Q3 2022 Hooker Furnishings Corp Earnings Call

December 9, 2021

Good morning, ladies and gentlemen, thank you for standing by and welcome to the home Furnishing Corporation third quarter 2020 earnings webcast. At this time all participants are in a listen only mode to the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to quest to start under one key on you touched on the telephone.

If he would call operator since any time. Please press Star then zero.

I'd now like to turn the conference over to your Speaker host today, So Paul called Bell Senior Vice President and Chief Financial Officer. Please go ahead Sir.

Thank you Olivia.

And welcome to our quarterly conference call to review our results for the fiscal 2022 third quarter, which began on August 2nd 2021 and ended on October 31 2021.

Joining me today is Jeremy Hoff, our Chief Executive Officer, we certainly appreciate your participation.

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

A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our press release and SEC filing announcing our fiscal 2022 third quarter 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.

This morning, we reported consolidated net sales of $133 million, a decrease of $16 3 million or 11% as compared to last year's third quarter.

We reported a quarterly net loss of $1 2 million or 10 cents per diluted share compared to net income of $10 1 million or 84 cents per diluted share in the same quarter a year ago.

For fiscal 'twenty for the fiscal 2022 nine month period consolidated net sales were $459 million up $74 million or 19% compared to last year during the same period.

We reported net income of $15 7 million or $1 30 per diluted share this year compared to a net loss of $19 million or $1 61 per diluted share a year ago, which was primarily due to a $44 3 million or 30 347 million after tax noncash impairment charge now.

Turn the call over to Jeremy to comments on our fiscal 2022 third quarter results.

Thank you Paul and good morning to everyone. While we were encouraged by a strong order backlog, which stands at three times typical levels and industry wide strong demand for home furnishings, we were challenged by ongoing supply chain disruptions during the quarter spin.

Specifically the slower than expected reopening of Vietnam, and Malaysia furniture factories. Following COVID-19 related shutdowns continued high freight costs and logistics challenges had the most adverse impacts on sales and operating income.

Our third quarter consolidated revenue decline follows two consecutive quarters of double digit sales and income gains at hooker furniture range. During the first half of the year the.

The declines this quarter were driven by significantly reduced shipments in the home Meridian segment due to the factory closures in Asia that began around August one and did not begin reopening until late in the quarter and then it only about 25% capacity.

The <unk> sales decrease was partially offset by double digit sales increases in the hooker branded and domestic upholstery segment versus the prior year period. These two segments have achieved five consecutive quarters of higher year over year net sales.

Sales volume reduction at <unk> was the primary driver of consolidated operating loss in gross profit decreases during the quarter high freight and product cost also contributed to the decrease in addition, <unk> had a significant a few significant charges during the period, including $2 6 million in one.

Time order cancellation costs to exit the ready to assemble furniture category.

This was a move we made to improve long term profitability by eliminating this low margin category.

Also <unk> incurred $1 9 million of higher than expected charge backs from two clubs channel customers.

These charges drove 75% of our earnings Miss.

Industry wide inflationary pressures also were a factor in reduced income along with decisions. We made that will have a short term adverse impact, but will strengthen the company in the long term.

For example, exiting the H M idea RTA category increased consolidated cost of goods sold by 200 basis points and contributed to the quarterly loss, but we believe this move will save about $10 million in product and freight costs related to RTA products on order and help us focus our resources in areas, where we can be most competitive.

And profitable.

We remain confident that we're utilizing all available levers to help mitigate global logistics challenges such as factory closures and reduced capacity higher freight and transit cost and decreased availability of shipping container space.

With the goal of minimizing cost and maximizing product shipments to customers. During these disruptions. We believe we have mitigated as much as possible through measures, including surcharges and price increases to cover higher transportation and raw material cost at the same time, we are rationalizing our stocking inventory to focus on a and b level top.

Selling products by prioritizing them for production in container utilization.

We should point out that the surcharges and increases we enact typically trail price hikes received from logistics partners and suppliers for up to 90 days.

Despite all of these efforts the current supply side factors are unpredictable and often involve frequent unexpected changes with little or no notice for example to Vietnam and Malaysia factories remain closed longer than expected and opened at only 25% capacity. We expect the factories to begin to approach 50% capacity in the near.

Future, but don't expect full capacity at least until second quarter 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 reported a sales increase again this quarter and continues to be our most profitable segment, but also felt some of the impact of higher logistics costs in the quarter.

Net sales increased by $8 7 million or 18, 5% and locker branded segment compared to the prior year quarter, driven by higher demand and inventory availability as well as lower discount the <unk>.

Distant in vibrant growth in this segment is driven by our diversification.

Branded product portfolio to address a wide variety of lifestyles and price points.

The introduction of our new Commerce and market accent furniture collection. This summer along with the ongoing strength of arm a large accident collection has significantly expanded our leadership position in the accident furniture category.

In addition, our strategy to rationalize our stocking inventory to focus on top sellers is helping us maximize shipping and protection capacity product flow and cash utilization.

While sales continue to reflect strong demand and a healthy furniture retail environment.

Ocean freight and product cost inflation impacted gross margin in the segment diluting the gains from sales increases this quarter.

We've implemented price increases to mitigate increased product costs. However, due to current order backlog levels and customer price changes taking effect at different times, we anticipate seeing more of the benefits of price increases in future periods as more products sold reflect the new pricing.

Actually the segment is starting to see another round of product and logistics cost increases, which will likely necessitate additional customer price changes.

Despite these adverse factors Hooker branded segment reported $6 7 million in operating income or an 11, 9% operating margin.

