Q1 2022 Hooker Furniture Corp Earnings Call

Greetings, ladies and gentlemen, and welcome to the Hooker furniture quarterly Investor Conference call reporting its operating results for the first quarter 2022.

At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.

You asked the question during the session you'll need the press Star then 1 on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Paul Heartfelt, Vice President Finance and Chief Financial Officer Berg of furniture Corp.

Okay.

Thank you Liz.

Good morning, and welcome to our quarterly conference call to review the financial results for our fiscal 2022 first quarter, which ended May <unk> 'twenty 'twenty 1.

Joining me. This morning is Jeremy Hoff, our Chief Executive Officer, We certainly appreciate your participation. This morning.

During our call we may make certain forward looking statements, which are subject to risks and uncertainties of.

The discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our fiscal 2020 to first quarter of results.

Any forward looking statement speaks only as of today and we undertake no obligation to update or revise any forward looking statements to reflect events or circumstances after today's call.

For our fiscal 'twenty, 2 first quarter, which began in February of <unk> 'twenty 'twenty, 1 and ended on May 2nd consolidated net sales were $163 million, an increase of $58 million or <unk> 55 per cent compared to the prior year first quarter, we reported revenue gains in all 3 of the company's reportable segments with home Meridian sales of 27.

Or 46% Hooker branded sales up $24 million or 89%.

And domestic upholstery sales up $7.7 million of 46 per cent compared to the prior year first quarter the.

The company reported net income of $9.4 million or <unk> 78 per diluted share compared to a net loss of $34.8 million.

A year ago, which was principally due to a $44.3 million or $33.7 million after tax.

The noncash impairment charge now I'll turn this call over to Jeremy to comment on our first quarter results. Thank you Paul and good morning, everyone. Our goal of this quarter was to return to the growth trajectory. We were on prior to the global pandemic and economic downturn, we were pleased to have surpassed that goal.

While we expected the sizeable sales improvement over last year's first quarter when the pandemic driven economic downturn began in mid to late March our results. This quarter represent a strong improvement over the first quarter of fiscal 2020 as well.

Sales were up 20% compared to the first quarter 2 years ago profitability has improved significantly in all segments and incoming order rates are more than double of our historical norms.

In fact, both of our quarterly revenues and net profit performance represents record high sales and earnings for the company's fiscal first quarter.

Especially proud of our team for delivering the strong rebound of year. After the onset of the pandemic despite industry wide logistics challenges, including higher Ocean and freight transit cost and shipping equipment bottlenecks raw material shortages and inflation.

The Hooker branded segment led the way during the quarter with the nearly 90% sales increase compared to a year ago, while the home meridian and domestic upholstery segments, both reported sales increases of approximately 46%.

We attribute the double digit gains to industry wide high consumer demand for home products and dramatic improvements and expansions of our product lines and rationalizing our stocking inventory, helping us to maximize shipping and production capacity along with improving our cash utilization.

In order to accommodate travel restrictions in place earlier this year the high points spring market was officially pushed of June.

In its place the hooker branded home Meridian and domestic upholstery segment participated in a high point premarket event in late April Hooker furniture <unk> results from the pre market were exceptionally strong in terms of traffic buying activity and reception to new product introductions, we enjoyed record attendance at the high point per.

The market with very positive customer response to a number of introductions, including Hooker case goods collections. The new brand launches of the Scott Brothers license collections Commerce end market and accent furniture line with pricing styling of materials to reach millennials and Gen X and hooker upholstery as launch of the upscale aspire.

Motion seating brand.

Consolidated operating income for the quarter was $12.2 million compared to a $45.4 million operating loss in the prior year period.

Last year's loss was primarily a true, but it will to $44.3 million in noncash impairment charges related to a write down of goodwill and trade names in the home Meridian segment and goodwill in the Shenandoah Division prompted by the impact of the COVID-19 downturn on our financials last year now I want to turn the discussion over to Paul heartfelt.

Who will discuss highlights of each of our reportable segments.

Thanks, Jeremy.

I'll begin with the Hooker branded segment, which led the way in the company's record first quarter sales and earnings.

Net sales increased by $24 million of about 90% and incoming orders nearly doubled compared to the pandemic impacted the prior year quarter. The quarter ended with a backlog of 3 times that of the prior year first quarter because much of the segments product line.

Shift out of U S distribution centers and product has ordered on the consistent weekly basis, we had goods in stock, which enabled us to ship more than expected. Despite the limitations on ocean vessel space in trucking capacity.

With our strategy to prioritize best sellers, we maximized our ability to perform against significant operational constraints and and due to the industry wide demand surge for home furnishings, we were able to sell through some slow moving inventory in this favorable demand environment.

