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Hooker Furniture (NASDAQ:HOFT)
Q1 2019 Earnings Conference Call
Jun. 5, 2018 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening, ladies and gentlemen, and welcome to the Hooker Furniture's quarterly investor conference call reporting its operating results for Q1 2019. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the normal presentation. [Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, vice president and chief financial officer for Hooker Furniture Corporation. You may begin.

Paul Huckfeldt -- Chief Financial Officer

Thank you, Carmen. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings of the fiscal 2019 first quarter, which ended April 29, 2018. We certainly appreciate your participation today. Paul Toms, our chairman and CEO, will join me for our prepared remarks.

For the question-and-answer portion of the call, several of our other business unit heads will be available to take questions, including Michael Delgatti, president of Hooker domestic upholstery and emerging channel; HMI co-presidents Doug Townsend and Lee Boone; and Jeremy Hoff, president of Hooker-branded casegoods and upholstery.During our call today, we may make forward-looking statements, which are subject to risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filings for the fiscal 2019 first quarter 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.This morning, we reported consolidated net sales of $142.9 million and net income of $7.2 million, or $0.61 per diluted share, for our fiscal 2019 first quarter. For the quarter, consolidated net sales increased over 9% compared to a year ago, primarily due to increased sales in Hooker-branded and all other segments that were partially offset by a decrease in sales in the Home Meridian segment.

Earnings per share increased to $0.61 per share, compared to $0.41 in the prior year. Now Paul Toms will comment on our first-quarter results.

Paul Toms -- Chairman and Chief Executive Officer

Thank you, Paul, and good afternoon, everyone. We were pleased that our strong top- and bottom-line performance for the quarter was driven by double-digit sales gains for Hooker-branded casegoods and imported upholstery, which began in the fourth quarter of last year and strengthened into the first quarter of fiscal 2019. The inclusion of Shenandoah Furniture acquired last September and the first-quarter results also boosted our year-over-year performance. The Shenandoah generated $9 million in sales for the quarter and contributed to profitability.Our gains were partially offset by 4.2% net sales decrease and lower operating profit in the Home Meridian segment during the quarter.

The dip is attributable to short-term and temporary production and shipping delays from three major product vendors, following Chinese New Year and inventory cycling by a couple of large customers. These delays are already behind us as April shipments at HMI exceeded the prior year by almost 30%. However, it wasn't enough to recover for the quarter. Our robust performance on a consolidated basis, despite a week quarter for Home Meridian, validates our strategy to build a diverse portfolio of companies spanning multiple channels of distributions, products and price points.During the quarter, consolidated gross profit increased 13.6% or $3.8 million, and it also increased as a percentage of net sales from 21.5% to 22.4% over the prior year quarter, primarily due to increased gross profit in the all other segments due to the inclusion of Shenandoah.

Gross profit increase in the Hooker-branded segment is driven by 12% net sales increase at Hooker casegoods and 30% increase at Hooker upholstery. Overall, sales in the Hooker-branded segment grew $5.3 million or 14.1% in the first quarter due to the brisk growth in both the business units that make up that segment.The 12% surge in casegoods continued positive momentum sequentially from the fourth quarter. Our focus on winning and emerging channels of distribution and product categories, along with a strong inventory position on best-selling collections, has had a positive impact on sales for the last two quarters. Hooker upholstery's been on a roll for 18 months now with two great High Point markets back to back.

Our customers have responded favorably to expanded price points, styles, and sourcing.Fresh product concepts with innovative function have been well-received, and having dedicated leadership for the business unit has had a positive impact as well, but also gratifying to see the operating margin in the Hooker-branded segment increase to 15.7% from 12.9% for the fiscal quarter prior year, reflecting the leverage gained from the uptick in sales. The segment also benefited from life insurance proceeds of approximately $1 million.During the quarter, Hooker promoted Jeremy Hoff to president of both Hooker casegoods and Hooker upholstery, which is a new position. Jeremy has been an outstanding executive since he joined the company last August as president of Hooker Upholstery. He has developed excellent relationships with other employees, sales representatives, and suppliers to complement the outstanding relationships he already enjoys with retail customers across the country.

We're confident Jeremy will do a great job in his expanded role.In the Home Meridian segment, we also had a major executive announcement and appointments during the quarter. George Revington announced he would retire from his position as chief operating officer of Hooker Furniture Corporation and as president of HMI. His retirement was effective Friday, June 1. We greatly appreciate George's contributions over the last two-plus years, both at Home Meridian and in helping us to refocus our strategy for the Hooker-branded segment, Bradington Young and Sam Moore, on the emerging and winning channels of distribution.George had served in the chief executive role at HMI for 18 years.

