Q4 2020 Earnings Call
Reporting operating results for the fourth quarter 2020 earnings.
At this time, all participants are in listen only mode.
Good question and answer session will follow the formal presentation.
The question during this session you and your because I wanted your telephone.
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.
Thank you Joel.
Good morning, and welcome to our quarterly conference call to review, our financial results for the fiscal 2024th quarter and full year, which ended on February 20 seconds 2020.
We certainly appreciate your participation this morning.
Paul Toms, our chairman and CEO, Jeremy half President of our Hunter legacy brands and Lee Boone Co President of our H.M.I. Division are joining me today for prepared remarks for the question and answer portion of the call or other executive officers will be available to take questions as well, including and Jacobson Smith, Chief Administration Officer, and Doug <unk> co.
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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 to differ materially from management's expectations is contained in our press release and FCC filing announcing our fiscal 2020 year end result.
Any forward looking statements speaks only as of today and we undertake no obligation to update or revise any forward looking statements to reflect the that to reflect events or circumstances. After today's call.
We get into the results are worried about our operating segments in the fourth quarter of 2020.
We updated our operating segments, our domestic upholstery business units Bradington Young Sam Moore, and Shenandoah were moved out of all other an aggregated into a new segment called domestic upholstery.
All other now consists of H contract and lifestyle brands, our two largest segments hooker branded at home Meridian were unchanged. We believe doing this better aligns our segment reporting with the accounting guidance.
This morning, we reported consolidated net sales of 610 million and net income of 17 million or $1.44 per diluted share for 2020 fiscal year ended February 2nd 2020.
Earnings per diluted share for fiscal 2000, 2020 decreased 57% from $3.38 from the prior year.
For the year net sales decreased 10.6% or 73 million compared to last year, and net income decreased 57% or $22.8 million.
For the fiscal fourth quarter, beginning November 4th and ending on February 2nd consolidated net sales were 165 million with net income of 7 million or 59 cents per diluted share.
Net sales decreased 35.6, or <unk> million or 17.8% compared to last year's fourth quarter due to net sales decreases across all three reportable segments Hooker branded home Meridian and domestic upholstery and were essentially flat and all other net income for the quarter decreased 52%.
Or $7.7 million.
Contributing to the consolidated revenue decreased for both the quarter as a year was one week of less than one week last of sales compared to the previous fiscal year fiscal 2019 at 53 weeks, while fiscal 2020 at 52 weeks.
Additional weak in the prior year contributed approximately 13 million.
Consolidated net sales based on an average net sales per day of shipping day.
Paul Toms will now comments on our fiscal 2020 and fourth quarter results.
Thank you Paul and good morning, everyone.
Oh, I apologize I had a time, there's a fellow right outside my window mowing. The grass. So here are some background noise, that's what it does.
A world has changed a great deal since our fourth quarter and fiscal year ended on February 2nd.
A little over a month later on March 11, Cobot 19 bars was classified as a global pandemic.
The other world Health organization, shortly thereafter federal state and local governments in the U.S.
And elsewhere began imposing restrictions on travel and business operations.
And advisors are requiring individuals to limit or eliminate time outside their homes.
Improve closures of businesses have also been ordered in many states.
In other businesses have temporarily closed on the voluntary basis. Consequently, they cover 19 outbreak has severely restricted the level of economic activity in the U.S. and around the world.
Before we review our fourth quarter fiscal year results in more detail I'd like to address the company's responding to cope with my team Goldman economic crisis.
We're carefully monitoring evolving updates and advisories from the Cds.
I believe we're adhering to their best practice recommendations regarding that health and safety ever voyage.
Eliminate the possibility of spreading infection most of our administrative staff for telecommuting.
For those administrative staff, not telecommuting and for our warehouse in domestic manufacturing employees.
We have implemented appropriate physical distancing policies.
Stepped up facility cleaning at each location.
On the central domestic travel for our employees this season and international travel has been completely prohibited.
Testing and treatments that covered 19 as covered 100% under I'm for medical insurance and counseling is available through our employee assistance plans to support those financial mental and emotional stress.
Related to the virus and other issues. In addition, we're offering temporary paid leave to employees diagnosed with of ours are those associates with another diagnosed person or persons in their household and are working to accommodate associates with child care needs related to school for daycare closures.
To address the financial impact of the virus answers conserve cash.
We are eliminating all non critical spending at our postponing called honest central capital projects.
Represent about 3 million over 5 million capital plan this year.
We've reduced the CEO and CFO salaries by 20%.
Other any other salaries by 15% and.
And officer and certain other company managers pay by 10%.
Our board of directors voted last week to reduce their own pay by 20%.
