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Edited Transcript of HOFT earnings conference call or presentation 6-Apr-17 6:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Hooker Furniture Corp Earnings Call

Martinsville Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Hooker Furniture Corp earnings conference call or presentation Thursday, April 6, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George Revington

Hooker Furniture Corporation - COO and President of Home Meridian Division

* Michael W. Delgatti

Hooker Furniture Corporation - President

* Paul A. Huckfeldt

Hooker Furniture Corporation - CFO and SVP of Finance & Accounting

* Paul B. Toms

Hooker Furniture Corporation - Chairman and CEO

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Conference Call Participants

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* Anthony C. Lebiedzinski

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Greetings, ladies and gentlemen, and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the fiscal 2017 fourth quarter and fiscal year. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO and SVP of Finance & Accounting [2]

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Thank you, James. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2017 fourth quarter and year, which ended on June -- January 29, 2017. We certainly appreciate your participation this afternoon.

Joining me today are Paul Toms, our Chairman and CEO; George Revington, Chief Operating Officer of Hooker Furniture Corporation; and Michael Delgatti, President of Hooker Furniture brands.

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 press release and SEC filings announcing our fiscal 2017 year-end results. Any forward-looking statement speaks only as of today, and we take 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 $173.9 million and net income of $11 million or $0.95 per diluted share for our 13-week fiscal quarter ended January 29, 2017. Fiscal year net sales were $577 million, and net income was $25.3 million or $2.18 per diluted share. This is the fourth quarter in which our consolidated financial statements 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 year results that will be referenced on our call today.

For the fourth quarter, consolidated net sales increased 187% and more than doubled for the fiscal year compared to a year ago due to the Home Meridian acquisition. The yearly increase was partially offset by lower sales for Hooker Furniture brand.

The acquisition of Home Meridian earlier this year resulted in expenses not typically part of our operating results. We incurred about $1.2 million year-to-date in deal-related cost. As part of the acquisition, we also 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 lived, 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 more than $330,000 of amortization expense in the fourth quarter and $3.1 million for the full fiscal year. We expect amortization expense to be about $1.3 million a year for the next 10 years or so.

Now Paul Toms will comment on our fourth quarter results.

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Paul B. Toms, Hooker Furniture Corporation - Chairman and CEO [3]

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Thank you, Paul, and good afternoon, everyone. Our fourth quarter sales and earnings surge lifted our fiscal year performance and allowed us to end the year with positive momentum. The outstanding fourth quarter results were driven by Home Meridian's record backlog at the end of the third quarter, resulting in record shipments in the final quarter of the year.

We also saw excellent postmarket orders and activity for Hooker Furniture brands after our best fall furniture market in 5 years. With sales recovering in both Home Meridian and Hooker brands, we demonstrated the significant earnings leverage possible with our business model when shipments are strong. Our Hooker casegoods, Upholstery and Home Meridian segments delivered their strongest performance in the fourth quarter. For each quarter this year, earnings per share have improved substantially from the previous quarter from $0.22 per share in the first quarter to $0.46 per share in the second quarter, $0.56 per share in the third quarter to $0.95 this quarter, our largest sequential increase.

It was a good year for our shareholders as well. We experienced appreciation in our share price throughout the year. As a result of strong earnings, we also increased our quarterly dividend by 20% in December 2016. As a result of Home Meridian's profitability and the comparatively small amount of stock issued as part of the transaction, the acquisition was accretive to earnings per share in the year of acquisition, as we expected. This provided further validation of the acquisition and positive momentum to the combined companies.

Our management teams have begun to benchmark and collaborate to leverage the talents and experience of the combined management group. To further this collaboration, at the end of the quarter, we added George Revington's role as President, Chief Operating Officer of Home Meridian, naming him Chief Operating Officer of Hooker Furniture Corporation with responsibility for all of our operating divisions and leadership of our strategic planning process.

George has done a very good job at Home Meridian of using data-driven analysis of their business as the foundation to develop and implement strategies for growth in an ever-changing industry landscape. We're excited about him leading a similar strategic development effort for the combined companies and are confident that it will better position Hooker Furniture, Bradington-Young, Sam Moore and Hooker Upholstery for future growth.

At this time, I'd like to call on George to expound on the strategy we're pursuing to address shifts in the marketplace. In addition, George will give some highlights for the quarter and year for Home Meridian and look ahead to fiscal 2018.