We're very pleased this quarter to name Lee Boone and Doug Townsend as co-presidents of the HMI operating unit. Both Lee and Doug will be responsible for overall top- and bottom-line results of the company, but each will have a distinct focus on their responsibilities. Lee will oversee the original operating divisions of the company that serve more traditional retail channels. Those include Samuel Lawrence Furniture, Pulaski, and Prime Resources International.

Lee will also have responsibility for overseeing HMI's marketing.Doug Townsend will oversee the operating divisions and focus on emerging channels of distribution, such as e-commerce, warehouse clubs, and hospitality that includes Samuel Lawrence hospitality and Accentrics Home, as well as the clubs division. He will have responsibility for overseeing company operations in the U.S. and the Far East. Both Doug and Lee, who report to me, are seasoned and well-prepared leaders who complement each other well, and who are highly regarded by our customers, suppliers, and employees.

We expect a seamless transition at HMI and know these two gentlemen will do an excellent job of leading Home Meridian today and into the future.Now, turning to HMI's performance for the quarter. As mentioned earlier, net sales in the quarter were down just over 4% and operating profit for the quarter was close to breakeven. The shortfall in sales emanated from inventory cycling, with several major traditional customers and short-term disruptions at three major Asian vendors, which delayed shipments. However, orders and backlog for the quarter were up over the prior year 19.4% and 16.4% respectively, indicating a bounce-back and better performance for the second quarter.HMI continues to make major investments in all of the emerging channels of distribution.

We have high expectations for e-commerce and continue to expand our e-commerce-specific division, Accentrics Home. We're building out our e-commerce sales teams and our digital marketing strategy and data analytics teams. We're also investing in 3D rendering technologies and web analysis tools, upgrading our photography and imagery, expanding our content-creation abilities, and investing in proprietary products specific to this channel and its customers.We believe these investments will make us very competitive inside the e-commerce channel, which will continue to be our fastest-growing distribution channel for the next few years. Similarly, we've invested heavily in our hospitality segment, developing twice as many sample rooms for four- and five-star hotels in the last six months, as in the previous six months.

This has created a record Q2 backlog for our hospitality division, and the expectation of a positive impact for Q3 and Q4.We also have invested in the start-up costs to create a new business unit within the hospitality group that will design and market kitchen cabinets. The initial products are just starting to ship, and we believe this business will grow substantially in the second half and into next year. We also continue to invest in our clubs group, creating proprietary sample products with design innovations for our clubs' customers, a business that while episodic, has big opportunities. Our forecast for Q2 and the rest of the year for all of our emerging channels combined is we will return to our high growth rates from previous quarters.Sales into our traditional channels declined 6% in the quarter due to the inventory cycling and Far East factory disruptions I mentioned earlier.

The factory disruptions are behind us and our vendor base has recovered is more stable looking ahead into Q2. We continue to focus our efforts on providing custom products to the best and largest traditional furniture retailers throughout the U.S.We currently have over 30 new proprietary design projects in development for our mega and target mega accounts. These projects are collaborations with mega accounts merchants that usually result in new business and will fuel our growth in the second half and next year with our traditional channel customers. We're also investing in a relaunch of Eric Church-branded furniture lines to lay the foundation for continued growth of that brand into fiscal 2020.Finally, our "all other" segment, which includes our domestic upholstery operations, Bradington Young, Sam Moore, and Shenandoah Furniture, along with H Contract, has a solid quarter in growth and earnings; Bradington Young continues along a path of steady growth; we believe Sam Moore is turning a corner, making progress in manufacturing efficiency and profitability, and has enjoyed two good markets in a row in High Point; Sam Moore has a committed leadership team and is making solid improvements; Shenandoah generated $9 million in sales for the quarter, contributed to profitability, and continues to give us a foothold in the winning and growing lifestyle specialty store retail channel of distribution.At this time, I'll turn the call back over to Paul Huckfeldt, who will give more details on our financial performance for the quarter.