As a result, the hooker branded segment remained highly profitable thanks to increased revenues and reduced discounting from contributed over 75% of the consolidated operating profit for the quarter.

The strengthening of our product line over the past 2 years, including and expanding lifestyle collection focus and a renewed emphasis on our value proposition within our various product categories has begun to significantly affect our top and bottom line performance.

Now moving to the home Meridian segment.

<unk> Q1 sales were $84 million up 46% over the prior year.

The Q1 sales increase was the result of continued strong retail demand versus weak demand during the initial weeks of the COVID-19 related economic shutdown last year.

Q1 sales would have been higher had we not struggled with inventory availability and shipping limitations.

Q1 operating income was 866000, an increase of $3.3 million over the pre impairment loss recorded during the industry shut down last year.

Operating income was driven by higher sales reduce the allowances and reduce fixed expenses.

Q1 profits were constrained by significant excess freight cost experienced during the quarter. Unfortunately. These headwinds are expected to continue impacting results over the next several months.

The supply chain related headwinds, we are facing cannot be overstated.

There are multiple factors at play that include general increased global demand for imported products, particularly for homes of significant shipping equipment disruptions, resulting from the Covid pandemic and the recent blockage of the Suez Canal.

Current unloading bottlenecks at most U S ports and rapid dislocation of empty containers. All of these factors are compounding of situations.

It's difficult to secure shipping space at virtually any price and the price of shipping has multiplied to levels that discourage retailers from the leasing their shipments.

This dynamic creates another compounding issue in factories cannot move out finished goods. They quickly run out of space to operate which forces them to stop or slow production despite record consumer demand for furniture.

In General <unk> service position improved moderately in Q1 as inbound shipments replenish the out of stock items. Nonetheless, logistical limitations will likely continue the constraint service at some level for the balance of the year.

As mentioned on our last conference call material and product cost increases are driving up our cost of goods sold.

We're working diligently the past these product and freight increases along to our customers. The vast majority of our retail customers understand the situation are accepting these increases regardless of their time lags that negatively impact margins in the short term. We continue to work on this issue and expect to return to target margins later this year.

Breaking the results down by business unit Q1, Q1, net sales were up strongly at Pulaski furniture, Samuel Lawrence furniture at Prime resources International and <unk> idea largely driven by weak comparisons in the prior year and strong demand this year.

Sales of eccentric homes, our ecommerce focused business unit were flat due to the surface limitations and strong ecommerce sales last year.

<unk> of our hospitality division struggled with significantly lower demand due to the ongoing negative impact of the pandemic on the hospitality industry.

Overall Q1 profits were much improved across every business unit, except <unk>, we believe the hospitality business will struggle for at least another quarter. However, we are beginning to see signs that demand will improve later this year.

Q1 orders were $85 million up 44 million or of 108% compared to the unusually low order rate, we experienced last year during the early weeks of the pandemic.

Incoming orders and backlog continue to run much higher than average the resulting from a combination of robust retail demand and ongoing shipping limitations.

HMA participated in the high point Premarket event in late April of note was the extremely enthusiastic response to our Scott Brothers brands, Scott living and drew and Jonathan home, which are plan to officially launch later this year.

We have numerous major dealers committing to buy the branded introductions now in Florida and as soon as we can deliver.

Even though the high point market does not open until tomorrow and no Scott brothers furniture products are yet in the stores, we're already hearing about consumers enquiring about where they can buy these products at retail.

All of these positive reactions underscore the tremendous opportunity, we see in bringing together <unk> 1 of the largest suppliers of home furnishings with the Scott Scott Brothers Global the most popular celebrity lifestyle brand in the home furnishing space.

The reach of the Scott brothers brand by of print TV streaming social media and other digital mediums combined with the scope of <unk> design product development.

The development sourcing sales and distribution capabilities create a formidable combination to drive enthusiastic consumer buying for years.

Turning now to domestic upholstery the segments net sales increased by $7.7 million of 46% during the fiscal 'twenty 2 first quarter due to significantly increased sales at all 3 divisions.

In response to the COVID-19 restrictions and reduced orders that began in March a year ago manufacturing plants at Bradenton Young in Shenandoah were closed for about a month during the prior year first quarter and Samar operated at about 50% capacity as.

As a result, these divisions reported sales at a much lower level during that period.

Although we are encouraged by incoming orders for domestic the domestic upholstery segment during the quarter, we started to experience form of allocation shortages and inflation in certain raw materials, such as palm lumber plywood fabric and mechanisms during the second half of the quarter.

