Q3 2020 Earnings Call
Greetings, ladies and gentlemen, and welcome to Hooker furniture quarterly Investor Conference call reporting its operating results for the third quarter of 2020.
At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
To ask the question. During this session you will need to press Star then one on your telephone.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host.
Paul Huckfeldt, Vice President Finance, and Chief Financial Officer for Furniture Corporation.
Thank you Liz.
Good morning, and welcome to our quarterly conference call to review the financial results of our fiscal 2023rd quarter, which ended November 30000 nicely. We certainly appreciate your participation.
All types, our chairman and CEO and Doug Touting co president of our home Meridians vision, joining me for our prepared remarks.
Question answer portion of the call several of our business units has will be available to say question, including Michael Delgatti, President picker domestic upholstery and emerging channels and Jeremy <unk> President of our Hooker rabbits like.
During our call we may make forward looking statements, which are subject to risks and uncertainties.
A discussion of factors that could cause our actual results could differ materially from management's expectations, saying that our press release and FCC filing announcing our fiscal 2020.
Third quarter results any forward looking statements speak only as of today, we undertake no obligation to update or revise any forward looking statements to reflect events or circumstances after today's call.
This morning, we reported consolidated net sales of 158.2 million as net income of $3.9 million for 33 cents per diluted share for our fiscal 2023rd for which ended on November .
Compared to last year's third quarter, net sales decreased $13.3 million or 7.8% and net income decreased $5.4 million 58%.
Earnings per diluted share decreased 58.2% from 79 cents year, it's a year ago.
For fiscal 2021st nine months consolidated net sales were 446 million net income of 10 million for 85 cents per diluted share net sales were down 7.7% or 37 million compared to last year's first nine months.
Earnings per diluted share for the first nine months decreased 60, percents 85 cents to share from $2 in 13 of the fire you.
I will turn the call over to Paul Toms comments on our fiscal 2023rd quarter results.
Thank you Paul and good morning, everyone.
Significantly higher charge backs and reduced volume from a single large retail customer at home Meridian.
Where's the most significant driver in our lower third quarter sales and earnings in addition, lingering effects of 25% tariffs.
Finished goods and component parts imported from China.
Along with spotty retail demand that's continued through the first nine months of the year or other factors negatively impacting our results.
Sales declined with the single major customer represented 70%.
Or 6.4 million over 9 million dollar volume reduction in nature My segment.
At approximately 3 million in excess charge backs from the same retail or drove a $4 million operating loss for the quarter.
In that segment.
That compares to operating income of about $5 million at home Meridian, and the same quarter a year ago.
Despite the headwinds we had positive achieved much this quarter in several areas, including.
Improved gross profits and operating income as a percentage and that sells at our home for branded segment.
And all other even though sales decreased modestly in both.
We continue to build our cash position this quarter since the end of the last fiscal year.
Built our cash by over $13 million, ending the quarter with 24.5 million in cash and cash equivalents.
We reduced inventories in the quarter, especially discontinued and overstocked items as we adjusted inventory levels to our lower order and shells right.
We made progress in our sourcing transition to non tariffs countries, which are on schedule, we expect to reduce a portion of our overall product line imported from China.
40% at the end of our most recent fiscal year two approximately 22% this fiscal year end.
Further progress expecting next year.
Given the challenging retail environment and they continue to impact of tariffs were gratified to improve profitability performance in her for branded segment.
And our domestic upholstery and H contract divisions, while sales were down at each segment in the mid to low single digits, respectively gross profits and operating income as a percentage of net sales improved compared to the prior year third quarter.
Our her branded segment achieved 190 basis point improvement in operating income margins.
Our all other achieved a 390 basis point improvement compared to prior year third quarter.
Taking a closer look at each of our segments I'll begin with the Hooker branded segment.
Net sales for the whole could brand segment decreased 2.8 million or approximately 6% in this fiscal 2023rd quarter versus prior year third quarter.