Paul Huckfeldt -- Chief Financial Officer

Thanks, Paul. Consolidated average selling price increased 5.8%, mostly due to increased Hooker-branded average selling prices and Hooker-branded increased share of consolidated sales. That was partially offset by a decrease of a little over 4% in unit volume. Unit volume decreased primarily due to 7% decrease in unit sales at Home Meridian, whose sales tend to be higher-volume but lower-priced units, and to a lesser extent, the absence of Homeware, which was shut last year.The inclusion of Shenandoah Furniture this quarter and increased sales at Hooker casegoods and Hooker upholstery helped offset some of the unit volume decrease.

The Hooker-branded segment reported a unit volume increase of 12%, with the average selling prices rising 2%, and both unit volume and ASC increased at Bradington Young, which continues to make steady gains. As Paul noted earlier, consolidated gross profit increased $3.8 million in the quarter, mostly due to increased sales in the Hooker-branded segment and all other.We're also pleased to report that we've seen margin improvement in our domestic upholstery operations after facing some pricing and efficiency challenges in Q4 of fiscal '18. Consolidated selling and administrative expenses increased in absolute dollars but decreased slightly as a percentage of net sales. Investments in people and systems, particularly at HMI, and higher compliance-related costs drove the increased spending but were able to better leverage fixed costs on the higher sales this quarter.Amortization of acquisition-related intangibles was higher in this year's fiscal first quarter due to adding amortization of Shenandoah's intangibles from our acquisition of that business in the third quarter of last year.

For these reasons, operating income for the fiscal 2019 first quarter was $9.4 million, or 6.6% of net sales, compared to $7.2 million, or 5.5% of net sales, in fiscal 2018 first quarter.Our balance sheet remains strong despite the use of cash and additional long-term debt incurred to acquire the Shenandoah business last year. At the end of the quarter, we had cash and cash-equivalents of nearly $47 million available to provide the required working capital and to service our acquisition-related debt, which stood at $41.5 million as of the end of the quarter.We also have access to $28.5 million on our revolving credit facility and about $23 million of cash surrender value of company-owned life insurance, which gives us an additional financial flexibility. In today's earnings release, we also announced a quarterly dividend of $0.14 a share, which represents about 1.5% dividend yield.Now, I'll turn the discussion back to Paul Toms for his outlook.

Paul Toms -- Chairman and Chief Executive Officer

Thanks, Paul. Retail business in the first quarter can best be described as choppy. Overall, incoming orders vary by business unit but generally exceeded shipments. Economic trends are favorable to the furniture industry and we entered the second quarter with a good bit of momentum.

Given the positive economic indicators and the diverse nature of our companies, products, price points, and distribution channels, we're strongly positioned and expect to continue to outperform the industry. This ends the formal part of our discussion. And at this time, I'll turn the call back over to our operator for questions.

Questions and Answers:

Operator

Thank you [Operator instructions]. Our first question comes from the line of Anthony Lebiedzinski with Sidoti and Company. Your line is open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

I do have a few questions just about each of these segments. I guess, first starting off with Hooker casegoods. Just wondering how much of the growth came from sales to what you call emerging channels of distribution?

Paul Toms -- Chairman and Chief Executive Officer

Anthony, that's a good question and I don't have that information at my fingertips. And the Hooker casegoods segment, emerging channels are pretty broad, it includes e-commerce, interior design, international, and also contract. And so I am going to guess that probably collectively that's around 25% of our business or so, and probably in the last quarter's growth was in the 25% to 30% range in those channels.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And as far as Hooker upholstery, so clearly nice job within that segment. Is there more room to improve in terms of expansion of price points and sourcing that you talked about?

Paul Toms -- Chairman and Chief Executive Officer

We have Jeremy Hoff with us, who has been the head of that division for about the last nine months. So I'll ask him to respond to that.

Jeremy Hoff -- President, Hooker casegoods and upholstery

I would say there is a lot of upside, a lot of potential for growth. We've had a good portion of our growth in other categories from recliners to home office chairs. And we've had a lot of traction in the motion category, as well as stationary, which are going to be some higher transaction dollars, which is going to lead to substantial growth potential for us in the future.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And then what about power motion specifically, what are you seeing there?

Jeremy Hoff -- President, Hooker casegoods and upholstery

It's become really all about power from our standpoint. The industry is a very high percentage toward power in the motion category. So the past two markets, we've been heavily introducing power in all categories that it relates to.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And then moving on to HMI. So just wondering what was the timing of the factory fire that you called out in the press release?

Doug Townsend -- Co-President, HMI

Anthony, this is Doug Townsend. We actually had two fires and one was in February and the other was in March at two different major factories.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And so as far as the three major vendors that you called out having disruptions, just wondering, were they, a significant portion of your overall sales coming from those three vendors?