All in the cash portion of their fees.
We're significantly reducing marketing and product development spending as well as most travel domestic and international.
We are reviewing all orders previously placed with our manufacturing partners and canceling adjusting or delaying those orders.
Based on our latest demand projections. Additionally, based on our belief that this downturn will continue well into the second half of this year.
It's a difficult decision to reduce headcount and eliminate 27 physicians in the hopper.
HM I administrative offices.
And six in nature in my warehouses.
We're furloughing approximately 500 manufacturing and warehouse employees is necessary based on current reduced demand.
We believe the difficult decisions, we're making today are both necessary and appropriate to ensure the survival of the company.
We will continue to pursue options to preserve cash and reduced false including pursuing applicable government sponsored programs evaluating a continuation of our quarterly dividends.
And approaching our business partners, including factories landlords and other service providers.
For assistance navigating these difficult times.
At the end of the call during the outlook I will comment further on how we expect the unprecedented economic challenges covered 19 pandemic.
Yeah impact us and the next quarter and beyond.
Now turning to the most recently completed since what you are important for this past fiscal year, which very challenging year, we faced headwinds of 25% tariffs on finished goods and component parts imported from China.
Industry wide, we retail demand.
The tariffs created a chain reaction of higher product costs higher selling prices to our customers.
Fly chain and inventory disruptions, we deployed significant management and financial resources to ship certain parts of our production to factories and Bonterra countries and successfully reduced our reliance on Chinese factories by half during the year.
Our topline was hit by fair related price increases to our customers that reduced retailer and consumer demand for products and our bottom line was adversely impacted by higher cost, which lowered margins.
Adding to these external disruptions, we encountered an unexpected quality related issue with a single large home meridian customers.
Resulting in significant access charge backs and lost revenues that sells decrease in charge backs in the single customer.
Accounted for nearly 80% of home meridians cells declined for the year.
We met the challenges presented to US and finished the year on a more positive note in the fourth quarter.
Which was our strongest quarter of the Europe, while sales were down versus a record fourth quarter in the prior year.
The shorter fiscal year compared to last year as Paul mentioned earlier accounted for about 40% of the 17.8% decline in revenue for the quarter.
Sequentially compared to the third quarter consolidated fourth quarter sales were off or 4% and.
Net income was up nearly 80% compared to the previous year end.
Our backlog was up over 9%.
Also in the fourth quarter fiscal 2020, we put the excess chargebacks with the single large h. in my customer behind us and resolve the quality issue.
Throughout the year, we successfully executed our care mitigation and resourcing strategies and reduce the amount of product, we import from China by about half with factories in Vietnam, and Malaysia picking up most of the production moved out of China.
Importantly, we generated over 41 million in cash from operations.
Down debt on schedule.
Ended the year with 25 million more in cash.
Compared to the prior year.
And we've grown cash another 15 million since year end through April 30.
During the year, we launched new divisions, new product lines, and merchandising programs and strengthen our management team together, we overcame challenges on multiple fronts.
At this time.
As for Jeremy Hall, or poker branded president.
Comment on results for the month for legacy brands.
Thanks, Paul in the Hooker branded and domestic upholstery segment, we were pleased to maintain profitability at close to the same solid levels as the prior year and slightly increased profitability in all other despite the tariff headwinds and lower demand.
Turning to a more detailed look at each of our segment I'll begin with the Hooker branded segment.
Net sales for the Hooker branded segment decreased 16.7 billion or 9.4% in fiscal 2020 with Hooker case goods reporting an 11% sales decrease partially offset by modest sales increase at hooker upholstery.
Despite the impact of the tariffs and soft retail demand throughout the year. We were pleased that this segment reported operating income of 21.5 million or 13.3% as a percentage of sales.
Hooker upholstery is positive sales despite the industry wide downturn were driven by broader line of well received product offerings, and a favorable product mix, including higher priced sofas and sectionals, leading to a 9% increase an incoming orders as compared to the prior year and a 37% Inc.
Ladies and backlogs at year end.
While sales were down at Hooker case goods products and collections introduced last several market cycles, such as Ciaobella Le Grange and sanctuary to have quickly made their way into our top 10 selling collections in the domestic upholstery segment net sales decreased 10.9 billion or 10 point.
2% due to reduced unit volume as a result of soft retail conditions, Bradenton young and Sam Moore experienced reduced incoming orders throughout fiscal 2020, while Shenandoah as incoming orders picked up in the fourth quarter versus the first three quarters of fiscal 2020.
Despite decreased net sales domestic upholstery is operating margin was essentially unchanged as compared to fiscal 2019.