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George Revington, Hooker Furniture Corporation - COO and President of Home Meridian Division [4]

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Thank you, Paul, and good afternoon. I'm excited about the opportunity to work with all of Hooker's business units as we continue to grow in a changing marketplace. We will take full advantage of the disruptions occurring in our industry by making positive adjustments to our product assortment, distribution channels and to our organization.

We have an excellent team in place in both companies as well as financial strength. We can leverage both to make strategic shifts to focus our resources on growing channels and customers. One year after the historic merger of Home Meridian and Hooker, we're truly a new company. As the landscape of the economy in our industry has shifted, we are adapting to that changing landscape by revisiting our business around customers and channels.

The success of our traditional business model, along with the industry-leading operating profitability performance, has allowed us to invest in emerging channels of distribution, new product categories through acquisitions and start-ups. Going forward, our strategic priorities will be focusing on emerging distribution channels, focusing on targeted growth customers, broadening our range of product categories and distribution channels, integrating our business units through benchmarking and collaboration to achieve synergies and best practices. We intend to enhance our competitiveness in the fast-growing channels of distribution while continuing to support our traditional channels.

In regard to Home Meridian's performance in the fourth quarter and year, HMI finished the year very strong with sales up 23% in the quarter over record sales in the prior period. Our order backlog was up 9.2% at the end of the quarter, and demand has increased as the current year's progressed with orders up 19% during February and March. For the year, sales were up 6%, orders up 8.5%. The success is a result of strategies we have in place to address emerging channels of distribution, in particular, e-commerce, hospitality, clubs, and mass merchant.

During the full year, emerging channels represent 38% of our business, and the sales in these channels were up a combined 31%. The hospitality channel led the way with sales up 76%. E-commerce was up 27%. And the clubs and mass merchants were up 25%.

For fiscal 2018, we continue to execute our current growth strategies with mega accounts and emerging channels along with expanding our successful Eric Church Highway to Home program. We'll expand our product line with a new start-up division, [ Eccentric ] Home. [ Eccentric ] Home's products will include fashion-influenced upholstered headboards, seating, accent chests and tables, and other stand-alone items. The line targets Millennials and Generation X-Z customers who enjoy curating their own eclectic collections of furniture.

We're also expanding our High Point Market showroom from 28 -- 82,000 to 92,000 square feet with a new casual and relaxed customer hospitality area and space for the new [ Eccentrics ] Home division.

We're creating a business intelligence group inside Home Meridian. This group will develop a technology-driven process to analyze data from myriad information sources, both within our systems and from many external customer-based systems with which we interface. Their goal would be to efficiently mine this data to find actual information that will help us make more informed business decisions.

At this time, I'd like to call on Mike Delgatti to give us an overview of the performance of Hooker brands and as well to look ahead to strategy for the year and to the High Point market that opens this month.

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Michael W. Delgatti, Hooker Furniture Corporation - President [5]

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Thank you, George, and good afternoon, everyone. Thanks for a very a strong High Point market in October, income and order rates for Hooker casegoods exceeded prior year levels throughout the fourth quarter, providing a positive shift from the first 3 quarters. We were able to convert the strong market and an elevated backlog to the best shipping quarter for Hooker casegoods of the year.

Our strategy to fast track and shorten production and shipping time in the well-received Hill Country and Arabella Collections made them available for shipment to retailers in the fourth quarter, rather than well into the following fiscal year as the typical product cycle would have allowed. That had a positive impact on fourth quarter sales and should give us additional turns of retail in the current fiscal year by getting the collections to market 3 to 4 months earlier than was typical in the past.

Our positive momentum is continuing with the year off to a great start. Casegoods orders are up 11% in the current fiscal year-to-date. On the Upholstery side, we were disappointed in our top line results of a slight decline of 2.5% for the Upholstery segment. However, we were pleased that even on slightly lower sales, operating income was comparable to last year.

In addition, we see a positive shift as consolidated Upholstery incoming orders were up 5% in the fourth quarter and orders are up 6% for the Upholstery segment in the fiscal year-to-date.

As we've discussed before, much of the upholstery segment sales dip related directly to the lingering effects of a quality issue at Hooker Upholstery that emerged in the second quarter and caused us to be out of stock on bestsellers. Another contributor was labor productivity issues at Sam Moore. We believe both are short-term problems, and they are improving steadily.

We expect the Upholstery challenge to be behind us by the end of May. We were especially pleased that Hooker Upholstery sales were up 10% in the fourth quarter, and we ended the year with an order backlog 58% higher than in the comparable period a year ago.

Across all Hooker brands, we are positioned with strong new products that are performing well and incoming orders that are trending up. In all the Hooker brands, we are intentionally focused on growing with distribution channels that we have identified as emerging for our business.