Doug Townsend -- Co-President, HMI

Luckily, they were all major vendors, really large. And so while they had fires, they're big factories with 3,000, 4,000, 5,000 people each and so, they've got multiple finishing lines. And they weren't devastating fires, so to speak, and nobody was hurt at any of these fires, thank God. So there was delays as they moved production around and tried to recreate some parts that got burned and things like that, and that affected both February, March, and a little bit in April, but those factories, for the most part, are 95%-plus recovered at this point.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

OK. Got it. And so it sounds like at this point based on the comments that you've made in the press release and during the call so far that HMI's issues have been resolved. Is that fair to say?

Doug Townsend -- Co-President, HMI

Related to those big issues, yes.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And then as far as the "all other" segment, just curious, when would you expect Sam Moore to operate at full efficiency and profitability?

Paul Toms -- Chairman and Chief Executive Officer

Well, they are steadily improving, as Paul alluded to in terms of profitability, starting to regain momentum in terms of sales orders, making particularly good progress with their key accounts. So I expect Sam Moore to make continuing progress through the balance of the year.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And at Shenandoah, has there been any cross-selling between Shenandoah and the legacy piece of the business, or is that something that you think you could do? And so just wondering if there is an opportunity there?

Paul Toms -- Chairman and Chief Executive Officer

Generally, Shenandoah has been focused on their primary lifestyle customers. However, we are in the process of developing an upholstery program that will target the interior design channel, it will actually be sold to a channel exclusively. And the launch of that program will be the October market.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

And lastly, a couple of other items I think, I guess these will be more for Paul Huckfeldt. So there was a $2 million provision on the cash flow statement for doubtful accounts. Can you just explain what happened there?

Paul Huckfeldt -- Chief Financial Officer

That's just a change in accruals. We cycled through -- HMI has a pretty high level of accrued allowances for some of their big customers, like, I think some of the major customers that require a lot of allowances throughout the sales cycle. [Aside]And actually it was an improvement, wasn't it? So we improved because we took some of those balances down as we reduced the AR balances in some of those --

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

OK, so I misread that. OK, got it. All right. And then lastly as far as the tax rate, it came in a little bit lower than we expected.

Just wondering how should I think about the tax rate going forward?

Paul Huckfeldt -- Chief Financial Officer

I would use the same tax rate for the rest of the year. It came in a little lower. The life insurance again tweaked it down a little bit. So I would use that rate for the rest of the year.

Operator

Thank you. And our next question comes from the line of Mitchell Brivic with Tygh Capital. Your line is now open.

Mitchell Brivic -- Tygh Capital -- Analyst

I wanted to explore the hospitality segment of Home Meridian. Historically, what percentage of Home Meridian sales has come from hospitality?

Paul Huckfeldt -- Chief Financial Officer

It was approximate about 5% last year and growing.

Mitchell Brivic -- Tygh Capital -- Analyst

And then how about the most recent quarter, what percentage was it?

Paul Huckfeldt -- Chief Financial Officer

It was a little less than that, about 3.5%.

Mitchell Brivic -- Tygh Capital -- Analyst

OK. And then you mentioned that you're seeing some nice orders in that category. Would we start to see the benefit of that in Q2, or is predominantly going to benefit Q3 and Q4?

Paul Huckfeldt -- Chief Financial Officer

It'll benefit Q2 for sure. We have a backlog for those shipments and those orders are in production now. And we expect it to continue in Q3 for sure and hopefully in Q4, but we can't see Q4 yet.

Mitchell Brivic -- Tygh Capital -- Analyst

OK. All righty. That's the only question I had. Thanks so much.

Operator

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Paul Toms for his final remarks.

Paul Toms -- Chairman and Chief Executive Officer

All right. We really don't have anything else to comment on. We appreciate everybody joining us today. We're glad to bring a good quarter and we're looking forward to post another good quarter next, in the next quarter, the second quarter, and we'll be back with you probably late August.

Thank you for joining us today.

Operator

[Operator signoff]

Duration: 27 minutes

Call Participants:

Paul Huckfeldt -- Chief Financial Officer

Paul Toms -- Chairman and Chief Executive Officer

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Jeremy Hoff -- President, Hooker casegoods and upholstery

Doug Townsend -- Co-President, HMI

Mitchell Brivic -- Tygh Capital -- Analyst

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