<unk> orders decreased slightly by one 9% as compared to the prior year period when business was rebounding dramatically after the initial COVID-19 related disruptions.

<unk> backlog remained historically high nearly double as compared to the prior year third quarter went backlog was already elevated versus historical averages.

Turning now to the home Meridian segment.

Net sales decreased by $27 5 million or 37% compared to the prior year third quarter, driven by inventory unavailability due to the temporary COVID-19 related closure of factories in Vietnam and Malaysia during the period.

Since it's such a large portion of home meridian shipments are shipped directly from our Asian suppliers to our customers' warehouses and factory shutdowns and increased transit costs have a much more immediate impact.

On this segment.

Home Meridian reported a $10 $2 million operating loss largely attributable to reduced shipments and higher cost of goods sold primarily from increased freight charges. In addition to higher than expected charge backs.

<unk> channel and the inventory cancellation costs related to <unk> H M ideas.

Our ready to assemble business contributed significantly to the operating loss.

Despite the disappointing financial results at HMA, we believe the challenges are short term.

We expect some improvement next quarter as the Asian factories and can increase capacity.

But we don't expect them to ramp up to full capacity until the second quarter of next year.

We're encouraged that demand remains strong.

Home Meridian, finishing the quarter with backlog of $12, 5% higher than last year's third quarter, but more than double as compared to pre pandemic levels.

And our long term strategic move were pleased.

The announcement in mid October we opened our highly efficient 800000 square foot distribution center in Savannah, Georgia, serving home meridian and its customers.

The moderate facility is a short distance from the port of Savannah, and will enable us to substantially increase operating efficiencies reduce our carbon footprint and ship orders faster.

Goal is to put the company on the right.

As it positioned the company as a best in class logistics, operator, and Savannah is a major step in that direction.

And the domestic upholstery segment net sales increased by $2 6 million or 10% in the fiscal 2022 third quarter compared to the prior year period, and all three divisions of that segment reported sales increases in the 10% range. However material cost inflation for most raw materials and higher freight surcharges offset the <unk>.

James from increased sales.

Segment reported an operating income of $1 4 million or five 2%.

During the quarter.

We continue to be challenged by raw material shortages, but we saw a lot of improvements later in the quarter and expect these positive trends to continue.

We've implemented price increases and surcharges with major accounts to improve margins.

Since this segment is a current order backlog.

Five to six months and prices will not increase on backlog orders, we anticipate seeing benefits of price increases beginning in the second quarter of next year.

All other net sales decreased by 134000 or 4% during the quarter.

Due to a five 6% decrease in our H contract Division on.

On a positive note as COVID-19 vaccines have rolled out, especially among the senior population H contract's incoming orders have increased three consecutive quarters in a row.

And finished the quarter with backlog of 150% higher than the prior year third quarter. Despite the sales increase all other still reported a 10, 7% operating margin for the quarter.

Finally, touching on our cash position and inventory positions.

Cash and cash equivalents stood at $57 2 million at the end of the quarter down $8 6 million compared to the balance at.

That's a fiscal 2021 year and as we work to increase our inventory levels, which were unacceptably low at year end in an effort to service the high demand that we've experienced all year.

During the first nine months of fiscal 2022, we used cash and $5 million generated from operations to pay $6 6 million of capital expenditures, which included $4 4 million and our newly opened Georgia distribution center $6 $4 million in cash dividends and $2 6 million on our new.

Our new cloud based ERP platform.

And finally, our Tuesday, we announced a <unk> <unk> increase to our quarterly dividend to <unk> 20 per share, which represents an 11% increase with a record backlogs and prudent low fixed cost business model, we have confidence in our ability to rebound.

As the production and transportation issues, we've been facing begin to resolve next year.

Now I will turn the discussion back to Jeremy for Us at his outlook. Thank you Paul consumer and retail demand remain historically strong with consolidated backlogs nearly tripled compared to pre pandemic levels.

However, we expect continuing supply chain turbulence to impact our net sales and income in the short term at least through the second quarter of next fiscal year, we expect our hooker branded and domestic upholstery segments will continue to be less challenged the number it in because more than 70% of home meridians business is shipped via direct container versus the domestic.

Warehouse distribution model in the Hooker branded and domestic upholstery segments. In addition, higher freight cost have a greater impact as a percentage on <unk> lower priced product line.

In the short to mid term, we look forward to the expected efficiencies and cost savings from <unk>, New Savannah facility. The facility puts us in an excellent position to grow <unk> warehouse business. We will continue to focus on factors, we can control such as developing relevant new products to meet consumer needs operational improvements.

Managing overhead and cost and executing our strategic growth initiatives, we remain very optimistic about our long term success as we manage through a challenging environment.

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

Thank you ladies and gentlemen.

A question at this time, you will need to press. The Star then the one key on you touched on telephone to which I have question question.

Please standby, while we compile the Q&A roster.

First question coming from the line of Anthony <unk> with Sidoti. Your line is now open.

Yes, good morning, and thank you for taking the questions.

So first yes.

A couple of questions here on <unk>, So obviously, a tough quarter here.

Third quarter.

Down 37% in terms of sales so given the backlog and the partial reopening of Vietnam.

Would be a reasonable.

Sales estimates for Q4 for <unk>.

Take a stab at it that'd be very helpful.

Uh huh.

Yeah.

Say about six to about $60 million.

Okay.

It's really uncertain its tough its tough to predict because of the just the erratic nature of this whole this whole COVID-19 situation.

And opening and closing, but that's the ballpark that we're thinking that he's given you a number based off of what were.

Getting.

We're being told from a capacity standpoint, what's available so.