For case goods experienced lower incoming orders and reduced sales volumes driven by lower consumer demand and soft home furnishings retail business conditions.
The impact of the 25% tariffs on imported furniture from China enacted over the past 15 months has generally resulted in that 10% price increase on that portion of the company's product line imported from China in this segment.
Crushing retail demand somewhat particularly in case goods, which are a higher ticket purchase that consumers are more likely to postpone.
The volume loss was partially mitigated by higher average selling prices as a division adjusted pricing.
To mitigate increased product costs and tariffs.
CRE upholstery continue to growth momentum that division has achieved the entire year, a broader product offering with the product mix, including more sofas Sectionals sofas.
Which have higher average selling prices are fueling hooker upholstery is growth.
Our growth strategies for hooker branded or based around product line extensions as well as a clear focus on our category are niche businesses.
We're excited about the spring launch of a new casual dining initiatives along with the pre cut of two major collections that we will be available to ship in the second quarter next year.
But for poultry continues to focus on programs that maximize sales per square foot for the retailer.
The success of this strategy is recognized through additional cover offerings expanded recliner options.
Customized for container direct capabilities.
Turning to all other which includes domestically produced upholstery division spreading can young Shenandoah and Sam Moore, along with H contract, we reported a net sales decrease of $1.3 million approximately 4.3% of cells.
Sales of 28.7 million and the current third quarter compared to $30 million at last year's third quarter lower sales were driven by sales decline in our domestic upholstery manufacturing divisions.
Due to soft retail conditions, partially offset by continued growth that H contract.
Specializes in furnishings for senior living and retirement facilities.
Despite the sales decrease all others gross profit increased in absolute terms and as a percentage of net sales.
Due to lower material costs and better cost containment.
Segment reported operating income margin of 9.6%.
And 8.7% for the fiscal third quarter and first nine months respectively.
US upholstery companies and for per contract continue to focus on sales and profitability growth.
Through new product development initiatives, including the development of proprietary products for key accounts and their pursuit of new.
Product categories. Additionally, there is a focus on better aligning marketing programs and products.
Capture more market share through advantage channels or design senior living.
Segments.
Right.
At this time I'd like to call on Doug talents and to give more detail on the home meridians segment performance this quarter.
Thank you Paul.
Each of my third quarter, net sales were $86 million down $9 million or 9.7% versus Q3 of last year. The significant reduction in sales with one major retailer that Paul mentioned earlier combined with continued softness at retail across all sales channels are the primary reasons for the decrease the sales decline with them.
Major retailer represent 70% of the total each of my sales reduction in the quarter.
Year to date sales are down 9.8% the majority of which is attributable to the same single customer.
Orders in Q3 were down 9% versus the prior year and our backlog was down 11% versus Q3 last year. Most of these declines are related to that same customer.
Q3, operating loss was negative $4 million or negative 4.6% of sales. This loss is primarily the result of lower sales continued tariff sharing with a couple of major accounts that still have shipments coming from China and significantly higher charge backs associated with the same large retailer.
Furthermore, we reserved additional funds in Q3 in expectation of inventory markdowns necessary to liquidate that customers product returns.
Also contributing to the loss were freight and demurrage costs on inventory brought in earlier than needed as well as warehousing costs for surplus and returned inventory.
These charges were taken during a time period of significantly reduced sales with the customer and that's the impact was amplified in the overall results.
Current demurrage expenses are significantly reduced from earlier this year and expected to be minimum by the end of Q4, resulting in a 500000 dollar savings versus Q3.
The combination of soft traditional retail conditions, China tariffs business disruptions from Resourcing trying to produce goods and the significant quality and sales problem with one of our largest retailers have resulted in an extremely challenging year for home meridian.
With respect to traditional retail we have reason for encouragement as October market yielded positive results for Polanski furniture, and Samuel Lawrence furniture, with Mega retailers buying several new product introductions from both companies.
Both polanski and Samuel Lawrence are developing compelling new designs and operating these products an exceptional values in the marketplace.