All other net sales increased 2.1 million or 20.7%, primarily due to strong net sales at our H contract Division.
H contract, which serves senior living facilities and retirement centers continue to a growth trajectory with a 15% increase an incoming orders in fiscal 2020 and finished the year with backlogs, 28% over the previous period, the nearly 20% sales growth at H contract along with 40% growth in.
Our other non residential business unit, H. and NYSE, Samuel Lawrence hospitality affirms our strategy to diversify our business beyond residential furnishings to include contract furnishings as well.
Now I'd like to call on leap and to give more detail on the age of my segment this quarter.
Thanks, Jeremy.
Beginning our summary, with the fourth quarter results have Meridian was pleased to report 1.8 million in operating income despite a 21.1 million or 17.5% sales decreased and we finished fiscal year 2020, with the backlog 8.3% over the previous year.
Our fourth quarter results are still well below our past performance. They are a significant improvement over the first three quarters, indicating that most of last year's problems are behind us and our turnaround strategies are delivering positive results.
For fiscal year 20, net sales in the Unready and segment decreased 47.2 million or 12.2%.
The sales decline was mostly attributable to one large customer. However, we also experienced modest sales declines with many of our largest traditional furniture retailers.
The large sales decline.
Access tariff costs, and higher resourcing transition costs, as well as higher inventory storage and handling costs and the quality issue discussed earlier led to a 7.2 million operating loss for the year.
Hmm I also experienced a significant negative impact on profitability from tariffs due to the nature of the company's distribution base.
Because many of our products are shipped directly from Asian manufacturing partners, rather than Stockton us warehouses, HM I was unable to build inventory before the 25% tariff was enacted.
In addition, we were unable to recover all the excess parent excess tariff costs through price increases due to the more price sensitive nature of many of our large customers.
For the year, Samuel Lawrence furniture, SLF, and Plaskett furniture company PFC turned in the strongest performance is of the two might divisions.
Although both business units experienced low double digit sales decreases versus the prior year. Both units delivered contribution margins close to budget and posted over $3 million in operating profit. Each. This performance is the result of less impact from the China tariffs less exposure to the issues with the single large customer and so.
Positive results from new sales and marketing initiatives as well as a new Vietnam based inventory mixing warehouse.
Samuel Lawrence Hospitality SL age recorded a 40% year over year sales increase as our hospitality division capitalized favorable business conditions in the segment.
Well also unwinding and unprofitable venture into the kitchen cabinet business.
Relates participated last year and significantly more model room projects, and which hotels create prototype rooms to finalize the refurbishing plans.
Since the volume of model rooms is reliable reliable leading indicator in the business this bodes well for the future.
Unfortunately, SL latest bottom line profitability did not improve with the topline sales increases much of which is the result of the issues with the kitchen cabinet business, we exited as well as and recover tariffs and contracts already in process.
Our reorganization of escalates work processes implemented mid year is also enhancing output and performance.
People right our motion upholstery division was almost 100% sourced in China.
Was consequently significantly disrupted by the tariffs.
I also experienced significant sales and profit losses with the large customer mentioned before.
The combination of these problems resulted in a significant financial loss for the division for the year.
On a positive note POI delivered its best quarterly performance of the here in Q4 in terms of sales contribution margin and bottom line results.
While the division is still in rebuilding mode. The improved Q4 results indicate that our reorganization and mitigation strategies are working.
Furthermore, we expect both our new leadership team and our new license agreement with NFL legend, Terry Bradshaw to create new customer and sales opportunities for PR in fiscal year 21 and beyond.
Eccentrics home a C. H R. E Commerce focused business unit was also negatively impacted by the product return from the single large customer as well as the China tariffs.
The corresponding price increases necessitated by the 25% tariffs combined with reduced business with a large customer slowed growth in our ecommerce sales in the second half of the year.
Countermeasures to improve sales and profitability are underway.
For example, more than half of the CH products originally sourced from China have already been resource to other countries.
On another positive note recent trends indicate that our ecommerce sales will be further advantaged by a changing consumer buying habits due to the corona virus as consumer shift their shopping activities from brick and mortar stores to online retail.
Finally, our recently launched mass channel and clubs channel business unit HM idea is expected to deliver incremental sales growth via our mass channel customers, primarily fueled by upscale ready to assemble or RT eight furniture, new product category for each of Mike.
Hey, Jim I'd up is now fully staffed with clubs and mass business specialist, which will provide us the expertise and focus to begin re growing both of those businesses. This year.
After years of consistent growth and profitability fiscal year, 20 was especially difficult for HMH, one in which we faced unique challenges that forced us to examine every aspect of our business for improvement.