In these times in the short term this is a little more of a capacity.

Budget versus the sales budget obviously.

Right right.

Yeah.

Okay and then.

I heard you guys call out.

Two out of three unusual charges for HMA it'd be RTA in the club channel unless I missed the third one.

Did you guys give that number what that was.

There were two in the club channel and there was one for the RTA.

Okay got it okay.

Okay and then.

In terms of the new warehouse so were there any one time costs that you guys won.

To call out as far as getting that new facility up and running.

And can you expand on the increased operating efficiencies you plan to get from that.

For next year, if there's any way to quantify that that would be very helpful.

Well of course, we have to fill it up and we did incur some costs.

To move products from our other warehouses, we're exiting our California and North Carolina.

Operating warehouses.

Probably spent are happening in the quarter most of it on relocating inventory.

Mhm.

Here I think our forecast shows this.

Saving about $2 million.

And then that will increase in subsequent years, but we've like I said, we're still going to fill that warehouse up before we can maximize savings.

Okay.

Got it and then.

So Jeremy.

I know you guys did move as far as Archie exit that are there any other <unk>.

Segments or sub segments of the business, where we should expect anything.

Similar to what you just did here I understand the rationale certainly makes sense.

Longer term cost saving perspective, but anything that we should be aware of.

As far as anything strategically that you guys are looking to perhaps exit out of or you are happy with the current business lines.

There's not anything imminent and what you just asked I do want to add to pulse.

Questioner is answer on the last one that the savings at <unk> for next year won't be fully realized but around $6 5 million. If you if you consider west coast warehouse.

Some salaries that had to do with the RTA Division, mostly and then the savings that we are that we're anticipating with Savannah.

Having the drayage from the Port all the way to made in Madison are those are those are very significant of which probably five to $5 $5 million would be realized next year.

Okay, Alright, that's definitely meaningful for sure.

Okay and then.

Just in terms of the total backlog can you, perhaps quantify what that was at the end of the quarter.

Oh.

Total backlog was $331 million.

Okay.

Thank you.

As far as the price increases.

Can you perhaps talk about what you guys did in the third quarter and plans going forward and then I guess.

Just to stick to the same topic. So if we assume that costs stabilize and I know thats, a big list, but assuming that they do.

Would you expect to.

To have the planned price increases.

To offset the higher cost by Q1 of next year would that be a reasonable assumption.

Yes.

Regarding price increases most are rolling now and going and will be executed within about a month or so.

Depending on which side of our business, we're talking about it will affect backlog on certain businesses, where we just couldn't absorb and it will not affect backlog on other businesses right.

Alright, so it'll it'll go in other words, there is a little bit of a trailing feeding into that.

And the whole industry is facing this right now.

There could be more price increases and the same thing will happen is that they will roll in depending on whether you apply them to backlog or whether you.

A lot of backlog to stand at the lower margins.

That's a business decision by each business.

Got it okay alright.

Alright.

I think that's all I had here so thanks, a lot and best of luck.

Thank you we appreciate it.

Our next question coming from the line of Sandy Midtown with evaluate research your line is open.

Yes. Good morning, Thank you for taking my question.

You know given that these are temporary issues out there for everybody in the industry.

Stock prices have come down because of this.

The medium term outlook is very positive.

Capex that you had for savanna is now behind you any thoughts of possibly and then our high net cash position any thoughts of a possible.

Dieback I noticed the dividend increase yesterday, which was excellent news, but any thoughts in terms of possibly buying back stock. Thank you.

We discussed buybacks a lot obviously capital allocation.

We have the luxury of being able to have capital allocation discussions pretty regularly.

And we've considered a buyback and.

Not ready to act on that at our board talks about we talk about buybacks at every every shareholder.

Quarterly meeting.

We also talk about the possibility of acquisitions to grow the company and and also to invest in additional inventory.

We are still well below our inventory levels.

Yes.

Were below historical inventory levels and with demand the way. It is we really need to grow inventory above.

Above even historic levels, so I think that.

We're not ready to commit to a buyback at this point, but it's a discussion item pretty regularly.

Thank you and one other question.

Can you comment or give some color on incoming order trends.

And in terms of how consumers are reacting to higher prices. So.

We see anecdotally very strong housing industry data people are moving to suburbs people are moving from one state together.

So the housing demand remains strong but housing prices are up for nickel prices are up and can you just give some color on what youre seeing out there in terms of how consumers are reacting to that thank you so much.

Yeah right now.

The hiring companies within all of the brands have the most I would call it closer to the pulse.

Because those are more sold orders. So I believe that's a better indicator for what you are asking and then those companies orders just keep that keep going its not hasnt slowed down really at all.

The businesses that are more stocking for warehouse orders.

The orders there so far out on the backlog that that has inherently slowed down orders within those businesses, but the backlog is over three times historic levels. So hope.

Hope that answers your question just for perspective.

February of 2020, our backlog was $122 million at the end of 2021, it was $240 million and its 331 million now.

What we're also seeing is we're not seeing cancellations.

Despite price increases in and all the other demands on the inflationary demands on consumers, we're not seeing cancellations and as you pointed out housing is still robust even at these higher prices and we think that trend is going to continue for a number of years.

With all that with all the favorable demographics of.

Millennials.

Settling down buying homes moving to the suburbs the new work trend, we think that all supports solid long term growth.

Great. Thank you so much.

Youre welcome. Thank you.

Yeah.

And our next question coming from the line of John <unk> with Pinnacle value. Upon your line is open hi.

Good morning, Thanks for taking my questions I was just curious.

You called out higher freight cost.

What other costs are increasing I know we've talked about this in the past, but where are you seeing the.