The supply chain and manufacturing can states led to a reduced led to reduced production levels, which adversely impacted sales volume and operating efficiencies for much of the quarter. We expect these challenges to continue in the short term.

And in all other net sales decreased by 368000.

Or 12% compared to the prior year period, principally due to a 17% decrease in H contract, which serves the senior living and retirement industry.

As you know the senior and the senior living industry was hit, particularly hard by the Covid crisis and has not yet recovered how.

However, we believe the ongoing debt process the progress in vaccinations will improve conditions in most senior living communities and H contract incoming orders increased by 9.5% during the quarter and the backlog was 35% higher than a year ago.

Despite the sales decline H contract will contribute the operating income for the quarter.

Lifestyle brands of new business start in fiscal 2019 also reported a small profit.

Finally, I'd like to touch on our cash and inventory position.

Since the end of the last end of last year, we've increased our inventory levels by about $10 million. This increase was about evenly divided between products in transit and in our warehouses.

That will help get us back in position to better service, our backlog and increase our in stock position on bestsellers.

Cash and cash equivalents stood at $61.6 million at fiscal at the fiscal 'twenty, 2 first quarter year Corp, first quarter, and a decrease of $4.2 million compared to the balance at the end of fiscal 'twenty 1.

Consolidated inventories stood at $81.5 million compared to $70.2 million.

At the physical at fiscal year end.

An increase of $11.3 million.

We expect our cash balances to decrease slightly in the coming months as strong sales continue and we build inventories to meet increased customer demand.

Now I will turn the discussion back to Jeremy for his outlook. Thank you Paul our consolidated orders and backlogs are more than double historical norms as we head into the summer months, given the strong position, we're cautiously optimistic considering the industry wide supply chain logistics and raw material shortages and inflation.

We believe we have mitigated these dynamics as much as possible through surcharges and price increases yet the supply side factors are unpredictable and can involve unexpected changes occurring almost daily.

Several macroeconomic factors provide a nice runway for growth such as the ongoing strong housing market and favorable demographics with the massive millennial generation, becoming highly engaged in household formation and home furnishing per purchases on the negative side, we expect increased competition for the <unk>.

<unk> discretionary income from industries, such as travel apparel and events as the COVID-19 vaccinations continue to rollout.

While we expect the extraordinary levels of demand for home furnishings to diminish somewhat we also expect the demand for home furnishings will settle into a higher level of demand than pre pandemic consumers aren't going to fall out of love with their homes and we are positioned to help them enhance their homes with comfortable stylish and quality of home furnishings, we bill.

<unk> our company is strongly positioned to win in this environment.

That ends the formal part of our discussion and at this time I will turn the call back over to our operator Liz for questions.

And you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.

To withdraw your question press the pound key.

Our first question comes from Anthony <unk> with Sidoti <unk> Company.

Good morning, and thank you for taking the questions.

So first I wanted to see if you guys could quantify perhaps of the.

You know order trend or maybe the.

If you could quantify the backlog. So that you are seeing now at the end of the first quarter that'd be very helpful.

Let's see.

Yes.

The consolidated backlog as at the end of the quarter was $280 million compared to 91 million of the same time last year.

Okay got it okay. Thanks, Paul and then.

As far as the price increases obviously.

We are an extraordinary time period.

Given the inflation so.

Can you just talk about how many rounds of price increase have you done over the past 12 months or so or maybe also like what would be the cumulative effect of the price increases you've seen a lot like the last few quarters.

Good morning, Anthony This is Jeremy I would tell you that it really varies depending on which of the 12 brands that you're asking.

So if you're in domestic upholstery, you're reacting to raw material increases and shortages of foam and.

Various.

The movement.

And the various.

Various movement parts of the furniture that debt increase as well so.

Domestic upholstery, you would be looking at.

Like to 2 different increases would probably be an accurate number across that segment.

When you look at more of the important divisions.

The freight.

It's really it's been unpredictable at best and it's usually a reactionary versus.

What you would like as being the being able to be proactive so you find out.

And of obviously end of each month, okay. What what has happened to freight at this point. So that's been a little more reactionary with with the.

The surcharge strategy, which the surcharge has probably changed 3 or 4 times on our different important companies and the.

Then there's been also.

First cost increases from factories that vary by brand of import products as well and so I can't really say of consistent because they are different with each 1 of them but.

We have everything from 2 different adjustments too.

Zero adjustments, thus far on factor increases.

Got it okay, yeah, thanks, Jeremy for that yes.

Yes, so in terms of your SKU rationalization.

Obviously, you benefited from that in the quarter.

Yes.

Is it possible for you guys to give some more details as to the the benefit of that you saw in the quarter and then what's the outlook going forward as far as the benefits from that SKU rationalization.