We changed some leadership reorganized certain business units launched a new business unit.
Moved away from a few nonperforming manufacturing partners at Reemphasized, our merchandising and sales strategies on winning products customers and sales channels.
We believe we are entering fiscal year 21 is a vastly more capable and leaner company and we expect significant improvement once the international health economic and social crisis of the Cobot 19 pandemic begins to stabilize.
At this time I'd like to turn the call over to Paul Huckfeldt, who will elaborate further on a quarterly results.
Thanks Lee.
Consolidated average selling prices increased 1.3%.
Due to increased Asps in the Hooker branded segment domestic upholstery and all other which was attributable mostly to price increases necessitated by the imposition of and subsequent increase and tariffs as well as favorable product mix. All of these offset a small decrease in ASP at home Meridian.
These factors were not sufficient to offset the overall, 12.7%.
At volume decrease which resulted in lower order volumes across all three reportable segments.
Unit volume declines were relatively consistent across all of our reportable segments.
Consolidated gross profit decreased $33 million to 114 million in fiscal 2020, and from 21.5% to 18%, 18.7% as a percentage of net sales.
Poker branded gross profit decreased modestly in absolute terms and as a percentage of net sales due to lower sales the impact of tariffs and modestly higher freight costs, partially offset by price increases in this segment to mitigate the tariff impact.
In the home Meridian segment gross profit declined significantly in absolute terms and as a percentage of net sales.
Meridians gross profit was negatively impacted by lower sales higher charge backs.
As well as Unrecovered tariff and freight costs and some lower margin sales programs that we've been working to improve or discontinue.
Undercover tariff costs and the write down at inventory.
With quality issues had an approximately 12 million dollar adverse impact on gross profit.
Other factors affecting gross profit included higher freight handling and warehouse warehousing costs of about 1.6 million due to higher than planned inventories.
Despite a 10.9 million dollar or about 10% sales decline in our domestic upholstery segment gross margin increased as a percentage of net sales due primarily to lower material costs and lower benefits expenses. These decreases were partially offset by higher direct labor and overhead as a percent of sales attributable to the reduced order volume.
Although a small part of our consolidated results. All other contributed approximately a million dollars an increased gross profit, which is attributable to strong sales and favorable product mix at H contract.
Good solid consolidated selling general and administrative expenses decreased in absolute terms, but increased as a percentage of sales due to decreased selling expenses and compensation costs on lower net sales base in fiscal 2020, partially offset by higher costs related to the Asian sourcing transition and about 660000.
Isn't in startup costs for two new business units.
For these reasons operating income in fiscal 2020 decreased $30 million to 22.7 million operating margin decreased from 7.7% to 3.7%.
The balance sheet, our cash balances increased about 25 million from fiscal 2019 year end just to 36 million. Despite the sales decline, we generated 41 million in cash from operating activities much of it from the collection of accounts receivable and reduced inventory levels and $1.4 million proceeds from the sale of a form.
Our distribution facility, which we had owner financed.
And by the way when looking at our balance sheet. Please remember that the adoption today associate 40 to the new lease accounting standard at the beginning of this year put about 40 million of new assets in a similar liability on our balance sheet and affects the comparison to last year's balance sheet.
At the end of fiscal 2020, we had access to almost 26 million on our revolving credit facility and $25 million of cash surrender value of company owned life insurance, which gives us some additional financial flexibility.
Despite the lower profitability in fiscal 2020, we continue to have confidence in our business model and the steps, we're taking to return to historical profitability. So in early March our directors approved a 16 cents per share dividend.
What's your current share prices gives us a dividend yield of about 3.8%.
Now I'll turn the discussion back to Paul Toms for his outlook.
Thanks, Paul.
David 19 virus pandemic presents an economic challenge of unprecedented proportions with an uncertain time frame.
The last several weeks.
We've seen an erratic stock market.
Mike and unemployment claims supply chain disruptions.
And the cancellation of business, social sporting academic and religious gatherings.
Alluding to high point pre market in the post fundamental in the spring Highpoint furniture market.
Some of our customers have temporarily closed due to stay at home orders across the country.
We've seen an industry wide decrease in demand and expect ourselves earnings and liquidity to be down material in the fiscal 2021 first quarter compared to the prior year period.
But are unable to estimate the extent of those decreases.
We also have limited visibility on the extent to which our businesses may impact the impacted by the outbreak.
But we're preparing for a significant downturn lasting anywhere from four to eight months.
With strategies in place to preserve cash and reduce operating expenses.
Situation is very fluid and further delays and the receded goods.
Other unanticipated impacts our supply chain, including on direct imports or components purchased domestically or on our retail customers could have a more significant impact on our future business.