Highest cost pressures going forward.

Well thats, mostly both on inbound from from overseas and want to tear it all of the domestic trucking is significantly higher as well.

To give you an idea I mean it.

It just it consistently goes up and now we're in a season, where you are starting to figure out okay. What's the contract going to be in all of the contracts are higher so.

It really is more.

It's what's not up I mean, it would be an easier question, it's across the board logistics is up.

Raw materials at Gladden heat as logistics.

Yeah.

But I mean in terms of raw materials.

What are you seeing in terms of the foam issue and.

Lumber prices and all of that how is that.

Moving.

<unk> foam has has been mostly mitigated it still can be a challenge at times, but not to the point, where it's really hurting our production significantly like it was before.

Lumber seems to have stabilized somewhat although.

We could get an increase tomorrow. So a lot of the raw materials did take significant price hikes recently, but.

Some of it has seemed to slow down in the foam issue has definitely started to.

To get much much better where it's not affecting our production.

That's good to hear.

You mentioned.

Adding inventory.

Where would you expect year end inventory to be at this point approximately.

Actually we don't expect year end inventory to be a lot higher than it is now I think he's saying what would we want it to be is that right right.

So I was going is that we'd like to add another.

$15 million to $20 million over the course of next year, but but but right now where we're shipping everything almost everything thats in transit.

His soul.

So we're shipping everything we get so we're not going to see a lot of growth in the short term, but we'd like to add.

$15 million to $20 million over the course of next year as the factories get back online.

Which.

Segments do you think that would.

Fall into.

Mostly in the Hooker branded thing granted okay. Good.

And then finally now that savanna is behind you do you have.

Ballpark Capex number for fiscal for next fiscal year.

It's going to be a little higher it can be high again next year, because we're renovating a showroom and we're going to complete our ERP project.

Typically been.

Pretty low Capex company, and very often under $5 million.

Gonna say next year, it could be around eight eight or nine eight or nine okay.

Moving to our great new showroom, it's going to require it can require some capex and and then finishing this ERP project.

It will be the other big piece that showroom revolves around the hooker legacy brands right.

And my point, yes.

Okay.

Alright, great. Thanks, very much and good luck going forward. Thank you.

Ladies and gentlemen to ask a question. Please press star one and our next question coming from the line of Jeff <unk> with global value investment. Your line is open.

Thank you good morning, gentlemen, appreciate your time here.

Good morning, Jeff.

With respect to backlog and I know you've made a few comments around this.

These elevated levels, assuming that the supply chain resolves itself at some point what would you expect the stickiness of this backlog to be.

I think that on if you're talking the hooker.

If you're talking to legacy brand business. So on that side of business I believe that is in line with what we may see in the in the future as well I mean, it's because thats more sold orders its more based on the consumer I think once we get passed to your point the supply issues.

The <unk> backlog would come significantly down because we would actually be able to perform on it and get it to a level that would still be advantage, but not at.

Not at the level it's at currently.

So your expectation in terms of withdrawal or cancellation of the current backlog.

We really have not had cancellations of any you know.

Has it been big at this point in.

We don't expect to have major cancellations in our backlog in the near future.

Alright, and then coupled that with.

Imposing price increases what is your expectation in terms of the elasticity of demand and potential volume impact as you raise prices.

We believe that our price increases are very much in line with the overall industry. So that's number one number two I don't pretend to know where that elasticity takes us, but there has to be a point somewhere but I believe we've had a deflationary industry for my entire career.

Which is 25 years, so I think we're making up some some levels there.

We're up I think I think the industry as a whole is in the is in the 20% to 30% range of how much is up over over this period of time.

The industry deflated at least that much over 25 years, so I'm not sure.

Now to answer your question on where that inflection point actually is but those are some just some points and we cover a number of price points. So obviously.

As we see.

Evolution will support the businesses that are most favored by the by their prices.

Alright, thank you.

Let's talk to a number of comps.

Companies in different industries, and it's fairly universal to hear issues about labor yet you did not mention any labor issues can you address that please.

Yes, it was probably a miss on our part candidly because labor is an issue.

Particularly in the domestic factories.

We have we've put a lot of initiatives in place, including in house recruiter.

But we're doing things you have to do things differently or you're not going to succeed in the labor market. So.

We're doing I think a relatively good job, but it still is very much a challenge.

We've had I mean, what type of.

Yeah right.

What type of.

Wage increases have you experienced.

Probably in the range of around probably around 5% would be the overall.

Alright.

Circling back on your freight slashed logistics U.

Indicate that.

Like most people you have.

<unk> seen accelerated cost, but we filed the shipping industry is fairly closely and it seems that's mitigated itself somewhat in the last say.

Four to six weeks can you speak to real time versus the two that you just reported out just directionally, what you are saying.

We're still seeing an increase especially in the costs coming from overseas. We believe some of that has to do with factories shut down and equipment in the wrong places so more of a supply and demand issue with the equipment, that's maybe creating a bit of a short term bubble, but we're not seeing.

Decreases at this point and contract rates are going up yet right.

Even if spot rates come down contract rates are going up so.

We're not we're not budgeting a lot of short term.

A lot of reductions in the short term.

Got it thank you.

And somewhat unrelated question, you did talk about capital allocation and share buybacks and the board contemplate the buyback from time to time.

Under what circumstance might the board consider buying back stock if not today.

I think that we contemplated but.

Between the fact that we're very comfortable we're pretty comfortable having a probably in excess of safety cushion of cash it served us well through the recession through through a number of downturns over the years.

So we probably we probably keep too much cash on the balance sheet. If you will.

