would say the second half of the year somewhere between 52% to 55% is probably a fair guess of how much of the business would fall in those two quarters.

Analyst for Matthew McCall - BB&T Capital Markets

Looking at the gross margin lines, is the discounting expected to continue? Maybe help me understand what the discounting impact is. I don’t know if it can be quantified to how that specifically impacted your gross margins but I guess what I’m trying to figure out is, is the 30% level that we saw in Q1 possible again once you get your price increases through and offset some of the raw material pressure and the increased labor from overseas?

Paul B. Toms, Jr.

30% gross margin achievable with the price increase?

Analyst for Matthew McCall - BB&T Capital Markets

Yes.

Paul B. Toms, Jr.

I don’t know that we forecast margins but I do think we should see some improvement in margins with the impact of our price increase that we implemented September 2. That price increase averaged about 7.2% across our line. We also have had significant cost increases earlier in the year from our Chinese suppliers, for case goods and imported leather and we’ve also seen container costs, freight, ocean container costs go up pretty significantly. However I will say I think recently it seems like the dollar has at least stabilized against the Chinese currency and our ocean freight contracts have an inflation/deflation clause in them that’s tied to the price of oil. And with oil coming down I don’t know that we’ll see it immediately; I think it trails back a quarter but I think certainly within three months or so we should see some stabilization and maybe decline in the cost of ocean freight.

E. Larry Ryder

As Paul pointed out in his comments earlier we have strived to take a lot of costs out of the business during the summer months. That should bode well for us as we get into the fall stripping out some of the overhead expenses that we pick up primarily in SG&A, reduction of employees that he talked about as well as other cost reductions. And also the inventory that he talked about building in anticipation of the better fall months should serve us well in that a great deal of that inventory came in before the price increases.

Analyst for Matthew McCall - BB&T Capital Markets

I don’t guess you guys quantify the overall expectation of cost savings from your recent announcements?

E. Larry Ryder

This year I think it’ll be about $2 million in cost savings for the fiscal year 2009.

Analyst for Matthew McCall - BB&T Capital Markets

Did any of that show up this quarter? It looks like despite the lower top line you had about 50 basis points of sequential SG&A leverage.

E. Larry Ryder

I don’t think much of those changes have shown up in the second quarter at all. It’ll all be third quarter and beyond.

Analyst for Matthew McCall - BB&T Capital Markets

Any help in the incremental versus Q1 costs at the Chinese facility added so we can kind of help to gauge a baseline on what the true SG&A level is now?

Paul B. Toms, Jr.

What facility? The distribution center?

Analyst for Matthew McCall - BB&T Capital Markets

The distribution center, yes.

E. Larry Ryder

I don’t know that we have that and can really quantify that.

Operator

Our next question comes from Todd Schwartzman - Sidoti & Company.

Todd Schwartzman - Sidoti & Company

When will you see the full benefit of the price increases you’re implementing now?

Paul B. Toms, Jr.

We saw a little bit of a surge in orders the week before the price increase so there’s a little bit of a backlog at all prices, but I would think you’d start to see some impact within the next month or so. Probably 60% to 70% of our business is special order. It’s a customer going into a store, maybe not seeing exactly what they want on the floor but going to a catalog and ordering. And those we would see immediately the impact because they’re ordered at the higher price. For the next month or so you may have a little higher proportion of stock orders that were placed prior to the increase than normal but we’ll see some impact starting this month and it’ll get significantly larger as we go forward.

Todd Schwartzman - Sidoti & Company

Can you talk about your allowance for docile accounts? Maybe quantify any change during the quarter if there was a change?

E. Larry Ryder

Not much of a change really. Our analysis of accounts receivable that we do on an ongoing basis has not shown any particular weaknesses in the collectability of those accounts. We of course have our normal watch list out there but aging has remained fairly steady. We’ve been very fortunate to maintain good quality accounts receivables. So we don’t forecast a lot of problems in that area that we haven’t already reserved for.

Todd Schwartzman - Sidoti & Company

As far as the pockets of relative strength during the quarter, I could see why youth bedroom was up due to the inclusion of Opus Designs, but what was the driver on the home entertainment side and also what was either the percentage change in that category or dollar change?

E. Larry Ryder

The percentage change would have been modest growth meaning mid-single-digit growth as opposed to shrinkage in almost every other category. As far as the reason, I don’t know that I can really give you the reason. In a sense home entertainment furniture average ticket size is probably going down because where we used to sell multiple pieces with an armoire in the middle to house older picture tube TVs, now we’re selling consoles a lot more frequently that may or may not have tiers and a light bridge and they’re designed to take plasma or LCD or DLP televisions. So average ticket’s gone down but obviously we’re selling more units in that product line. We probably saw some benefit maybe from the April market.

Todd Schwartzman - Sidoti & Company

In terms of total unit sales, what was the decline for the quarter? I don’t know if you quantify that.

E. Larry Ryder

I do not have the numbers on unit sales.

Todd Schwartzman - Sidoti & Company

Or how much were ASPs down roughly?

E. Larry Ryder

For the quarter Todd, it looks like they were down about 0.6%.

Todd Schwartzman - Sidoti & Company

That’s the selling price?

E. Larry Ryder

Yes. Average selling price.

Todd Schwartzman - Sidoti & Company

To what extent has discounting continued in Q3? Did it get worse? Is it about the same?

E. Larry Ryder

In Q2?

Todd Schwartzman - Sidoti & Company

Q2 to Q3 to date.

Paul B. Toms, Jr.

I would expect that we’re going to make similar efforts in the current quarter to stimulate sales and promote business as we did in the summer. And that’s on in line products across all three companies and there will be some impact also to move the remaining domestic inventory. So I think we’re well reserved against the remaining domestic inventory but I would say the pattern of discounts probably isn’t going to be significantly different in Q3 than it was in Q2.

E. Larry Ryder

Let me correct something that I said earlier. I said 0.6%. It’s 6%.

Todd Schwartzman - Sidoti & Company

So ASPs were down 6% for the quarter?

E. Larry Ryder

That’s correct.

Todd Schwartzman - Sidoti & Company

Is a re-up on the share repurchase authorization off the table for the time being?

Paul B. Toms, Jr.

The Board of Directors did not take any action yesterday in the Board meeting and I believe with our cash position being what it is right now, I think that’s probably off the table for a while anyway.

Operator

There are no other questions at this time.

Paul B. Toms, Jr.

We really appreciate everybody being on the call today and look forward to talking with you again at the end of the third quarter.

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