We're thankful to be part to be in the strong financial position, having built significant cash last year.
And enhancing our cash position further so far this year.
Our lower fixed cost broad distribution business model gives us more flexibility to scale, our business up or down.
We're also fortunate to have a strong presence in E commerce.
Jet channel is holding up during the crisis so far.
And our 95 years business our company has been for recession, a depression or World War terrorist attacks natural disasters and every other type of crises imaginable.
We have endured each time by coming together working as a team.
Taking prudent business decisions and not letting pure cripple us.
Held at our team is coming together to meet these challenges just as we came together to meet multi faceted challenges last year.
This ends the formal part of our discussion at this time.
Turning the call back over to Joe well for questions. Thank you.
Thank you as a reminder to ask a question you will need to press star one on your telephone which are your question because the pound key.
Please standby will be comprised acuity roster.
Our first question comes from Anthony Lebiedzinski with Sidoti and company. Your line is open.
Thank you and good morning, everyone.
Thank you for taking the questions. So.
I guess first just to take a step back.
I appreciate the color about the different segments.
So.
Looking at the home Meridian obviously.
The number of challenges could can you just kind of remind us as to the extent of.
All the costs that you had old is sales chargebacks and the demurrage costs and everything we can you just refresh your memory us.
What the extent of that was this just to give us a senses to what those costs.
You don't think will repeat and in your fiscal 2001.
Paul let Phil do you want to take a stab at that.
Sure.
In the in the aggregate I think we're looking at about $10 million of of costs that were unique to the year about half of that maybe a little more.
It was related to a large charge back and also the related.
Inventory write downs on on a return on the return related to that charge back.
We had a couple of I think I mentioned in the call. We had about 1.6 million of of additional.
Warehousing related costs as having having entered the year.
With.
More inventory than because of the because of the slowdown in the early part of the year end. The fact that many of our customers loaded up on inventory at the end of fiscal 19, we came into the year with more inventory than than anticipated that was.
Approaching a couple of million dollars more and then we also had another couple of million in.
In excess freight and storage charges on our product coming in.
So so I would say this is about overall combined it's about $10 million of.
Unique probably that have unique expenses that we don't expect to recur in the current here.
Okay. So that's a meaningful number okay.
Okay, and then as far as the H. am I have you guys talked about the some of the reorganization that you did.
And the expectation that should do better after the Covance pandemic passes so.
Just just wanted to get a little bit more details as far as you know.
Each of my.
As far as a whole reorganization efforts.
And just give us a little bit more color that'd be great.
Lee.
Sure Anthony So we have new leadership in place now PR I as a new president and a new vice president of sales and merchandising that were added earlier. This year, both have extensive experience and expertise in the field and we think are very well suited to grow.
So the PR business and make it significantly more profitable.
In addition, we hired three executives to stand up the HCM idea division.
Which are focused on on the mass channel and the clubs channel and the RTL products segment that will be largely incremental business for each of my NRT, a and then continuing business and growth and profitability in the club segment.
So thats five new executives that we added in the last in the last six to nine months going forward, we feel good about that.
Okay great.
Okay and then thus far is your reliance on China. So you cut that in half. So it's about 20% I believe so so what is your obviously.
Colin I guess, maybe it might be concerned but is it safe to assume that you'll continue to reduce your reliance.
On China with additional product sourcing being shifted away from from there.
Anthony This is Paul Toms and yes, our intention is to continue to reduce our reliance on China as a source country I don't think you'll see the same.
Magnitude of reduction this year as we had last year I would say think.
We have said somewhere on our.
One of our filings recently that maybe we get it down the 16 or 17%, there's some things that they do in China large cutting so product.
For some of our larger customers are not feasible and other countries right now.
Got other businesses that we get paid for the tariffs on the cost of.
Doing business in China, our customers still want to product out of China and are willing to pay us for it so and then.
There are other businesses that were on the hooker branded side, where.
We're just not able to ramp up as quick in Vietnam, as we'd like and rather than disrupt our supply chain will will just move it a little bit slower pace, but I think probably the.
From 2022%.
Our total cell source out of China, maybe to 16 or 17 this year would be pretty good estimate.
Got it okay. Thanks for that explanation so.
So you also talked about E. Commerce, obviously that stand out now so can you give us a sense as to what year.
Penetration is in terms of.
Sales.
Overall sales for the company or percentage of sales that goes to ecommerce retailers.
Paul comps again, I'm going to guess somewhere between.
12, 13% of our total volume, maybe a little bit more and it varies between divisions domestic upholstery almost non.
All meridian is probably a bigger share their business and as a broker branded but.