Just looking at it for me lately.

So.

So we tried to keep we keep more cash we.

Also are we.

I think we stated pretty regularly that we would like to grow by acquisition. So we've tried to preserve cash for that so we feel like in the long term to grow a bigger healthier company as is.

Better investment than buying back our own shares although theres got to be I mean, there is a price.

I don't know I can't quote that price, but there is a price where we would buy back shares.

Yeah. That's fair. Thank you guys I know, it's been a challenging environment I appreciate your taking time to speak with shareholders today no.

We appreciate it. Thank you I appreciate the interest.

I'm not showing any further questions at this time I would now like to turn the call back over to Mr. Jeremy <unk> for any closing remarks.

Thank you maybe I would like to thank everyone on the call for their interest in Hooker furnishings, we look forward to sharing our fourth quarter and year end results in April I hope everyone has a wonderful holiday season take care. Thank you.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

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Good morning, ladies and gentlemen, thank you for standing by and welcome to the Furnishing Corporation third quarter 2020 journeys webcast. At this time all participants are in a listen only mode. So to speak of his presentation. There will be a question and answer session. That's a question. During the session you will need your class to start on the one key on your thought.

Don telephone if he will call offer assistance at any time. Please press Star then zero.

I'd like to turn the conference I'll, let you speak of Jose suppose pork Bell Senior Vice President and Chief Financial Officer. Please go ahead Sir.

Thank you Olivia good morning, and welcome to our quarterly conference call to review our results for the fiscal 2022 third quarter, which began on August 2nd 2021 and ended on October 31, 2021, joining me today is Jeremy Hoff, our Chief Executive Officer.

Certainly appreciate your participation today.

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

And 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 $133 million, a decrease of $16 3 million or 11% as compared to last year's third quarter.

We reported a quarterly net loss of $1 2 million or 10 cents per diluted share compared to net income of $10 1 million or 84 cents per diluted share in the same quarter a year ago.

For fiscal 'twenty for the fiscal 2022 nine month period consolidated net sales were $459 million up $74 million or 19% compared to last year during the same period.

We reported net income of $15 7 million or $1 30 per diluted share this year compared to a net loss of $19 million or $1 61 per diluted share a year ago, which was primarily due to a $44 3 million or $34 7 million after tax noncash impairment charge now I'll.

Turn the call over to Jeremy to comment on our fiscal 2022 third quarter results.

Thank you Paul and good morning to everyone.

We were encouraged by a strong order backlog, which stands at three times typical levels and industry wide strong demand for home furnishings, we were challenged by ongoing supply chain disruptions during the quarter specifically.

Our third quarter consolidated revenue declined follows two consecutive quarters of double digit sales and income gains at hooker furnishings. During the first half of the year the.

The declines this quarter were driven by significantly reduced shipments in the home Meridian segment due to the factory closures in Asia that began around August 1st and did not begin reopening until late in the quarter and then at only about 25% capacity.

The <unk> sales decrease was partially offset by double digit sales increases in the hooker branded and domestic upholstery segments versus the prior year period. These two segments have achieved five consecutive quarters of higher year over year net sales the sales volume reduction at HMA was the primary driver.

Consolidated operating loss and gross profit decreases during the quarter.

Great in product cost also contributed to the decreases in addition, <unk> had a significant a few significant charges during the period, including $2 6 million in one time order cancellation costs to exit the ready to assemble furniture category.

This was a move we made to improve long term profitability by eliminating this low margin category.

Also <unk> incurred $1 9 million of higher than expected charge backs from two clubs channel customers.

These charges drove 75% of our earnings Miss.

Industry wide inflationary pressures also were a factor in reduced income along with decisions. We made that will have a short term adverse impact, but will strengthen the company in the long term.

And profitable.

Selling products by prioritizing them for production in container utilization.

We should point out that the surcharges and increases we enact typically trail price hikes received from logistics partners and suppliers for up to 90 days.

Future, but don't expect full capacity at least until second quarter now I want to turn the discussion over to Paul <unk>, who will discuss highlights of each of our reportable segments.

Thanks, Jeremy.

Net sales increased by $8 7 million or 18, 5% and locker branded segment compared to the prior year quarter, driven by higher demand and inventory availability as well as lower discount the.

The consistent and vibrant growth in this segment is driven by our diversification of the hooker branded product portfolio to address a wide variety of lifestyles and price points.

The introduction of our new Commerce market excellent furniture collection. This summer along with the ongoing strength of arm a large accident collection has significantly expanded our leadership position in the excellent furniture category.

In addition, our strategy to rationalize our stocking inventory to focus on top sellers is helping us maximize shipping and protection capacity product flow and cash utilization.

While sales continued to reflect strong demand and a healthy furniture retail environment higher ocean freight and product cost inflation impacted gross margin in this segment diluting the gains from sales increases this quarter.

We have implemented price increases to mitigate increased product costs. However, due to current order backlog levels and customer price changes taking effect at different times, we anticipate seeing more of the benefits of price increases in future periods as more products sold reflect the new pricing.

Additionally, the segment is starting to see another round of product and logistics cost increases, which will likely necessitate additional customer price changes.

These adverse factors Hooker branded segment reported $6 7 million in operating income or an 11, 9% operating margin.

Incoming orders decreased slightly by one 9% as compared to the prior year period when business was rebounding dramatically. After the initial COVID-19 related disruptions backlog backlog remained historically high nearly double as compared to the prior year third quarter backlog was already elevated versus historical averages.

Turning now to the home Meridian segment net sales.

