Hooker Furniture's (HOFT) CEO Paul Toms on Q3 2017 Results - Earnings Call Transcript

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Hooker Furniture Corporation (NASDAQ:HOFT) Q3 2017 Results Earnings Conference Call December 7, 2016 2:00 PM ET

Executives

Paul Toms - Chairman and CEO

Paul Huckfeldt - VP, Finance and CFO

Michael Delgatti - President

George Revington - President, Home Meridian

Analysts

Anthony Lebiedzinski - Sidoti & Company

Operator

Greetings, ladies and gentlemen. And welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the Third Quarter 2017. 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, Vice President of Finance and Chief Financial Officer of Hooker Furniture Corporation.

Paul Huckfeldt

Thanks, Kevin. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2017 third quarter and first nine months, which ended on October 30, 2016. We certainly appreciate your participation this afternoon. Joining me today are Paul Toms, our Chairman and CEO; Michael Delgatti, our President; and George Revington, President of our Home Meridian segment.

During our call, we may make forward-looking statements, which is 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 2017 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 $145.3 million, and net income of $6.5 million or $0.56 per diluted share for our 13-week fiscal third quarter ended October 30, 2016. First nine months net sales were $403 million, and net income was $14.3 million, which converts to a $1.23 per diluted share. This is the third quarter in which our consolidated results include results from Hooker’s acquisition of the business of Home Meridian International, which we completed on February 1, 2016, the first day of our 2017 fiscal year. Home Meridian’s results are not included in the Company’s prior year fiscal results that will be referenced in today’s call.

For the third quarter and first nine months, consolidated net sales more than doubled compared to a year ago due to the Home Meridian’s acquisition. This increase was partially offset by a sales decrease in Hooker Furniture’s legacy business in both the quarter and the year-to-date. The acquisition of Home Meridian earlier this year resulted in some expenses not typically part of our operating results. We incurred about $1.1 million year-to-date in deal-related cost. We expect only nominal cost during the remainder of the fiscal year, as we continue to integrate HMI into our organization.

As part of the acquisition, we recorded significant intangible assets, including trade names, goodwill, the value of customer relationships, and the margin in the acquired order backlog. Some of these assets are considered indefinite live, while others will be amortized, mostly over a 10-year period. However, the margin in acquired backlog was fully amortized in the first half of fiscal 2017. We recognized slightly over $330,000 in amortization expense in the third quarter, and $2.8 million in the first nine months. We expect to record about $330,000 of Home Meridian related amortization expense in the fourth quarter and expect amortization expense to be about $1.3 million a year after this year.

Now, Paul Toms will comment on our third quarter results.

Paul Toms

Thank you, Paul, and good afternoon, everyone. I’m gratified to report improved top and bottom line performance for the third quarter in a row. Compared to the second quarter, consolidated net sales were up sequentially about $9 million or 6.7%, and we are encouraged by robust incoming orders in the last six weeks, driven by orders of new product introduction from the October High Point Market, and improve retail sales of our in-line products. Post-market orders in our legacy Hooker Casegoods segment and Hooker Upholstery division have been particularly strong. We’ve leveraged higher sales to improve profitability. And the addition of Home Meridian’s business has helped us increase operating income nearly 50% compared to the same period a year ago.

Consolidated net income was up nearly 40% for the quarter and over 18% for the first nine months from the comparable periods a year ago. For each quarter this year, earnings per share have improved from the previous quarter from $0.22 per share in Q1 to $0.46 per share in the second quarter to $0.56 per share this quarter. At Home Meridian, both sales and orders increased on a sequential basis compared to the second quarter, and order backlogs were at an all-time high at the end of the quarter. We’re encouraged that all of Home Meridian’s marketing units participated in the games. George Revington will give more details about Home Meridian’s results later on this call.