Yes, I think north of 10% at both recur branded and home Meridian.
Got it okay.
So.
So obviously.
You guys entered with.
Backlog up 9%, but you talked about the order cancellations and the deferments deferrals from customers.
So given the timing where you are now you only have about two weeks left to the first fiscal quarter. So.
No I know Paul you did mentioned you expect a.
A significant negative impact on the on the quarter.
Is there any more us fig any more color that you can provide us how we should think about the extent of your.
Sales and earnings for the first quarter given that you already.
Like I said, you only have two weeks or so left in the quarter.
So the corona bars actually impacted us in different ways within the same first quarter.
To start our fiscal year, which is typically run around first the February issuers February 3rd.
You think about that that's when the virus was.
At its peak campus disrupting the return to work.
Employees in China, and a lot of Chinese employees that are advantage button supervision of factories in Vietnam.
So early in the quarter the disruption from the virus was actually on our supply side that factories that.
Ramp up as quickly as normal and there was delayed shipments.
Six weeks later it starts to impact here and as they put it.
Although.
Efforts in place here.
Our business is close before shelter at home things like that.
Significantly reduced demand and our large customers.
I have no hundreds of stores that were close.
Immediately canceling orders postponing the orders asking that you don't ship anything.
[music].
This.
Like overnight came to a halt.
And that's probably going to impact the last six weeks over a 12 week quarter 13 week quarter. So.
No more probably I mean are planning as did ask about second quarter, but we expect made to be very similar to April and business to get somewhat better and June July August and then hopefully better again.
September.
It's it's hard to say what the impact is in the first quarter February in spite of not being able to get production out of.
China in Vietnam that might have impacted a few direct customers.
When we ship containers direct from Asia to their stores.
Generally February was pretty normal.
Similar to the February in the prior year.
In March the first two weeks were reasonably normally we started to get production backup in Asia.
So.
First half of March was normal I would say mid March is when everything is kind of.
Came to stop there was maybe some.
Business that was in the pipeline that we realized.
But by early April really late March.
We realize we didnt have sufficient orders to run our domestic upholstery plants full schedules we furloughed.
Two and probably be three weeks.
All of our domestic upholstery plants.
Weve furloughed about half of our warehouse employees because of the same reduced demand so.
It's really hard at this point to say, how the quarter, it's kind of shake out, but it will definitely be.
Hi, and prior year because of the disruption.
Right. Okay. Thanks for that color. So obviously as you noted.
You are reducing.
Salaries and some other expenses.
You're reducing your capex, just like other companies as well.
So this is so as far as a first I guess on the expense side of the business I mean.
In total I mean, how much would you say.
For the either.
Quarterly basis or them annual base. However, you want to do that.
The extent of some of these.
Operating expense.
Cutbacks I mean.
Just wanted to see if you guys could quantify that and I guess capex.
Thank you said about 2 million customers. So I think is the capex for this fiscal year, but just wanted to clarify that.
Okay. So our operating budgets and expenses that we have control over fixed expenses that we have control over.
We set a target of 15% to 20% reduction.
Those of about 10% in salaries and wages.
I think where.
Or very close to that so baby, all and you're looking at 12% to 13% decline.
Spending.
Every month and Thats first month, we'll have some offsets to that.
Severance for employees that were dislocated.
Would be the larger one some of the things.
Savings will take a few months to work with landlords on.
Any concessions and rent.
Over other vendors, but.
I think on spending size, you could expect 10% to 12% less than some of our other cost fluctuate with sales commissions royalties things like that which would be down proportionately.
The cells.
Capex we have.
Relatively small capex for company our size, because we don't have a lot of.
Retail stores or other.
Large manufacturing operations.
Poultry plants or.
Nowhere near as capital intensive this case goods facility choose to be.
So capex, we have I think budget this year of around $5 million and were identified at least half of that maybe 3 million that we could postpone into future years without any significant impact to the business.
Got it Okay and then.
Last couple of questions for me I guess is just.
How should we think about priority of.
Your cash flow usage now.
Plus also.
I know you're.
Your debt matures next early next year as far as your expectation to renew that the facility.
Just wanted to get your revolving credit facility as far as you what is your expectation to be able to to review that.
Great. Thank you.
Falls fed working on a lot of models. The last few weeks, so I'll, let him take that question.
Okay. Okay.
Regarding the credit facility, we fully intend and expect to renew it we've had discussions with our bank obviously.
There are no firm commitments.
But.
We're working closely with our bank to make sure that they are understand our situation.
I'd like many of many of their other clients.
Fully intend to renew that I think the.
Right now the cost that we can start renewing it now that the costs are pretty high. So we just continue to monitor that we've done a lot of cash flow forecasting and.