<unk> decreased by $27 5 million or <unk>, 37% compared to the prior year third quarter, driven by inventory unavailability due to the temporary COVID-19 related closure of factories in Vietnam and Malaysia during the period.

Since there's such a large portion of home meridian shipments are shipped directly from our Asian suppliers to our customers' warehouses and factory shutdowns and increased transit costs have a much more immediate impact.

On this segment.

<unk> channel and the inventory cancellation costs related to <unk> H M ideas.

Our ready to assemble business contributed significantly to the operating loss.

Despite the disappointing financial results at <unk>, we believe the challenges are short term.

We expect some improvements next quarter as the Asian factories.

<unk> capacity.

But we don't expect them to ramp up to full capacity until the second quarter of next year.

We're encouraged that demand remains strong.

Home Meridian, finishing the quarter with backlog of 12, 5% higher than last year's third quarter, but more than double as compared to pre pandemic levels.

And our long term strategic move were pleased.

The announcement in mid October we opened our highly efficient 800000 square foot distribution center in Savannah, Georgia, serving home meridian and its customers.

The moderate facility is a short distance from the port of Savannah, and will enable us to substantially increase operating efficiencies reduce our carbon footprint and ship orders faster.

Our goal is to put the company on the.

As it positioned the company as a best in class logistics operator.

Savannah is a major step in that direction.

From increased sales the segment reported operating income of $1 4 million or five 2%.

During the quarter.

We continue to be challenged by raw material shortages, but we saw a lot of improvements later in the quarter and expect these positive trends to continue.

We have implemented price increases and surcharges with major accounts to improve margins.

Since this segment is a current order backlog.

Five to six months and prices will not increase on backlog orders, we anticipate seeing benefits of the price increases beginning in the second quarter of next year.

All other net sales decreased by 134000 or 4% during the quarter.

Due to a five 6% decrease in our H contract Division on.

On a positive note as COVID-19 vaccines have rolled out, especially among the senior population H contract's incoming orders have increased three consecutive quarters in a row.

And finished the quarter with backlog of 150% higher than the prior year third quarter. Despite the sales increase all others still reported a 10, 7% operating margin for the quarter.

Finally, touching on our cash position and inventory positions.

Cash and cash equivalents stood at $57 2 million at the end of the quarter down $8 6 million compared to the balance at.

The fiscal 2021 year and as we work to increase our inventory levels, which were unacceptably low at year end in an effort to service the high demand that we've experienced all year.

During the first nine months of fiscal 2022, we used cash and $5 million generated from operations to pay $6 6 million of capital expenditures, which included $4 4 million and our newly opened Georgia distribution Center $6 4 million in cash dividends and $2 6 million on our new.

Our new cloud based ERP platform.

And finally on Tuesday, we announced a <unk> <unk> increase to our quarterly dividend to <unk> 20 per share, which represents an 11% increase with a record backlogs and proven low fixed cost business model, we have confidence in our ability to rebound.

As the production and transportation issues, we've been facing begin to resolve next year.

Now I'll turn the discussion back to Jeremy for Us at his outlook. Thank you Paul consumer and retail demand remain historically strong with consolidated backlogs nearly tripled compared to pre pandemic levels. However, we expect continuing supply chain turbulence to impact our net sales and income in the short term at least through the second quarter of next fiscal.

Full year, we expect our hooker branded and domestic upholstery segments will continue to be less challenged than home meridian, because more than 70% of home meridian's business is shipped via direct container versus the domestic warehouse distribution model in the hooker branded and domestic upholstery segments. In addition, higher freight cost have a greater impact as a person.

<unk> on <unk> lower priced product line.

In the short to midterm, we look forward to the expected efficiencies and cost savings from <unk>, New Savannah facility. The facility puts us in an excellent position to grow <unk> warehouse business. We will continue to focus on factors, we can control such as developing relevant new products to meet consumer needs operational improvements.

Managing overhead and cost and executing our strategic growth initiatives, we remain very optimistic about our long term success as we manage through a challenging environment.

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

Thank you ladies and gentlemen.

Question at this time, you will need to press. The Star then the one key on your touched on telephone to which I have a question question.

Please standby, while we compile the Q&A roster.

First question coming from the line of Anthony.

Anthony <unk> with Sidoti Your line is now open.

Yes, good morning, and thank you for taking the questions.

So first.

Couple of questions here on <unk>, So obviously, a tough quarter here.

Good quarter.

Down 37% in terms of sales so now given the backlog and the partial reopening of Vietnam.

What would be a reasonable.

Sales estimates for Q4 for <unk>. So you could take a stab at it that'd be very helpful.

Say about $60 million.

Okay.

It's really uncertain its tough its tough to predict because of the.

The erratic nature of this whole this whole COVID-19 situation.

In closing, but that's the ballpark that we're thinking that he's given you a number based off of what we are.

Getting.

We're being told from a capacity standpoint, what's available. So in these in these times and the short term. This is a little more of a capacity.

Budget versus the sales budget obviously.

Right right.

Yeah.

Okay and then.

Yes.

I heard you guys call out.

Two out of three unusual charges for HMA it'd be RTA in the club channel unless I missed the third one.

Did you guys give that number.

There were two in the club channel and there was one for the RTA.

Okay got it okay.

Okay and then.

In terms of the new warehouse so were there any onetime costs that you guys.

To call out as far as getting that new facility up and running.

And can you expand on the increased operating efficiencies as you plan to get some of that.

Our next year, if there's any way to quantify that that would be very helpful.

Well of course, you know we have to fill it up.

And we did incur some cost.

To move products from our other warehouses, we're exiting our California and North Carolina.

Operating warehouses probably.