During the quarter, we also saw the beginning of the positive momentum shift in our Hooker Casegoods segment. Throughout this fiscal year, Hooker Casegoods shipments have been down by 10% to 12%, which we attribute both to sluggish industry-wide retail business, and specifically to the Hooker Casegoods several past market cycles of average new product placements. However, the High Point Market in late October was one of our strongest in the last five years with very strong placements of our two major new collections, Hill Country and Arabella. Quarters on these and other new product introductions have been significant part of the increase in demand in the last six weeks. We’ve also seen furniture retail conditions improve since early November. Shipments have not bounced back quite as quickly as orders due in part to the higher concentration of new products being ordered versus in-line products. Fortunately, our strategy to fast-track our speed-to-market and shorten production and shipping times on new collections is culminating at just the right time.

The new Hill Country collection was shipped to container-direct customers in late November from Asia, and we’ll have inventory available to ship from our U.S. distribution centers in late December. This means Hill Country will have a positive impact in our fiscal fourth quarter from initial shipments in December and January, and we should achieve additional turns at retail next year by getting the collection to market three to four months earlier than was typical for us in the past. In addition, the Arabella Collection will be available for shipments to container-direct customers in mid-January from Asia.

In our Upholstery segment, shipments are off approximately 3.6% year-to-date, but orders have also been trending up since the High Point Market. Hooker Upholstery, which includes import leather upholstery, bar and counter stools, and a new line of domestically produced upholstered beds had a record High Point Market and backlogs are at an all-time high.

Bradington-Young, our domestically-produced upscale leather upholstery line, performed well in the quarter with a slight sales and profitability increase. Despite lower sales attributed primarily to short-term labor shortages, our custom fabric upholstery brand, Sam Moore, continued its profitable performance with 43% operating income improvement for the first nine months of this year. Although it’s a small component of our overall results, our all other segments also delivered encouraging results for the quarter. H Contract, which provides upholstered seating and casegoods to upscale senior living facilities is profitable and growing nicely, reporting a nearly 40% sales increase in the first nine months versus a prior year period. H Contract doubled operating income year-over-year and is achieving an approximate 10% operating margin.

At this time, I’d like to call on Hooker Furniture President, Mike Delgatti, to give more details about the performance of Hooker Upholstery, Bradington-Young, and Sam Moore this quarter, along with an overview of our successful October High Point Market. Mike?

Michael Delgatti

Thank you, Paul. Good afternoon, everyone. While the Upholstery segment experienced singled-digit sales decreases for the quarter and first nine months, half of that decline related directly to the lingering effects of the quality issue at Hooker Upholstery that emerged in the second quarter and the other half related to labor productivity issues at Sam Moore. We believe both our short-term problems, and they are improving steadily.

Regarding Hooker Upholstery, last quarter, we recorded how a good start to the year was disrupted by quality issue with several months’ production we received from a vendor that had to be returned. This resulted in about a $1 million negative impact on sales for both the second and third quarter at Hooker Upholstery. Currently, our vendor is expediting the production of replacement products, and we expect to be back in stock on the affected inventory by mid-to-late December.

Hooker Upholstery had an outstanding High Point Market with very strong reception to new introductions including a comprehensive new custom upholstered bed program. We also reinvigorated our Motion upholstery line with the new supplier and have the best club chair and reclining chair market in years. Driven in large part from market introductions, Hooker Upholstery’s backlog is double over last year. Once we begin shipping new products and the replacement inventory from the quality issue, we expect sales and profitability to go back to the solid performance of the division before we experienced the product quality problem last quarter.

The sales decrease at Sam Moore relates to challenges over the summer with high employee turnover, which negatively impacted production rates and capacity. We have hired a number of new people who are being trained and going through a learning curve. Over the next several recent months, we expect to see production capacity and sales steadily increase.

While Sam Moore did not have as strong of a High Point Market as the other upholstery brands, we did have a good response to new fabrics and the new simply made, customizable upholstered sectional program, we have seen in a proven in orders over the last two to three weeks at Sam Moore. Despite volume being bound, [ph] Sam Moore is tracking for this to be the best profitable year at the division since Hooker purchased it in 2007.

Bradington-Young continues to perform very well and reported both a sales increase and profitability gains. Bradington-Young also had a great market. Standouts included stationary leather sofas and the new power mechanism for motion sofas, sectionals and recliners.

