Hooker Furniture Corporation (HOFT) Q3 2019 Earnings Conference Call Transcript

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Hooker Furniture (HOFT 1.99%)
Q3 2019 Earnings Conference Call
Dec. 6, 2018 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the fiscal 2019 third-quarter first month -- first nine months. [Operator instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, vice president of finance and chief financial officer for Hooker Furniture Corporation. Sir, you may begin.

Paul Huckfeldt -- Vice PResident of Finance and Chief Financial Officer

Thank you, Valerie. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2019 third quarter, which ended October 28, 2018. We appreciate your attention this afternoon. Paul Toms, our chairman and CEO, will join me for our prepared remarks.

For the question-and-answer portion of our call, we have several of our business unit heads available to take questions, including Michael Delgatti, president of Hooker Domestic Upholstery and Emerging Channels; HMI Co-Presidents Doug Townsend and Lee Boone; Jeremy Hoff, president of our Hooker Branded segment; and Anne Jacobson, our chief administrative officer. 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 2019 third-quarter results. Any forward-looking statements 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 $171.5 million and net income of $9.3 million or $0.79 per diluted share for our fiscal 2019 third quarter, which ended on October 28. For the quarter, consolidated net sales increased 8.6% compared to a year ago, with increases in each of our three segments. Diluted earnings per share increased to $0.79 per share, compared to $0.61 a share in the prior year quarter. Now Paul Toms will comment on our second-quarter results.

Paul Toms -- Chairman and Chief Executive Officer

Thank you, Paul, and good afternoon, everyone. We're pleased to report increased revenues across all three of our business segments during the quarter. Consolidated sales were up nearly 9% and consolidated net income was up more than 29%. The efforts we are making to focus on winning channels of distribution are benefiting all segments of our business.

The Hooker Branded segment led the way in our quarterly sales and income gains, with both Hooker Casegoods and Hooker Upholstery reporting solid sales increases and a corresponding increase in profitability. At Home Meridian, profitability performance is improving and most of the business units are growing with some growing dramatically. In the All Other segment, which includes our domestic upholstery operations and H Contract, sales growth of nearly 29% for the quarter was driven mainly by the inclusion of Shenandoah's net sales and a 10% sales increase at Bradington-Young. Now taking a closer look at each of our segments, I'll begin with the Hooker Branded segment.

During the second quarter of this year, you may remember that sales in the Hooker Branded segment were essentially flat, following four consecutive quarters of year-over-year sales growth. The segment strongly rebounded this quarter with 9% year-over-year improvement in both the Casegoods and Upholstery divisions. The increases were driven by our focus on when channels of distribution, strong product lines and in-stock positions on our best-sellers. We also had a good Fall High Point furniture market.

We believe the Hooker Branded segment is growing at a faster rate than the industry average and that the profitable growth we are enjoying should continue. Hooker Casegoods has fueled momentum with their speed-to-market strategy in which the division pre-ordered two major new collections prior to the Fall High Point furniture market. These collections have been favorably previewed by major retailers in late summer. Because these collections will begin shipping to retailers in early January, several months sooner than the typical product introduction cycle, we are able to gain additional retail placements at the market.

Retailers like the opportunity of having exciting new products to offer at the beginning of the year. Not only will shipments of these products have a favorable impact on this year's fourth quarter and next year's first quarter, we also expect to achieve additional turns at retail next year on these collections. The Hooker Branded segment, along with the domestic upholstery divisions, continue to gain positive traction from a long-range strategy to develop new business and advantage in winning channels of distribution, particularly the interior design and e-commerce channels. At the fall market, the company launched two comprehensive programs to address interior designers: Design Pro, a paid membership program providing features and benefits to interior designers; and MARQ, a line of modern upholstery and premium bedding designed especially for and available exclusively to the interior design trade.

We had good reception to both programs, which demonstrates our level of commitment to the interior design channel. Attendance from interior designers at market was up about 10%. Even though overall attendance at the market was down 10%, primarily due to Hurricane Florence, which hit the Carolinas and other parts of the region just prior to market. During the latter part of the quarter, a 10% tariff was imposed on furniture and component parts imported from China.

The Hooker Branded segment responded with modest price increases on portions of its product line imported from China. We don't believe the price increases negatively impacted sales in the quarter. With the price increase to our customers and the help of some of our Chinese vendors, we have effectively mitigated the negative impact of the current 10% tariffs. Turning now to the Home Meridian segment, net sales were up 3% over the prior year and operating margin was 5.1% and about $200,000 higher than the prior year quarter, a significant improvement from the first half.