Probably spent a half million dollars in the quarter most of it on relocating inventory.

Here I think our forecast shows us say.

Saving about $2 million.

That will increase in subsequent years, but we just like I said, we're still going to fill that warehouse up before we can maximize savings.

Okay got.

Got it and then.

So Jeremy.

I know you guys does it move as far as Archie exits are there any other.

Segments or sub segments of the business, where we should expect anything.

Similar to what you just did here.

And the rationale certainly makes sense.

Longer term cost saving perspective, but anything that we should be aware of.

No as far as anything strategically that you guys are looking to perhaps exit out of or you are happy with the current business lines.

There's not anything imminent and what you just asked I do want to add to Paul's.

Questioner is answer on the last one.

The savings at <unk> for next year.

Be fully realized but around $6 5 million. If you if you consider west coast warehouse.

Some salaries that had to do with the RTA division mostly.

And then the savings that we are that we're anticipating with Savannah by not having the drayage from the port all the way to make it in Madison. Those are those are very significant of which probably five to $5 $5 million would be realized next year.

Okay Alright.

The only meaningful for sure.

Okay and then.

Just in terms of the total backlog can you, perhaps quantify what that was at the end of the quarter.

Uh huh.

Total backlog was $331 million.

Company wide.

Thank you and then as far as the price increases.

Could you perhaps talk about what you guys did in the third quarter and plans going forward and then I guess.

Just to stick to that same topic. So if we assume that cost stabilize.

That's a big if but assuming that they do.

Would you expect to.

To have the planned price increases.

I also had the higher cost by Q1 of next year would that be a reasonable assumption.

Yes.

And regarding price increases most are rolling and now and going and will be executed within about a month, so and depending on which side of our business. We're talking about it will affect backlog on certain businesses, where we just couldn't absorb and that will not affect backlog.

Log on other businesses.

Alright, so in other words, there is a little bit of a trailing fees under that.

And the whole industry is facing this right now.

There could be more price increases and the same thing will happen is that they will roll in depending on whether you apply them to backlog or whether you.

Allow backlog to stand at the lower margins.

That's a business decision by each business.

Got it okay.

Right.

I think that's all I had here so yes. Thanks.

Best of luck.

Thank you we appreciate it Kevin.

And our next question coming from the line of Sandy Mehta with evaluate research your line is open.

Yes. Good morning, Thank you for taking my question.

Given that these are temporary issues out there for everybody in the industry.

<unk> prices have come down because of this.

Medium term outlook is very positive.

The Capex that you had for savanna is now behind you.

Any thoughts of possibly and then our high net cash position any thoughts from a possible buyer.

Buyback I noticed the dividend increase yesterday, which was excellent news, but any thoughts in terms of possibly buying back stock. Thank you.

We discussed buybacks a lot obviously capital allocation, we have the luxury of being able to have capital allocation discussions pretty regularly.

And.

We've considered a buyback and.

Not ready to act on that our board talks about we talk about buybacks at every every shareholder.

Quarterly meeting.

We also talk about the possibility of acquisitions to grow the company and and also to invest in additional inventory I think we are still well below our inventory levels.

We're below historical inventory levels and with demand the way. It is we really need to grow inventory above.

Above even historic levels, so I think that.

We're not ready to commit to a buyback at this point, but it's a discussion item pretty regularly.

Thank you and one other question.

Can you comment or give some color on incoming order trends.

And in terms of how consumers are reacting to higher prices. So.

We see anecdotally very strong housing industry data people are moving to suburbs people are moving from one state together.

Yeah right now.

The hiring companies within all of the brands have the most I would call it closer to the pulse.

Because those are more sold orders. So I believe that's a better indicator for what you are asking and then those companies orders just keep that keep going its not hasnt slowed down really at all.

The businesses that are more stocking for warehouse orders.

The orders there.

So far out on the backlog that that has inherently slowed down orders within those businesses, but the backlog is over three times historic levels. So hope.

Hope that answers your question just for perspective.

In.

February of 2020, our backlog was $122 million at the end of 2021, it was $240 million and its 331 million now.

We're also seeing is we're not seeing cancellations.

Despite price increases in and all the other demands on the inflationary demands on consumers.

We're not seeing cancellations and as you pointed out housing is still robust even at these higher prices and we think that trend is going to continue for a number of years.

With all that with all the favorable demographics.

Millennials.

Settling down buying homes moving to the suburbs the new work trends, we think that all supports solid long term growth.

Great. Thank you so much.

Youre welcome. Thank you.

And our next question coming from the line of John <unk> with Pinnacle value. Your line is now open.

Hi, Good morning, Thanks for taking my questions I was just curious.

You called out higher freight car.

But what other costs are increasing I know we've talked about this in the past, but where are you seeing the.

Cost pressures going forward.

Well thats, mostly both on inbound from from overseas and want to tear it all.

All of the domestic trucking is significantly higher as well.

To give you an idea I mean it.

It consistently goes up and now we're in a season, where you are starting to figure out okay. What's the contract going to be in all the contracts are higher so.

It really is more.

It's what's not up I mean, it would be an easier question, it's across the board logistics is up.

Domestic raw materials.

He has logistics.

Yeah.

But in terms of raw materials.

What are you seeing in terms of the foam issue and.

Lumber prices and all of that how is that.

Moving.

So foam has has been mostly mitigated it still can be a challenge at times, but not to the point, where it's really hurting our production significantly like it was before.

<unk> seems to have stabilized somewhat although.

We could get an increase tomorrow. So a lot of the raw materials did take significant price hikes recently, but.

Some of it has seemed to slow down in the foam issue has definitely started to.