I believe that we have sufficient liquidity to get to get through this crisis of course, if it's early in the crisis and Weve.
There are a lot of developments yet to be seen so I think over the next couple of months, we'll have a clearer picture of.
Okay.
Of our real.
Total cash needs and and and where we need to go with that.
But I think we're we're comfortable now for I think we've mentioned a couple of times, we entered this year.
With a solid cash balance and we've built the cash balance since then.
So we have the advantage of of having the time to evaluate the situation before making more any more deeper more drastic.
Adjustments.
I know that was kind of a vague answer but at this point theres a lot of uncertainty.
Right right, but I.
I guess the other.
What I was trying to also ask as far as dividends versus debt reduction.
I know you guys pay the dividend during the last recession.
Unlike a lot of other companies, which did not pay the dividend so.
Just wanted to get a better sense of how you're thinking about the.
Dividend payments versus debt reduction.
Debt reduction we plan to bank are regularly scheduled debt payments.
Yeah.
And I think that what I was getting that when I said the luxury of not having to pull levers to soon is that we obviously need to evaluate the dividend based on how things develop we'll have to we'll have to have conversations about our next dividend.
In early June and I think we'll have more clarity obviously, it's got to be on the table, but it's not something that we that we relish doing so.
So I think that we have the luxury of.
A couple more months of.
Yes, a couple of more months of.
This visibility before we have to make a decision about the dividend, it's not our attention to cut it but.
Survival and liquidity is the most important consideration.
Got it Okay and Anthony that's all I had a.
Ben That's I think 50 years, we've had a consistent history of paying dividends even through the last.
Financial crisis 2008, 910, so were.
We definitely.
Put a priority to maintaining the dividend but.
That.
Everything remains to be seen in terms of.
Demand from our customers for our products.
How are customers pay us for the products, we have already shipped them.
With this I think in six weeks, we'll have more visibility than we have today, so weve postpone the decision on the.
Late June dividend until early June.
Got it okay. That's all they have thank you very much alright.
Thank you. Our next question comes from JP Jagan with global value investment. Your line is now open.
Hey, good morning, Thank you for taking my questions.
You spoke on it a little bit, but I'm, hoping you might elaborate on your cost structure, specifically the variable component versus fixed component.
Specifically, how you can scale the business.
We did Paul you want to take a stab at that are out yes.
About.
Five 5% of net sales.
Is that maybe just a little bit under that are in that ballpark.
5% net sales are variable SGN, a cost thats commissions.
Design designed for royalties and expenses and some.
Some more flexible marketing costs beyond that most of our operating costs are fixed or semi fixed which is that's the area that we've that weve focused on trying to make.
Cost reduction decisions, whether its layoffs or.
Looking for vendor concessions or just reducing spending in cases like some marketing spend.
So thats the scaling of the business some of it naturally scales with the with variable costs. The rest of it are the hard decisions that fit.
That we've had to make whether it's like said layoffs or furloughs or.
We're going to our vendors and partners for for additional contributions.
This is Paul Toms I think what's helped us and past downturns is that.
Our cost of goods sold doesn't vary.
Hardly at all.
And really.
Hi sales were lower sales periods, our costs from our vendors, which is about 85% of what we sell as source.
Outside of our own plans.
Those costs, just don't change as opposed to when we had.
Are you factoring facilities and if you're under utilizing them the cost.
Product to produce went through the roof.
Our upholstery plants, 15% of our total businesses upholstery.
Produced domestically at our plants and.
The costs will go up on those products, but labor as a key component there.
We don't have as many fixed cost for machinery and equipment and those plants is whether the case goods facility.
We're also.
Thankful at this time that we don't have retail stores are a reason for not having retail stores was limited our ability to sell into a multitude of other distribution channels, but.
Thank you know.
Right now we're grateful we don't have.
Cost of.
Pieces of other cost related to retail stores.
Then in your 8-K, when you reference you low fixed cost broad distribution business model gives you the flexibility scale the business up or down you're referencing your distribution model and the lack of a retail footprint and or your fixed cost structure relative to revenue not necessarily fixed cost as a portion of your cost of goods sold.
Cost of goods, so pretty much stays the same.
That's right most most the cost of goods sold is variable, but that's right Paul.
Great.
Thank you for the clarification.
My second question is given the.
Unique in fluid market situation right now you talked about where you see opportunity.
Thats a good question I mean, I think this has shown that E commerce, which is a significant part of our business I think we're further along in.
Developing E commerce and most of our peers.
As certainly an area, we want to continue to grow but honestly.
This point, we're more focused on.