Furthermore, the recently launched.
Samuel Lawrence furniture, Vietnam based mixing warehouse is enabling smaller U.S. customers to buy assortments have a broad range of products directly from Asia, which lowers inventory and logistics costs for the retailer.
In addition, our Prime resources Division launched the new Terry Bradshaw motion upholstery collection at October market to a customer base enthusiastic about the NFL legend and the product line branded with his name.
The exclusive new collection is targeted at today's motion upholstery customer many of whom our fanatical sports enthusiasts, who clearly identify with the Terry Bradshaw brand.
We expect many new growth and profit opportunities to result from this launch shipments are now expected to begin in the first quarter of next year.
Our efforts to mitigate the China tariffs are on schedule product shipments from China and are less than 20% of our total down from over 45% in Q4 last year.
This number will continue to come down as Vietnam, and Malaysia develop additional capacity and new product capabilities become available in other countries.
Given China's historical grip on furniture production, some major retailers have been understandably reluctant to buy products from other developing countries.
These concerns are beginning to abate as the Vietnam factories ramp up production.
Still there our capacity and capability shortages in some product categories outside China, and we will need to continue managing our sourcing to limit negative impacts.
Regarding our quality and sales problem with the major retailer we have conducted a comprehensive analysis of the business the problems on the root causes.
In the nearly 10 years of doing business with this retailer we have never encountered chargebacks anywhere close to this magnitude.
By year end, our sales will be down approximately 50%, but this retailer and we're projecting some further reductions next year as we right size the business.
Fortunately, we have sales gross operating growth opportunities with other mega accounts that should offset this decline.
Our remaining business with this customer should better match, our core competencies and should be much less volatile.
We do not expect the recurrence of the quality issues. We faced this past year. In addition to Rightsizing. The business, we're installing a new focused management team to deliver improved results in that segment.
On a somewhat more positive note our e-commerce business is up 11% year to date, although growth slowed considerably in Q3.
We attribute this slow down to price increases we issued in response to the 25% trying to tariffs implemented this summer.
We continue to view E Commerce is our largest growth opportunity and we continue to invest in developing this channel.
SL H, our hospitality division is our fastest growing division. This year sales are up 34% year over year backlog is up nicely positive 27% at the end of October , which bodes well for Escalations Q4, and Q1 shipments.
Earnings in this segment were negatively impacted earlier in the year by several different tariffs and unusually high freight costs.
Most of these costs are behind us and profitability has improved the past two months growth in the hospitality channel is helping to offset headwinds in the traditional residential channel and we will continue to invest in this business.
Looking forward, we anticipate better each of my shipments and far less Arnie, which will result in significant performance improvement in Q4 and beyond.
At this time I'd like to turn the call over to Paul Huckfeldt, who will elaborate further on our quarterly results.
Thanks.
Consolidated average selling prices increased 1.7% due to increased average selling prices in the hunkered branded segment and all other which is attributed price increases necessitated by the composition of tariffs and higher freight costs.
A favorable product mix also contributed to the higher average loan size that these factors were not sufficient to offset the seven of the half percent unit volume loss.
Which resulted in lower order volumes in both of our reporting segments and all of it.
Consolidated gross profit decreased $7.4 million to 28.
And a half million dollars in the fiscal 2022nd third quarter and decreased from 20.9%, 18% as a percentage of net sales.
Okay branded gross profit decreased modestly in absolute terms due to the lower sales.
For the quarter, but increased as a percentage of net sales to relative success. This segments has had mitigating the impact there.
In the home Meridian segment gross profit declined significantly in absolute terms and as a percentage of net sales.
Greetings gross margins negatively impacted by lower sales higher charge that as well as on recover repair and freight costs and some lower margin sales programs that we've been working to improve or discontinued.
Other factors.
Impacting gross profit were $650000 write down.
Our inventory.
Try to increase is ready to sale excess freight handling costs of about 600000 at about 450 thousands of increased warehousing costs.