To get much much better where it's not affecting our production.

That's good to hear.

You mentioned.

Adding inventory.

Where would you expect year end inventory to be at this point approximately.

Hum.

Don't expect year end inventory to be a lot higher than it is now I think he's saying what would we want it to be isn't that right right.

So I was going is that we'd like to add another.

15% to $20 million over the course of next year, but.

But right now where we're shipping everything almost everything Thats in transit is.

Is sold.

So we're shipping everything we get so we're not going to see a lot of growth in the short term, but we'd like to add.

$15 million to $20 million over the course of next year as the factories get back online.

Which.

Segments do you think that would.

Mostly fall into.

Mostly in the Hooker branded thing granted okay. Good.

And then finally now that savanna is behind you do you have.

Ballpark Capex number for fiscal for next fiscal year.

It's going to be a little higher it can be high again next year because we are.

Renovating a showroom and we're going to complete our ERP project.

Typically been.

Pretty low Capex company, and very often under $5 million I'm going to say next year it could be around eight eight or nine eight or nine okay.

Moving to our great new showroom, it's going to require it can require some capex.

And then finishing this ERP project.

Will be the other big piece and that showroom revolves around the hooker legacy brands right.

And my point, yes.

Okay.

Alright, great. Thanks, very much and good luck going forward. Thank you.

Good morning, ladies and gentlemen to ask a question. Please press star one and our next question coming from the line of Jeff <unk> with global value investment. Your line is open.

Thank you good morning, gentlemen, appreciate your time here.

Good morning, Jeff.

With respect to backlog and I know you've made a few comments around this.

These elevated levels, assuming that the supply chain.

<unk> itself at some point what would you expect.

The stickiness of this backlog to be.

I think that on if you're talking the hooker.

If you're talking to the legacy brand business. So on that side of business I believe that is in line with what we may see in the future as well I mean, it's because thats more sold orders its more based on the consumer I think once we get passed to your point the supply issues.

The <unk> backlog would come significantly down because we would actually be able to perform on it and get it to a level that would still be advantaged, but not at.

Not at the level of debt currently.

So your expectation in terms of withdrawal or cancellation of the current backlog.

We really have not had cancellations of any.

<unk>.

Isn't been big at this point in.

We don't expect to have major cancellations in our backlog in the near future.

Alright, and then coupled that with.

Imposing price increases what is your expectation in terms of the elasticity of demand and potential volume impact as you raise prices.

We believe that our price increases are very much in line with the overall industry. So that's number one number two I do.

Don't pretend to know where that elasticity takes us, but there has to be a point somewhere but I believe we've had a deflationary industry for my entire career, which is 25 years. So I think we're making up some some levels there.

We're up I think I think the industry as a whole.

And that is in the 20% to 30% range of how much. It is up over over this period of time and I bet. The industry deflated at least that much over 25 years. So I'm not sure how to answer your question on where that inflection point actually is but those are some just some points and we cover a number of price points. So.

Obviously as we see an evolution will move will support the businesses that are our most favored by the by their prices.

Alright, thank you.

Analysts talk to a number of <unk>.

In different industries, and it's fairly universal to hear issues about labor yet you did not mention any labor issues can you address that please.

Yes, it's probably a miss on our part candidly because labor is an issue.

Particularly in the domestic factories.

We have we've put a lot of initiatives in place, including in house recruiter.

Doing things you have to do things differently or youre not going to succeed in the labor market. So.

We're doing I think a relatively good job, but it still is very much a challenge.

We've had many and what type of.

Right.

What type of wage increases have you experienced.

Probably in the range of around probably around 5% would be the overall.

Alright.

Circling back on your freight slash logistics U.

Indicate that.

Like most people you have.

<unk> seen accelerated cost, but we follow the shipping industry fairly closely and it seems that's mitigated itself somewhat in the last say.

Four to six weeks can you speak to real time versus the Q that you just reported out just directionally, what youre, saying.

We're still seeing an increase especially in the costs coming from overseas. We believe some of that has to do with factories shut down and equipment in the wrong places so more of a supply and demand issue with the equipment that may be creating a bit of a short term bubble, but we're not seeing.

Decreases at this point and contract rates are going up yet right.

Even if spot rates come down contract rates are going up so.

We're not we're not budgeting a lot of short term.

A lot of reductions in the short term.

Got it thank you.

And somewhat unrelated question, you did talk about capital allocation and share buybacks and the board contemplate the buyback from time to time.

Under what circumstance might the board consider buying back stock if not today.

I think that we contemplated but.

Between the fact that we're very comfortable we're pretty comfortable having a probably an excessive safety cushion of cash it served us well through the recession through through a number of downturns over the years.

So we probably we probably keep too much cash on the balance sheet. If you were looking at it for me lately.

So.

So we tried to keep we keep more cash we also are we.

I think we've stated pretty regularly that we would like to grow by acquisition. So we try to preserve cash for that so we feel like in the long term to grow a bigger healthier companies is a better investment than buying back our own shares although theres got to be I mean, there is a price.

I can't quote that price, but there is a price where we would buy back shares.

That's fair. Thank you guys I know, it's been a challenging environment I appreciate your taking time to speak with shareholders today no.

We appreciate it. Thank you I appreciate the interest.

I'm not showing any further questions at this time I would now like to turn the call back over to Mr. Jeremy <unk> for any closing remarks.

Thank you Levi I would like to thank everyone on the call for their interest in Hooker furnishings, we look forward to sharing our fourth quarter and year end results in April I hope everyone has a wonderful holiday season take care. Thank you.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

Q3 2022 Hooker Furnishings Corp Earnings Call

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