Ryan to navigate our way through a significant downturn in cells.
All the impacts of.
Trying to.
Reduce the amount of product coming from overseas.
This making sure our employees are safe.
Trying to.
So what we can do to take care of down during this time, we havent been is focused on.
Opportunities, we've got things that are and works have been in works for probably.
Most of our business units new products new programs.
Categories to be on new licensing opportunities, they're all out there even launch and HM idea into ready to assemble case goods line that will be sold through mass channel that we havent been at a meaningful way before I think product category, we havent been at all so those things are all.
In the Hopper, but.
Because really the last.
Four weeks as Ben just what's right in front of us and navigating our way through this.
Great. Thanks for your time that does it for me.
Alright, thank you.
Thank you.
Our next question comes from John Deysher with Pinnacle. Your line is now open.
Hi, good morning, Thanks for taking my question.
I was just curious back to the backlog question I think you indicated it was up 9% at year end.
What was the number at your end to end of January and what would the number be.
At the end of March.
We can get you the number for the end of January I'm not sure that that number at the end of March would be meaningful be costs. They are still orders in the backlog that we know.
They're not shippable in normal time frame customers mail left them, but said don't ship days until like give you.
Release and that could be two three months down the road so.
I don't have that number it's not a number that we typically provide other than to say up or down by a certain percentage, but I can tell you. The backlog at the end of March is going to be less than it was at the beginning of the year.
And I'm not sure that the backlog if we gave you the number not sure that that even as accurate number of what we could actually ship today that backlog.
Okay. That's fair, but you are and will be disclosed in the 10-K.
Well okay.
Good.
What were the quality issues that led to.
The decline with the large customer.
And.
How have those spend six.
At this point.
Doug or Lee would you like to answer that.
I'm sure I'll do that Doug Townsend.
Quality issue was.
Manufacturing.
The fact that.
Within a given very small percentage of a very large cutting it was.
Less than.
That's form half a percent.
Right.
Because it wasn't just that we had to return the whole thing.
That's all.
It was on inspection issue and we dealt with it in terms of their quality management team over there and Paul.
And the management of the factory.
So because it was less than 1% of I guess, the total order size you had to.
Take back the whole inventory.
Yes.
And what country was that you know.
Yes, it came out of Vietnam.
No okay, what's your confidence thats been solved at this point.
Yes, we put in new procedures, no new management new.
Excellent okay.
Okay, all right good that's encouraging and the large customer.
Got you referenced or are you still doing any business with them.
Lower level are you.
You are yes, that's at a lower level, but there's still a significant customer.
Okay, all right so that the tour still stays open there.
Alright, Thats good news.
And I guess the question is you know we're talking about rolling returns that in terms of the economy opening up depending on which areas are most impacted.
Hi.
In terms of your customer base.
Hello.
How would you say that those are positioned.
For that.
Rolling reopening of the economy I think we all know where the hot spots are but how would you say your customer base is position.
As we go forward.
John This is Paul comps.
I would say.
We're position probably as well as anybody could be costs of the broad distribution, we have underwear.
Selling.
Retailers.
25, 26 different channels of distribution from some that haven't been as impacted or have actually.
Ben advantaged by this like E Commerce catalogs.
We're selling regional.
Powerhouses.
Havertys in the southeast rooms to go in the southeast crossed I guess parts of the.
Part of the country.
Macy's as a customer Thats national course that had their own challenges through this.
Well sell and other department stores, we're selling a lot of independent furniture retailers some that are.
Single store mom and Pops and.
Remains to be seen how theyre ferret through all of this others that are strong in particular markets like Berkshire Hathaway furniture divisions. So.
I think we are so broadly distributed set.
It will come back kind as a country comes back there is not really a pocket of the country that were more concentrated and.
Elsewhere.
Okay, and remind us again, what was the total E commerce site as a business last year as a percentage of total roughly.
Paul Huckfeldt you can help me here, but I think and companywide about 12% to 13% of cells.
I, yeah that sounds about right.
Of course, that's that's pure play.
Theres omnichannel, so so probably more of it sold by the Internet, but thats the that 12% probably about right for pure play comps.
Alright.
Thanks, very much and good luck. Thank you. Thank you.
Thank you.
Going any further questions at this time I would now like to turn the call back over to Paul Toms for closing remarks, alright. Thank you, Joe well really have nothing additional to add as we've said multiple types of this call. These are really unprecedented times.
I have no doubt that company, we'll get through and we've got a strong management team.
Everybody's focused on doing what we need to to.
Get through this crisis.
Look for it to reporting back to you and about two months, we're doing and having a much more visibility into the impacts of the current environment crisis. Thank you for joining us today.
Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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