Returns and higher than planned inventory.
Despite sales decline in all other gross margin increased in absolute terms and as a percentage of net sales due primarily to lower material costs in our.
Domestic upholstery unit as well as increased sales and profit in H contract.
These gains were partially offset by slightly higher direct labor and overhead cost as a percent of sales attributable to the reduced.
Factoring volumes.
Consolidated selling and administrative expenses decreased slightly in absolute terms, but increased as a percentage of sales due to lower net to the lower net sales base into fiscal 2023rd quarter.
In addition to variable selling expenses, which were lower due to the lower sales volume this quarter compensation and bad debt expenses will help offset higher costs.
Due to the Asian sourcing transition consulting and professional fees and about 200000 of startup costs for our HMS idea division.
All these costs were partially offset by $520000 gain on the settlement of our pension plan during the quarter, which we recorded in other income.
For these reasons operating income for the fiscal 2023rd quarter decreased 7.3 million to $5 million operating margin decreased from 7.2% to 3.2%.
On the balance sheet, our cash balances increased 13 million from the fiscal 2019 year end to 24 and a half million. So far this year, we've generated 26.6 million in cash from operating activities much of it from the collection of accounts receivable and customer deposits in home meridians hospitality division as well as one point.
4 million and proceeds from the sale of a form of distribution facility, which we had over time I.
I should also note that we adopted assay a 42 at the beginning of the year. This is a new lease accounting standards, which put about $41 million new assets at a similar liability on our balance sheet and effects comparisons to last year's balance.
At the end of the fiscal 2014 third quarter, we had access to almost 26 million on our revolving credit facility and 25 million of cash surrender value.
Our company Licensors, which gives us some additional financial flexibility.
We continue to have confidence in our business model and the steps, we're taking to the turning to our historical profitability. So at our recent board meeting our board of Directors approved works and increase to our in our quarterly dividends, which gives us a dividend yield of about 2.8%.
Now I'll turn the discussion back to Paul Thomas for closing remarks, and his outlook. Thanks Paul.
Compared to the second quarter consolidated orders increased by about $8 million or 5% and the third quarter. However, compared to the same period, a year ago consolidated orders shipped approximately 15 million or 8%.
The decline in orders from the one large home meridian customer is a significant part of that reduction.
Along with the subdued demand from increased prices due to tear ups.
Some retail segments like large national chains clubs International sales and full line furniture independent retailers are sluggish sales performance and other channels such as e-commerce hospitality contract furniture and interior designer.
On a consolidated basis, we expect earnings to improve on a sequential basis next quarter.
We believe the earnings performance momentum, we have enough occur branded and all other segments will continue and for the home meridians segment earnings to improve significantly despite the reduced volume from the single large customers.
There are two calendar dynamics to point out that will impact our performance next quarter first last year was at 53 week fiscal year. So companywide, we will have one less week of shipments this year in the fourth quarter. In addition to this last week of shipping the Chinese new year, and Vietnamese Tet, New your holiday.
Locations or earlier this year.
Which will result in five to 10 fewer shipping days this fiscal year for our container direct customers.
Regarding the overall business climate, we believe.
Positive housing and demographic trends bode well for us and for the furniture industry in general housing activity has been particularly robust in recent months for example permits for home construction jump to a 12 year high recently and housing starts were up nearly 10% year over year in October health.
Whole formations home affordability.
Mortgage interest rates have all trended positively recently demographically millennials are finding jobs, leaving home getting married creating households, and starting families. Gen X consumers are reaching peak earnings years.
And we're seeing housing turnover from baby boomers as they retire relocate or downsize all of these would be positive for people on the furniture industry like ourselves, we expect to be well positioned strategically financially and with the right product lines and talent to capitalize on all these trends.
It ends of formal part of our discussion at this time I'll turn the call back over to our operator lives for questions.
As a reminder, ladies and gentlemen to ask a question you will need to press Star then one on your telephone to withdraw your question press the pound Keith.