On a year-to-date basis, sales are up about 2% over last year, but operating profit remains below prior year. The decrease in operating profit is a result of customer mix changes, higher spending, investments in emerging channels, and the short-term effects of the 10% tariff enacted on furniture and components from China during the quarter. Orders during the third quarter were very strong, up 32% over last year. Backlog at the end of the quarter was also up in double digits by 22%.

The emerging channels, now 42% of our HMI business, continued to deliver higher sales growth than traditional channels, with business from emerging channel customers up 16% while the traditional customer business is down 7%. Although sales from the traditional customer base were down overall, we believe this is a short-term situation driven mainly by variable factors and timing related to product placements for a couple of our largest customers. E-commerce remains our fastest-growing HMI business, with business up 55% in the quarter and 33% year to date after a slower-than-expected first quarter. We continue to shift the resources to and invest in emerging channel customers with very positive results.

Our sales and product development focus on the 50 largest e-commerce players in the furniture continues as these retailers see value in partnering with a company that has invested heavily in product development, inventory, technology, photography, online content, and human resources, all tailored to the unique needs of e-commerce. Nine of our top 12 e-commerce customers are the e-commerce arms of conventional multibillion-dollar retailers. SLH, our hospitality and kitchen cabinet business, continues to grow rapidly as hotel and other commercial renovations build momentum. SLH's net sales were up approximately 40% year to date and order backlog is up 200% over the same period prior year.

The division has a large pipeline of potential new projects for fiscal 2020, so we expect continued growth well into next year. Our club's business is down year to date, but due to the exceptionally large backlog with the clubs that will ship out in the fourth quarter, we expect to exceed last year's sales and our budget projection for this year. The 10% tariff on Chinese goods affects 36% of the HMI business. It has a much larger effect on production serving the emerging channels than the traditional.

Most motion upholstery, e-commerce, and hospitality products come from China. Our strategy to mitigate the cost of the tariff includes negotiating vendor price concessions from most all vendors, resourcing almost of our China products to other countries and instituting price increases with customers. The sourcing change is in process and should be complete by midyear 2019. Price increases will be implemented over time depending on products and customer agreements.

As a result, other than the timing differences from the implementation of those actions, the 10% tariff will have little effect on our financial performance for the current scenario. Within the traditional retail channels, the biggest retailers continue to outperform the smaller stores and our mega account strategy of providing proprietary products and services for these major retailers puts us in a strong, competitive position. That said, additional channel retailers continue to lose share to emerging channels. And thus, our blended retail distribution approach is critical to optimizing sales within the shifting marketplace.

The recent October High Point furniture market, which primarily impacts the traditional channels, was very good for all of our HMI business units, which bodes well for sales in the next year. The relaunch of our exclusive Eric Church Highway to Home brand at the October market was highly successful, and those new goods will begin shipping early next year. Our strategy identifying 10 new mega accounts, each of which we believe can potentially grow to $10 million in annual sales, is beginning to yield promising results. We believe this will not only grow sales, it will help to diversify our customer portfolio going forward.

Finally, our new product and sales initiatives for our key account base, 70 of the second tier retailers with multiple stores across the country, are delivering positive results, and our business with that account class is up 5% on the year. Overall, we entered the fourth quarter with good sales momentum and a record backlog that will enable HMI to finish the year strong. Potential tariff issues and possible headwinds from a weakening housing market notwithstanding, we expect 2020 to be another year of solid growth at HMI. Finally, All Other, which includes our domestic upholstery operations, Bradington-Young, Sam Moore and Shenandoah Furniture, along with H Contract, reported a sales increase primarily driven by the addition of Shenandoah's net sales for two of the months in the quarter and a 10% net sales increase at Bradington-Young.

Bradington-Young's incoming orders increased about 6% and backlog was 30% higher than a year ago. With the solid growth at Bradington-Young for the last four years, we're now investing $5 million in a factory expansion at our Hickory, North Carolina plant that should be completed in the first quarter of next year, increasing capacity by nearly 50%. While the top line is solid at Bradington-Young and Shenandoah, we are working on improvements that will help to bring profitability at each division back to historical levels. Sales at Sam Moore continue to run below prior year levels for the quarterly and year-to-date periods.

However, better controlled labor costs and other expenses improved Sam Moore's gross and operating margins. Incoming orders decreased slightly, but quarter-end backlog was 27% higher than the prior-year period. The division is currently actively searching for a new president after the departure of their previous president in early October. We expect to have a new president in place by the end of the fiscal year.