We're focusing our efforts to ensure that we support these emerging channels with on-spot designs and value, industry-leading marketing support and superior customer service. We're developing unique strategies for each of the emerging channels of distribution that represent the most potential for growth while supporting, at the same time, our traditional channels. The emerging channels we are focused on at Hooker brands include e-commerce; interior design; lifestyle retailers that appeal to Millennials, Gen X and Baby Boomers; contract; and international.

As George mentioned, the spring High Point market opens in a little over a week, and based on premarket results, we are excited about 2 major new casegoods and Upholstery collections. We have both already on order and expect to be shipping 2 retailers as earlier as June on a direct container basis, and in August, out of the Martinsville warehouse. That would give us an extra few months of retail sales compared to the normal production to retail cycle and would ensure that collections are established at retail for the historically strong Labor Day weekend sales.

At this time, I'd like to turn the call over to Paul Huckfeldt for more details on our fourth quarter and fiscal year results.

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO and SVP of Finance & Accounting [6]

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Thanks, Mike. Consolidated net sales increased due to the addition of the Home Meridian businesses, which contributed $113 million of net sales to Q4 and $345 million of net sales for the year. In our traditional Hooker businesses, net sales for fiscal 2017 declined $14.4 million or about 6% compared to fiscal 2016, primarily due to decreased unit volume in our Casegoods and Upholstery segments, which was partly offset by increased average selling prices in those segments.

Unit volume decreases in our Casegoods and Upholstery segment were primarily due to softer demand environment and the Upholstery segment quality issue Mike referred to earlier. Container direct shipments to retailers were particularly hard hit earlier this year as retailers worked through inventories and showed a little less willingness to commit to larger inventories. This shift from container to noncontainer sales contributed to higher average selling prices.

Upholstery segment net sales decreased 2.5% on a 6.3% decline in unit volume, which was partially offset by a 4.5% higher average selling price. And net sales in our "all other" segment grew approximately -- grew nearly 14% year-over-year on higher unit volumes, mainly on the strength of our H Contract business but partially offset by lower average selling prices in our Homeware division as we worked through that inventory.

Overall, average selling prices in our traditional Hooker businesses increased 2.3% during the fiscal year, primarily due to the mix of product shipped and fewer container-direct shipments. But the increase in ASP did not offset the nearly 8% decline in unit volume during that same period.

For the year, consolidated gross profit increased with the addition of Home Meridian's results. For the traditional Hooker businesses, gross margins improved 180 basis points due primarily to lower ocean freight costs. The improved margin offset much of the unfavorable impact of lower sales volume, and gross profit dollars were slightly higher than the prior year. 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 business. So company-wide SG&A costs as a percentage of sales were lower than the prior year. Within the traditional Hooker business, SG&A expenses were lower than prior year in dollars and as a percentage of net sales due to higher net sales during the fourth quarter.

For the year, SG&A expenses as a percentage of net sales increased due to lower net sales but decreased in absolute terms due to lower selling expenses and bonus expense, partially offset by increased bad debt expense. For these reasons, operating income for the fiscal 2017 year was nearly $25 million or about 10.7% of net sales compared to $24.3 million or 9.8% of net sales for our legacy Hooker businesses during the fiscal 2016 year. And HMI contributed another $14 million of operating income.

For the quarter, consolidated operating income was nearly $17 million compared to $6.5 million last year. The Home Meridian segment contributed about $8.4 million to operating income, while the legacy Hooker businesses contributed $8.6 million during that same time period.

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 nearly $40 million and about $22 million of cash surrender value of company-owned life insurance as well as $28.5 million availability on our revolving line of credit, which [ implied ] working capital, capital spending needs and other needs. Our acquisition-related debt stood at $47.6 million as of the end of the quarter.

In March, we announced a quarterly dividend of $0.12 per share, which reflects the 20% increase we implemented last quarter. This represents a 1.2% dividend yield on our current share price.

Now I'll turn the discussion back to Paul Toms for his outlook.

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Paul B. Toms, Hooker Furniture Corporation - Chairman and CEO [7]

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Thanks, Paul. We experienced a distinct uptick at retail late in the fall after the uncertainty of the election was over. Consumers seem to have gotten off the sidelines and are more willing to commit to larger-ticket purchases than before. The macroeconomic environment is generally positive. Sales of existing and new homes are trending positively versus a year ago. And new home construction is robust.