Again that is star then one if you'd like to ask a question at this time.
We have a question from the line of Anthony Lebiedzinski with Sidoti and company. Your line is now open.
Hi, good morning.
Thank you for taking the questions. So.
Just first just just wanted to get a better handle on the H. am I.
It seems like this is.
This is another first quarter assets, we've had some of these issues. So I guess with respect to the.
Single large retail customer that you rent of reference here.
It sounds like if I heard correctly that you still expect to do some business with this customer next year, but the it sounds like significantly less says is that correct.
Anthony This is Doug Yes that is correct me Doug.
Good morning, Okay, yes. So.
And as far as.
Reasons why your sales are down so much with this customer and expect to be down so much.
Could you perhaps expand on that.
Part of it is its project based and so it's not.
It's not like traditional furniture, where you put something on someone's floor and then it sells for a long time on the floor.
So theres different cycles and.
You gain more projects are less projects, depending on the on the cycle.
And I think part of it it's just a kind of resetting and re sizing the business to one that.
It's manageable and has a little less volatility.
Yes.
Okay. So and then you sounds like you expect to be able to offset.
Some of this because of some new customers will you be able to fully offset the is this the sales declined from this one customer next year or not.
Our intention is to fully offset.
Okay.
Got it okay.
And.
So as far as the costs as far as to the charge backs associated so I know with what happened in the quarter here.
Just reported as far as the fourth quarter.
Is there an expectation of.
What is the expectation for for the charge backs for Fourq you from from this customer.
Our current expectation is that the charge backs are behind us and that we don't we don't know of any other ones that are related to this.
Anthony This is Paul Toms chime in as well.
Couple of things in addition to what Doug said I would reinforce I think in total we definitely expect home meridian to grow next year in spite of.
Continued attrition with that one single large customer.
And as far as Chargebacks there may be.
A lot of the Chargebacks. We've received this year from that customer related to significant product returns.
Late last year in the fourth quarter.
We believe the trailing charge backs are behind us, but we have accrued and the third quarter for what we believe could be residual.
Last charges related to those products so.
We could have some but I believe we'll properly accrued for it and this quarter's results.
Okay, all right that's really helpful.
Okay. So Paulo, while we're on the subject from home Meridian, So sounds like you're pretty optimistic that despite the loss of this or not a total loss.
Certainly a partial loss from this one customer can you just give us some examples of.
Either products or.
Retailers not necessarily by name, but just as kind of like Q.
Broadly speaking if you could give us some examples as to what will enable you guys to actually drive improvement in sales from home Meridian next year right so kind of.
Bear with me as I can give you a little bit of a lengthy response, but I think if you look at this year, we're certainly impacted by.
Significantly reduce business with a single customer.
But were also impacted by.
Cycle of inventory names at our large home meridian customers.
Typically do you think back a year ago.
It was the threat the tariffs were going to go to 25% on January Onest.
A lot of retailers brought in.
Much inventory is a could have China products.
Try to get ahead of those tariffs.
And.
Turns out they didn't go to 25% to later in the year, but people are brought in a tremendous amount of inventory and it's about exactly the same time that business turned down for most of these retailers and it could have turned down from really poor stock market performance late last year government shutdown tariff concerns there's all kinds of.
Reasons that business may have turned del but retail was pretty soft the first half of this year and so.
Our customers I think entered the year over inventory.
It took them through the first quarter may be ended the second quarter to kind of get inventories properly sized and then business started to pick up maybe late summer and it's been better in the fall than it was the first half of the year, it's still not to the levels I think of a year ago, but its closer.
So I don't think.
Sales of our products at retail has been as poor as our shipments mainly in the first and second quarters of this year. So when you get passed this one large customer, which we've said we're going to do less business.
I think our placements for placements with other customers are good added new products at this most recent market.
We have.
Transitioned over half of what we were importing from China to other non tariff countries so pricing.