Yeah. So.

Fortunately, we started pretty deep into that exercise on our largest warehouse.

Graham, which is really the hooker branded product.

And that really became an a b C mentality not to over simplify it but you know the really trying to make sure we werent investing cash in CS trying to manage the obsolescence at very low levels, which we've been able to do and really putting all of our capacity and all of our utilization.

Of our container space towards A's and B's and.

Definitely helped us weather the storm that we're in for share and it's and it is significant and it will continue to be significant because we have of extremely disciplined approach about how we're going to utilize our cash for the stocked items. It allowed us the ships at the levels right right right.

Got it okay. So you think this will benefit you guys from the balance of the year as far as the SKU rationalization.

Yes, it was what it essentially does when we when we have the large transfer of product that we would love to be able to stock up more products in our warehouses, but when we do have large transfers most of it sold.

So in that channel.

Those are those are skus that are obviously are better skus, so and we're not stocking up skus of adult matter.

Got it Okay and then so you know this this past Monday, we just wrapped up the memorial day.

Weekend, which is typically.

Strong selling season for retailers. So just curious you know coming off from the Memorial day.

What are you hearing from your retail partners as far as the demand outlook.

Very strong everyone. We've spoken with is relayed to us that memorial weekend continued the.

Very strong demand environment that we're in and.

So that was encouraging so we really haven't seen much of a lull in the demand.

Really since <unk>.

Just past the Pan just past the start of the pandemic.

Okay, Great that's great to hear and then yes. The couple of more questions from me so.

So Jeremy.

But when you joined.

The beginning of February 1 of the things that you put in places.

<unk> 1 of 1 company 1.

Culture, So just wanted to get a better sense as to what you've done.

Have you seen flow from that initiative.

Should we think about that from.

For the balance of the year.

Well.

We've been able to quickly see benefits I believe from all of our operations all of our operations coming together and really <unk>.

Reported in each of the 12 businesses with utilizing our scale so yeah.

Having 1 team that's H M. I agree of another team that hooker branded and in another right. So we took all of those really good people and by the way. It was not this was not a cost saving exercise it was of get better exercise it was us becoming more efficient and getting better at what we do and trying to be the best sourcing company that we can be the best.

Quality company and the best safety. So we try very hard to make sure everyone is running the same direction and working on what we need to work out with all of the good people that we have and that's what it really has done.

Got it and then last question from me so given the strong balance sheet that you guys have I mean, what is your outlook for acquisitions.

We continue to fine tune.

Our profile the regarding what type of company, we would be interested in and so our management team has and our board of very well aligned and what that would look like.

And we were very I've said before we're not in a hurry to do anything that wouldn't be positive and the right fit culturally the right fit.

EBITDA of the right fit and all in all categories that matter. We wanted we would want to make sure that that it would make an incremental difference and be accretive we don't want anything that would possibly be dilutive.

I am stating the obvious but.

That's where we are and if that doesn't happen we won't buy any 1 right.

And we're comfortable actually having the strong balance sheet makes us.

It's been a tradition in this company and it makes us a lot more comfortable weathering these ups and downs.

We weathered the Covid crisis pretty well we.

We can look back 10 years ago 10 years ago to the.

To the recession, and I think having that maybe what you might consider an access of balance sheet.

It's a pretty positive thing when things things get tough. So so we're not in a hurry to spend that money now, but we will spend it for the right acquisitions.

Right. Okay. Thanks, a lot of sensible thing the best of luck.

We appreciate it thank you Anthony.

Our.

Next question comes from Sandy Mehta with evaluate research.

Yes.

Congratulations on the strong results all of the Capex that you guys are doing including the the 800000 square foot facility in Georgia.

Can you tell us once all of these facilities are up and running.

What would be the run rate revenues, the incremental revenues as well as profit of few hope from get.

To get from all of this incremental capex. Thank you.

Well, that's a tough 1 the.

The the.

The warehouse in Georgia is primarily of cost saving exercise now obviously, we hope to grow our warehouse businesses.

Which is which is like our E Commerce E Commerce business in particular, but Theres also a new initiative to.

To grow the warehouse business on the home Meridian side, which has traditionally focused on mega accounts.

The cost saving on that is the difference between calling containers 25 miles or.

The Savannah port versus about 300 miles to the.

Of our Georgia, and North Carolina ports. So that's the that should be a significant cost savings.

It will it will take days off the transit process will allow us to ship more quickly and honestly, it's the there's an environmental.

Benefit too because we're not running trucks up and down the road.

So.

I think we expect to see incremental growth, but that 1 is primarily of cost savings.