Stock market gains have kept consumer confidence at high levels. Wages are trending up. Employment levels are solid. And consumer spending is strong. Based on the improvements we've seen in our business over the last 2 quarters, we're fairly bullish about the foreseeable future and very confident in our long-term strategy.

This ends the formal part of our discussion. At this time, I'll turn the call back over to our operator, James, for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [2]

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So obviously, you had great success in the October market with preordering the collections of the casegoods furniture. Is that a strategy that you intend to go on a go-forward basis? Any thoughts on that? And I do have a couple of other questions as well.

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Michael W. Delgatti, Hooker Furniture Corporation - President [3]

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Yes, Anthony, we are going to continue with that strategy. As a matter of fact, that premarket, which was about 30 days ago, we introduced 2 major casegoods collections. And because of the response prior to premarket as we vetted the new introductions with key accounts and response from dealers while at premarket, we went ahead and ordered both collections. We reserved capacity for June production and expect to ship both new collections in June with the goal of having those products on most retail floors ahead of Labor Day weekend, which is such an important weekend for furniture sales.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [4]

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Got it. Okay. That's very helpful. And also, as far as the Home Meridian segment, I mean, clearly, the acquisition looks like it's paid off nicely for you. And just wondering, as far as the pace of change that I think George had alluded to, accelerating. With that backdrop, I mean, can you give us a sense as to how much of your sales are now coming from e-commerce and if you have a number also for the legacy business that's coming from e-commerce players?

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George Revington, Hooker Furniture Corporation - COO and President of Home Meridian Division [5]

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Yes, in the Home Meridian segment, our e-commerce business is just a little bit less than 15% of the total. And we measure that only with really true pure play e-commerce customers. There are a lot of people who do e-commerce but not as a full business. And the traditional part of our business is still about 64% of the business right now at Home Meridian.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [6]

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Okay. And then switching over then to the Upholstery segment. I mean, that was down in your last fiscal year. Some of it was because of some company-specific issues. I mean, what is your outlook for Upholstery now that you entered the new fiscal year?

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Michael W. Delgatti, Hooker Furniture Corporation - President [7]

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Outlook is positive. Bradington-Young continues to perform well. We're in the process of ramping up capacity for that business unit. Sam Moore is aggressively trying to hire more people, is currently training more people, and we're seeing a steady improvement and -- in productivity. And then, Hooker Upholstery, as I mentioned, we do believe that the issue we had last year will be behind us by the end of May. The good news there is the backlog is very strong. And since the fourth quarter, we're starting to see a ramp-up in sales on a year-over-year basis. So that's very encouraging to us.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [8]

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Got it. That's good to hear. And I think, Mike or one of you had mentioned the new line of the [ Eccentrics ] Home. Will that be already in the High Point market later this month?

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George Revington, Hooker Furniture Corporation - COO and President of Home Meridian Division [9]

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So we will be showing [ Eccentrics ] Home products in the market that's coming up, and that part of our business actually has done really very well so far this year. But the full expression of [ Eccentrics ] Home will happen at premarket in September when we'll add another 10,000 square foot of showroom space and be able to really show it to its full extent.

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Anthony C. Lebiedzinski, Sidoti & Company, LLC - Research Analyst [10]

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Got it. Thanks for that. And lastly, also any sort of comments that you may have on the potential border adjustment tax? I mean there's been a lot of chatter about that. And if so, any potential impact that could have on you?

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Paul B. Toms, Hooker Furniture Corporation - Chairman and CEO [11]

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Anthony, this is Paul Toms, and it is something that we monitor. We've spoken with our trade association lobbyist in Washington. We follow news releases. We've actually joined the National Retail Federation Group in opposition of that. We get numerous updates from them daily. I think that it is still a risk. The legislation as currently contemplated by the House Ways and Means Committee would be very concerning to us. However, I don't think there's anybody that believes that, that legislation is what the final version will be, that the Senate is very opposed to the type of border adjustment tax they're proposing in the house and that we will have tax reform, but it's really hard at this point to understand how a border tax or import tax will play versus rate -- income tax rate reductions. And I think we just have to kind of wait and let things emerge.

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Operator [12]

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There are no further questions at this time. I turn the call back over to the presenters.

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Paul B. Toms, Hooker Furniture Corporation - Chairman and CEO [13]

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All right. Well, we appreciate everybody joining us for our fiscal 2017 fourth quarter and year-end call. We're obviously pleased with the results that we're able to report. We're optimistic about the first quarter, and look forward to continuing the momentum that we currently have. Thanks for joining us.

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Operator [14]

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This concludes today's conference. You may now disconnect.