Bradington-Young orders are up on a year-over-year basis and have been particularly strong since market through the end of November and early December. On that basis, profitability in the Upholstery segment has held up well all year despite the overall sales decline. Gross profit in the segment was up year-to-date.

As Paul mentioned earlier, Hooker Casegoods has gained momentum with one of the best markets in years. Strong dealer reception was driven by a couple of trend forward exciting collections. We also had a good home office market and one of the best accent furniture markets in several years. Adding to the strong market, improving retail conditions are sparking more orders for in-line products as well.

Also at the October market, we launched an all new marketing initiative called Hooker Furniture marketing toolbox. This new extensive package of retail support materials and custom marketing programs will allow our retailers to go better present our products and brand stories on the retail floors and in their local, traditional and digital advertising. In addition by making available to them our in-house agency, they have access to a wide range of custom marketing and advertising products exclusive to their business.

Another good news for the Casegoods segment, we’re very excited to have Steve Lush, 33-year retail veteran join the Company this week in a new position of Executive Vice President, Hooker Sales and Casegoods Merchandising. We believe he brings a fresh perspective because of his retail background. He has an in-depth understanding of the dynamics of the competitive landscape in the end consumer.

Now, I’d like to turn the call over to George Revington, President and Chief Operating Officer of Home Meridian to give us an overview of their quarter.

George Revington

Thank you, and good afternoon. Our incoming order rate was very strong, up 17% in Q3 versus Q2. Our major sales initiatives continued to gain traction especially in e-commerce, hospitality, mass and clubs. Hospitality order rate was particularly impressive, growing 75% quarter-to-quarter. In addition, our largest customers are increasing their inventory positions as opposed to the second quarter when we saw retrenchment in customer inventories. Further, the relatively early arrival of Chinese New Year this January is pushing demand up as customers accelerate their shipments in anticipation of the three-week shutdown.

All the above mentioned segments experienced growth that continues to be tempered by modest declines in some of our traditional champs. With the order rate increase, our order backlog has reached record highs, growing 29% from Q2 to Q3. It positions to us to have we a very strong fourth quarter. Our hospitality business again is exceptionally robust, backlog grew 76%; e-commerce is up 10%; and our PRI [ph] division’s backlog, which is the division it sales wholesale clubs is up 21%.

Third quarter sales were up 7% over the last quarter but biggest gains continued to be in e-commerce up 24%, mass merchants more than doubled, and our Eric Church Collection which is sold in multiple channels. Just as a reminder, Home Meridian sales do have seasonality. Typically, we experience lower sales in Q1, approximately 20% of the total; higher sales in Q2 and Q3, 25% each; and our largest sales are in Q4, 30% of the total. Home Meridian has enjoyed a strong High Point Market in October, several major accounts committed to new placements of proprietary goods and both collections and use bedroom.

Our mega account offers were well-received. They actually required us to temporarily expand our showroom to be able to display all the proprietary and in-line goods. In addition, it had major introductions in urban lifestyle category which is the fast emerging style trend. These products are part of 18 new groups that Sam Moore and Pulaski together introduced and put in production at this market. These groups are expected to produce sales when they start shipping next fiscal year. Also importantly, we received new proprietary designs from new multiple major customers.

Our sales strategies remain the same. We need to continue serving our core traditional furniture retailers and allow those profits to fund our rapid expansion and emerging channels of distribution. We have confidence in these strategies; they’re working; we’re refocusing, accelerating and tweaking them as need. Our current focus is to execute on the order flow and the backlog we have so that we can assure a solid fourth quarter performance.

Now, I’d like to turn the call back to Paul Huckfeldt, our Chief Financial Officer, for additional details on our consolidated third quarter and year-to-date results.

Paul Huckfeldt

Thanks, George. I’ve already mentioned the deal-related cost and the intangible amortization, which are not regular components of our results. Looking at the more typical items, consolidated net sales increased due to the addition of Home Meridian businesses, which contributed $86 million and $231 million to net sales in the third quarter and first nine months, respectively.