On those products will.
Go up in some cases it may come down.
I, just don't see anything with other customers at home Meridian that indicates that we're losing floor space or.
Central volume with them and then that launch.
The Terry Bradshaw collection that will be incremental business, they're launching HMS idea there right.
Ready to assemble.
Product that's targeted at mass, but will also be sold through e-commerce .
And there are other product line extensions that they have weather.
Leather programming, Pulaski or laminate program et cetera, large furniture theres, just a lot of regular product line extensions.
Thanks will generate business. So we expect for home meridian to.
Well, it's back next year to grow.
Certainly over what they've done this year and.
I think that a lot of the impacts from Chargebacks related to the returns last year excessive chargebacks for the year from that one customer.
And the move.
Sourcing changes will all be positive.
Okay. Thanks for that the clarification Paul so.
So it sounds like you know if you if you expect sales to improve at home Meridian your profitability should be even better right because of the absence of the chargebacks and most of the means to Vietnam and elsewhere.
Right and what were we really.
Looking at how long will it take us to recover to get back to the profitability at home Meridian enjoyed last year.
And I don't think it will all return next year, but I think.
The majority of it will and maybe it'll take us.
Two years to get back to the full profitability from the previous fiscal year, but I expect.
Next year to be is.
Significant turnaround in that and they do as well.
This grab numbers I asked them to look at that business in placements and.
Pick out these what we believe are unusual and non recurring type expenses.
And.
The how quickly we can rebuild it we were impacted this year a lot more.
And we would have.
As expected.
Charge backs, but also by tariffs and home meridian as less able to pass tariffs along with their customers than the other parts of our company.
Customers are just much larger they're very price sensitive.
We've had to eat a lot of the tariffs in that division this year and I think with the sourcing changes.
Lot of that's behind Us.
Okay, well, thank you for that.
So.
Switching to the other segments.
Branded and no. Other you were able to improve your operating income despite the.
The decrease.
And.
Sales there so.
Can you just kind of expand on <unk>.
On the reasons why you were able to do that and also.
Give us some sense as to whether that is sustainable through the fourth quarter.
Yes. Thanks, the best thing here would may be to let the two gentlemen that are responsible for those businesses chime in and slow test, Germany Hall first.
Comment on the Hooker branded case goods, an important pull through business and Mike Delgatti can answer that question.
With the domestic upholstery and H contract.
Hi, Anthony this Jeremy.
Good morning, Jeremy.
Okay. Good.
So the main things that we tried to do during the year when we saw.
The tariff coming at Us of course at first at a 10% level and then at a 25% level. As we went into is very much a controller controllables mode. There's several levers I would say discounting was definitely a lever that we tried to control in the company.
We also had to extend price increases at a reasonable level without killing our demand so and we kept on costs at a reasonable level that would help us offset the tariffs. So those are really the biggest levers I can think to tell you the to help drive the profitability.
Okay got it.
Thank you.
Anthony as far as all over all other we've done a number of of different things. So first of all as was pointed out earlier.
We did benefit from lower material cost.
Particularly.
With leather leather cost have dropped rather significantly over the last 12 months or so we also have up.
Have been very proactive in purging the Bennett businesses up some low margin.
Programs and products products.
I also think the business unit leaders have been very effective and in managing cost spending.
And.
Jeremy just pointed out.
We too.
Had a couple of price increases over the last 12 months tariff related.
Got it.
Alright, well, thank you, Mike and best of luck in the.
Coming retirement, thank you.
I want to Miss these costs.
I bet.
You are in this room, so your face right now.
We are that is.
Okay.
Okay.
Anything else Anthony.
Okay.
Good.
That will conclude our question answer session I'd like turn call back to Mr. Thomas from numerous.
Thank you for joining us we're.
We didnt have better results to report this quarter, but I think we understand what's impacting our business and have strategies in place to mitigate those impacts we expect much better performance.
Current quarter and certainly in this coming year. Thank you for joining us today Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.