All of our upholstery units experienced a negative impact on margins from price increases in materials and components such as foam, plywood, and steel. Many of these components are imported from China and also were subject to the 10% tariff imposed on furniture and component parts, some of which began midyear. Initially, there was a lag between those cost increases and our own price increases to our customers, but we have caught up by the end of the quarter. H Contract is on the front end of the strategy to broaden its product line and pursue a more aggressive product introduction strategy.

Orders were up nearly 8% in the quarter and quarter-end backlog is up 26% compared to the same period last year. At this time, I'd like to turn the call back over to Paul Huckfeldt, who will elaborate further on our quarterly results.

Paul Huckfeldt -- Vice PResident of Finance and Chief Financial Officer

Thanks, Paul. Consolidated average selling price increased 2.9%, mostly due to higher average selling prices at home Meridian and All Other, which offset a decline in average selling price in the Hooker Branded segment. Most of the change in ASP was the result of product and customer mix. Unit volume increased slightly on a consolidated basis but there were significant changes between segments, again, driven by product and customer mix as well as significant sales increase in the Hooker Branded segment.

In All Other, the inclusion of Shenandoah Furniture this quarter and increased sale of higher-priced Bradington-Young products helped offset sales decreases at Sam Moore. Consolidated gross profit of almost $36 million was $1.6 million higher than Q3 of fiscal 2018. Gross profit increased in Hooker Branded and All Other due to increased sales volumes while gross profit declined slightly at Home Meridian due to a greater mix of lower margin sales programs as well as higher freight costs, in part attributable to increased demand for freight capacity in anticipation of the imposition of tariffs on Chinese products. Gross margin was flat the last year in Hooker Branded and somewhat lower in All Other due to the mix of customers.

However, the additional volume attributable to Shenandoah more than offset the lower margin. Consolidated selling and administrative expenses increased about $660,000 but declined as a percent of sales. Higher selling expenses on higher volume, higher employee benefit costs and the cost of investments in people and systems drove the increased spending, which offset the absence of $700,000 in acquisition-related costs last year, but we've been able to better leverage fixed costs on these higher sales this quarter. For reasons -- for these reasons, operating income for the fiscal 2019 third quarter was $925,000 higher than the prior-year quarter.

Operating margin for the quarter remained at 7.2%. For the fiscal 2019 nine months, consolidated operating income increased over $3 million to $33.5 million, or 6.9% of net sales, thanks primarily to a $38 million sales increase. Our balance sheet remains strong despite the use of cash and additional long-term debt incurred to acquire the business of Shenandoah Furniture last year and the unscheduled $10 million debt payment made earlier this year as well as a $3 million additional pending -- pension funding made in September. At the end of the quarter, we had cash and cash equivalents of over $29 million available to provide the required working capital and to service our acquisition-related debt.

We also have access to $28.5 million on our revolving credit facility and $23 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility. In today's press release, we also announced an increase in our quarterly dividend of $0.15 per share based on continued confidence in our long-term prospects and the strength of our business model. Now I'd like to turn the call back to Paul Toms for his outlook.

Paul Toms -- Chairman and Chief Executive Officer

Thanks, Paul. As of quarter end on October 28, consolidated orders were up 19%, backlog was up 17% compared to the prior year quarter, with the higher backlog driven primarily by Home Meridian. Our view on macroeconomic trends is a bit more mixed and uncertain than in recent months due to the current bumpy stock market, a slowdown in the housing sector, and the overhanging concern about the ongoing trade negotiations between the U.S. and China.

After a positive meeting between the two countries at the recent G20 summit, they announced a tentative agreement to put on hold additional tariffs that have been scheduled to take effect January 1. The current 10% rate remains in place for 90 days while negotiations continue. Despite some mixed trends in the overall economy, based on our incoming order trends, higher backlog at HMI, and overall momentum in our business, we're bullish as we look ahead to the fourth quarter. This ends our -- the formal part of our discussion.

And at this time, I'll turn the call back over to our operator, Valerie, for questions.

Operator

Thank you. [Operator instructions] I'm showing no questions at this time. I'd like to turn the conference back over to management for any closing remarks.

Paul Toms -- Chairman and Chief Executive Officer

Well, we must have done a really good job of anticipating all the questions and answering them ahead of time. Really have nothing else to add. I appreciate everybody joining us for today's call. We look forward to joining you again in about four months as we release our year-end results in early April.

Thank you for joining today's call.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Paul Huckfeldt -- Vice President of Finance and Chief Financial Officer

Paul Toms -- Chairman and Chief Executive Officer

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