In our traditional Hooker businesses, net sales for the fiscal 2017 first nine months declined $14.5 million or about 8%, compared to the same period of fiscal 2016, primarily due to decreased unit volume in our Casegoods and Upholstery segment, which is partially offset by increased average selling prices in all three segments of our legacy business.

Unit volume decreases in our Casegoods and Upholstery segment were primarily due to softer demand environment and Upholstery segment vendor quality issues that Paul and Mike both mentioned previously. Container-direct shipments to retailers were particularly hard hit, especially earlier this year, as retailers worked through inventories and showed a little less willingness to commit to larger inventory positions.

This shift from container to non-container sales contributed to a higher average selling price, as did continued lower discounting, since we’ve been able to keep our slow-moving and obsolete inventory at very manageable level.

Upholstery segment net sales decreased 3.6% on a 7% decline in unit volume, which was partially offset by higher average selling prices and net sales in our all other segments grew nearly 20% year-over-year, on both higher unit volumes and higher average selling prices, reflecting the steady growth of our H Contract business.

Overall, average selling prices in our traditional Hooker businesses increased 2.7% during the first nine months, primarily due to the mix of products shipped, lower discounting in our Casegoods segment and fewer container direct shipments. But the increase in average selling price didn’t offset the 10% decline in unit volume during the same period. For the year-to-date, consolidated gross profit increased, with the addition of Home Meridian’s results.

For the traditional Hooker businesses, gross margin improved, but gross profit dollars declined, as a result of lower sales volume, which negatively affected gross profit by about $2 million and more than offset the impact of low discounting and lower freight ways.

Consolidated selling and administrative expenses increased with the addition of Home Meridian. Excluding the amortization of intangibles, Home Meridian’s SG&A expenses are lower as a percent of sales, compared to the traditional Hooker businesses. So, Company-wide SG&A costs as a percentage of sales were lower than in the prior year. Within the traditional Hooker businesses, SG&A expenses were lower than the prior year in dollars, but increased about 70 basis points as a percent of sales due to lower net sales in the quarter. For the nine months, SG&A expenses were slightly higher than the prior year due to deal-related costs mentioned earlier, which offset the favorable impact of lower variable selling expenses and $500,000 in life insurance gains.

For these reasons, operating income for the fiscal 2017 first nine months was $22.2 million, or 5.5% of net sales, compared to $17.7 million or 9.5% of net sales for our legacy Hooker businesses in the fiscal 2016 first nine months. For the quarter, consolidated operating income was about $10 million, compared to $6.6 million last year. The HMI segment contributed about $3.5 million to operating income, while the legacy Hooker businesses reported $6.4 million, despite the sales decline.

Our balance sheet remains strong, despite the use of cash on hand and debt to acquire the assets and businesses of Home Meridian. At the end of the quarter, we had cash and cash equivalents of over $43 million available to provide the required working capital and to service our acquisition-related debt, which stood at $49 million as of the end of the quarter.

We also have access to $29 million on our revolving credit facility and about $22 million of cash surrender value of Company-owned life insurance, which gives us additional financial flexibility. Last week, we also announced an increased quarterly dividend of $0.12 per share, which is $0.02 or 20% increase. This dividend represents about a 1.5% dividend yield at our current share price.

Now, I’ll turn the call back to Paul Toms for his outlook.

Paul Toms

Thank you, Paul.

Based on Home Meridian segment’s record backlog, very strong interest received at the October High Point Market for the legacy Hooker business, higher order trends since market and generally improved retail conditions since early November, we are very bullish on our prospects for the fourth quarter and into next year.

With the strength of new product introductions across the board, particularly in our legacy Hooker Casegoods segment and import Hooker Upholstery divisions and Home Meridian’s growing sales momentum, we expect to see an increasingly positive impact on sales as we begin fully shipping new product orders in the fourth quarter of this fiscal year and into fiscal 2018.