Some of our other major projects. The ERP is it's time to upgrade that AARP I'm not sure. You can you can pay the incremental savings are incremental growth to an ERP project, but those are the end of life systems that need to be replaced and those are going to support our project 1.

Yes.

Bringing the company together as a single as the single back office operations. So.

I am dodging your question a little bit but.

Think that they are all they are all going to be accretive to the bottom line, maybe not all of the topline.

And the current housing boom in furniture boom.

Or your thoughts on the longevity of the cycle do you think that demand will remain strong both for housing and furniture.

<unk> it till the end of next year at least thank you.

Yeah, we do we believe we have a nice runway for demand mainly due to the demographics.

With millennials really starting to purchase homes and really starting to furnish these homes.

And we feel like we have some dynamics that have occurred from the pandemic with.

Consumers moving out of big cities into larger homes, there's a lot of things going on debt that do benefit us and as I said earlier, we are going to compete.

More for the discretionary dollars being spent on travel and the things that people are going to be able to do.

Post pandemic and as this vaccine gets more and more rolled out but.

All in all of the or.

The it really from our standpoint, it looks the future looks bright.

Far as demand is concerned.

The numbers I've heard is that there is a.

Nationwide shortage of about 4 million homes.

And so.

Even if people are moving into new homes, there's going to be a lot of furniture, we believe theres going be a lot of furniture purchases.

Sure.

Great. Thank you very much.

Youre welcome. Thank you.

Our next question comes from J P Jagan <unk> with global value investment Corp.

Hey, good morning, and congratulations on the strong quarter.

I think between the previous 2 analysts some of my questions of at least elements have been answered already but at the.

Sounding redundant let me.

Piggyback on the Anthonys question about your use of cash in.

And you'll obviously be flushing cash well you are flushing cash right now I think in your prepared remarks, you said you expect your cash balance to decline modestly throughout the year, but if the.

Strong end markets persist, you'll generate quite a bit of cash going forward more.

More generally I'd asked about capital allocation, including any sort of plans to allocate capital in addition to.

Your intent to acquire.

Well, that's I think building.

Building the assets to make an acquisition is our primary focus.

And like I said also.

I think we've got.

Okay.

Long standing tradition of of being perhaps overly cautious overly.

Yes.

Carrying more cash than you might expect debt that they may be the textbooks would tell you.

<unk>.

We of course, we've been increasing our dividend, which is it's a small use of capital.

We do have these these capital projects that are going to be.

More than are typical of our typical capital spending was 3 or $4 million of year.

We've got.

We've got the CRP project, we've got the Savannah warehouse projects. So we're going to of a couple of years.

We will be refurbishing showrooms. So we've got a couple of years that involve.

To use a little more capital than typical.

And I know this question usually winds up with share repurchase.

We talk about share repurchase of lot and so far we we felt like there have always been higher priorities.

But you're right if we continue to generate cash, it's obviously going to be.

Significant discussion at our board meetings.

I can't tell you that we're planning to repurchase at this point.

That's helpful. I appreciate your insight.

We're well aware of shortages in components like foam of plywood, but I thought I heard you say in your prepared remarks that there are shortages and other components can you put some flesh around that comment and perhaps talked about.

Your perception of the appetite of consumers for additional price increases, particularly.

As demand might settle in at a higher normalized level than we've previously seen.

As far as the earlier comments you know steel is another thing that seems to be a little bit.

We're not not as predictable as usual with the law of the movements in motion furniture and whatnot.

But the big the big.

The biggest part of all of this.

As logistics of the container shortages the the amount of money it takes to get of container from overseas, which we don't believe will we believe it will continue.

Really through probably through the next quarter, but we think there will start to be a light at the end of the ton of we do think that we'll be paying more than historical norms. Eventually when it settles, but not anywhere near the rates. We're talking about so a lot of the much of the inflation of price increases that of that have occurred for us have been related to.

To that not not all to do with cost increases from factories and raw materials, although that has happened to just not at the level.

That is more than the logistics the industry has gone a long time without significant price increase as deflation. Yes, yes. So so this is a little bit of of catch up I mean is this just like the whole country.

A bit of of catch up.

Got it.

Thank you for your comments I appreciate the color and congratulations again on the good quarter.

Thank you we appreciate it.

I'm showing no further questions in queue I'd like to turn the call back to Jeremy Hoff for closing remarks.

Thank you Liz I would like to thank everyone for participating in our call today and your interest in Hooker home furnishings, we look forward to sharing our second quarter results with you in September. Thank you and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Alan.

Yes.

Yes.

Okay.

Okay.

[music].

Sure.

Yes.

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