With furniture retailers around the country reporting improving sales, economic and market conditions also present a positive environment for growth. Consumer confidence is at healthy levels, wages are rising, employment levels are solid, and stock indexes are pushing all-time highs. In addition, existing home sales continue to perform well, driven by home prices that have risen to pre-recession levels in most areas and low mortgage interest rates by historical standards. Demographics are favorable as well with millennials starting families and buying homes, baby boomers retiring and empty-nesters downsizing all moving to new homes. The macro environment for our industry is overwhelmingly positive. We believe, we have the products, customers and strategies to capitalize on the significant opportunity this presents and are excited to see what the future holds for our newly consolidated Company.

This concludes our formal remarks. And at this point, I’ll turn the call back over to Kevin for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski

Hi, guys. Good afternoon, and thank for taking the questions. So, first, just looking at the new collections, Hill Country and Arabella, what would you say are the primary reasons, why these new collections have been so well-received?

Michael Delgatti

I’d say because number they are on trend, and they also play into our strength in terms of design and the finishes that we offer in the upper band that we participate in. So, we were very much on spot in terms of the concepts and the design direction of both collections.

Anthony Lebiedzinski

Okay. And you also mentioned that you’re getting the -- as far as the order intake, more from the new products versus your in-line products. So, how is your inventory position, so just wanted -- just to check to see if there is any markdown risk perhaps with the older products since these new ones are so popular?

Paul Toms

Anthony, this Paul. We certainly have had a stronger market than we’ve had in a while, but our in-line business is also up significantly over the last six weeks. So, we’ve looked at the incoming orders and the breakdown between October market introductions and in-line products, and orders are very strong in our in-line products as well. So, we’re looking inventories all the time; we’re constantly dropping products and adding new products to the tune of about two or three a day on average. But, we feel like inventories are adequately sized, will probably boost ordering actually on in-line given the trends over the last six weeks. But, I think we’re in real good shape for the forcible future on in-line products, and we will as we pointed out in the call, we’ll have the new products in inventory about three months sooner than normal for Hill Country, which was about half of our market.

Anthony Lebiedzinski

Right, which leads to my next question. So, what is the reason why you’re able to bring the collection to market three to four months earlier than typical?

Paul Toms

We just moved the whole timeframe up, we took on a certain amount of risk by doing that. We actually placed the first production orders about three months before we had a chance to show the product in person to our major retailers in September. So, there is a lot of work in the field, well first of all in Asia developing the product in the field and in the U.S. getting feedback from our major customers and then getting commitments from the ones that were willing to commit prior to seeing the product in person. But, we just as I said, took on a little more risk by placing orders three months earlier and in some cases more than three months early. But, I think it was rewarded in this case, and it’s something that we intend to continue doing on collections that we feel strongly about and have gotten buy-in from some of our major customers ahead of time.

Paul Huckfeldt

That mitigates the risk. We don’t just buy stuff because we like it, we get feedback.

Paul Toms

And also, we actually placed four different orders for that group. So, we ordered $800,000 back in June, and then in maybe August another $800,000, and September another $800,000. And we didn’t place the whole bet back in June, we increased it as we had placements and orders from our major customers.

Anthony Lebiedzinski

Got it. Okay. Thank you for that color. And switching over to Home Meridian, obviously very strong performance there. I know, George, you mentioned a few statistics about e-commerce. So, can you just repeat as far as what’s your sales to e-commerce is now and what the growth rate to e-commerce retailers was?

George Revington

Yes. So, receptive total, it was about 15%; we mostly just track to pure play, there is probably some more flowing into it with brick and click retailers. And no, it’s growing in the 25%, 30% range. We have just -- we’ve had really burst of business here even after the quarter, which has helped us.

Anthony Lebiedzinski

Got it. Okay. All right. That’s all I had. Thank you very much.

Paul Toms

Thanks, Anthony.

Operator

[Operator Instructions] And I’m not showing any further questions at this time.

Paul Toms

All right. Thank you all for joining us, as we presented our Q3 results. And we look forward to presenting Q4 in about four months. Thank you.

Operator

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.

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