Q2 2020 Earnings Call
Reporting its operating results for the second quarter.
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A brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host.
Paul Huckfeldt, Vice President Finance, and Chief Financial Officer for Hooker Furniture Corporation.
Good morning, and welcome to our quarterly call to review financial results.
For our fiscal 2022nd quarter, which ended on August four 2019.
We appreciate your pre participation today, Paul Toms, our chairman and CEO and Doug Thompson co presidents of our home Meridian Division will join me for our prepared remarks for the question and answer portion of the call. Several of our business unit has will be available to take questions, including Michael Delgatti President of Hooker domestic upholstery in emerging channels home Meridian co President LIBOR, Jeremy Hall, President of our Hooker branded segment and Jacobson, our chief administrative officer.
Gerard 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.
Management's expectations is contained in our press release and FCC filing announcing for fiscal 2022nd quarter results.
Any forward looking statement speaks only as of today, we undertake no obligation to update or revise.
Any forward looking statements to reflect events or circumstances after today's call.
This morning, we reported consolidated net sales of $152 million and net income of 4.2 million or 35 cents per diluted share for our fiscal 2022nd quarter, which ended August 4th 2019.
Compared to last year's second quarter, our sector, our net sales decreased 16.4 million or 9.7%.
And net income decreased four and a half million or 52%.
Earnings per diluted share decreased 52% from 74 cents a year ago.
For the fiscal 2021st half can tell consolidated net sales were 288 million with net income of 6.1 million or 52 cents per diluted share that sales were down 7.6% or 23.8 million as compared to last year's first half.
Earnings per diluted share decreased to 52 cents from $1.34 last year, a 61% decline from the prior year first half.
Paul Toms will now comment on our fiscal 2022nd quarter results.
Thanks, Paul and good morning, everyone as we expected after first quarter business in the second quarter was significant.
Definitely impacted by tariffs on finished goods.
Component parts imported from China.
As well as weak retail demand through the first eight months of this year.
In addition, lingering effects of severance cost related issues that began late last year at home Meridian.
Deflated our performance in the quarter.
We believe the macroeconomic challenges related to the tariffs and soft retail conditions are affecting many companies and the furniture industry looking across our industry.
Many public furniture companies reporting weaker cells reduced earnings.
Business disruptions from the 10% tariff imposed last September and the additional 50% tariff imposed June 15th this year.
It impacted both our top and bottom line.
Revenues have been negatively affected by tariff rhetoric and turbulence in the marketplace and by tariff related price increases these tariff dynamics have reduced retailer and consumer demand.
Profitability has been negatively impacted by higher false which have also lowered margins.
Despite all the headwinds I believe were doing a credible job executing various measures to mitigate the impact of the tariff on our business going forward.
Leasing lewd negotiating vendor price concessions.
Passing through modest price increases to our retail customers. The first of which was put in place last fall.
And the most recent one in mid June .
And most importantly, we are well on schedule and shifting production away from China.
While slightly over 40% of our product line was imported from China at the end of our most recent fiscal year.
We expect about 22% of our products will be produced in China by the end of this fiscal year.
The lower year over year sales trend that began in the first quarter continued in the second quarter.
Home meridians, 14% or 13.8 million cells decline had the most impact on lower consolidate itself.
While sales from that were for branded segment and all other decreased modestly by 1.1 million or 2.8% at hooker branded.
And $1.4 million or 5.3% at all other.
Compared to the prior year second quarter.
Home Meridian revenues were hit harder by tariff disruptions, we cost accompanies base of larger retailers, where it ended the year over inventoried and delayed reorders until late in the second quarter.
As we approach the end of the quarter in July retailers appear to complete their inventory rebalancing.
We began to see retail demand improve at H. and Mike.
Hmm divisions, Pulaski, Samuel Lawrence furniture, and Samuel Lawrence Hospitality, all finished the quarter with double digit increases in their backlogs.
The incoming order picture also frightened in July on a consolidated basis corporate wide income these orders are trending.
Notably compared to both last quarter and the year ago period.
Since July large retailers or have been asking us to expedite orders. So they can stock up for the upcoming fall selling season, which is traditionally the strongest of the year for furniture sales.
Backlogs are also are improving with six of our 11 business unit reporting higher backlog than a year ago.
While the sales trend was a bit weaker in the second quarter compared to the first.
Net income adult primarily because of better performance HMRC, which in my operating results improved to nearly breakeven compared to the $5 million operating loss in Q1.
Income at home Meridian was nonetheless subdued from a lower top line tariff related margin deterioration inflated warehousing costs from increased inventories.
And other operational disruptions and resources and costs.
Falls by the tariffs.
Taking a closer look at each of our segments I'll begin with her branded.
Net sales for the for branded segment decreased $1.1 million for 2.8% in the fiscal 2022nd quarter.
Driven by a low single digit sales decrease in number per case goods division, partially offset by net revenue growth in the mid to upper single digits at Hooker upholstery.
For for upholstery continues to benefit from an expanded product offering at higher average prices for a more sofa sectional cells and this product mix.
A minimum at Hooker upholstery is also strong with incoming orders up over 20% in the second quarter.
As her case goods, we passed on some tariff related price increases.
In General case goods are a high ticket discretionary purchase in an environment, where retail sales are already weak.
And you layer in the tariff dynamics. It just gives US a reason for the consumer to postpone the purchase.
Despite the sales decline and increased product cost for branded was still highly profitable with over 30% gross profit margin and 10% operating income margin during the quarter and for the first half.
Thoughts, we stock approximately six months of case goods inventory in our Virginia warehouses.
The impact of tariffs was felt much more on the demand side than in margins in the second quarter.
Although margins were not entirely unaffected.
And we reported about 500000 of and priests LIFO expense in the quarter.
All other which includes domestically produced upholstery divisions Bradington young Shenandoah.
And Sam Moore long with H contract.
Reported a net sales decrease of $1.4 million or 5.3% from $27.1 billion in last year's second quarter to $25.7 million in the fiscal 2022nd quarter lower cells.
Were driven by a sales decline in our upholstery manufacturing divisions.
Due to lower demand, partially offset by continued growth at H contract.
Which specializes in furnishings for senior living and retirement facility.
Targeted sales efforts product line expansions innovations and mid tier product introductions that pay dividends in the segments with three of the four divisions reporting double digit order increases in July .
Under a new Division President Sam Moore is starting to grow again with incoming orders up nearly 16% in July .
And backlogs up 2.5% compare compared to the prior year second quarter.
Despite the sales increase im sorry, despite the sales decrease all other gross profit increase in absolute terms and as a percentage of net sales due to lower materials cost and better cost containment.
The segment reported operating income margins of 6.8% for the fiscal second quarter.
And 8.3% for the first half.
Now I'd like to call on Doug talents and.
HM My co president to give more detail on the H. and ice segment performance this quarter.
Thanks, Paul.
Hmm sales in Q2 were $87.2 million down $13.8 million or 14% versus last year continued softness at retail across all residential channels of distribution compounded by ongoing industry disruptions, resulting from the China tariffs were the primary causes of the sales decreases.
The retail softness negatively impacted four of our five business units with sales down across all traditional furniture retail segments.
Escalate, our hospitality business unit reported strong sales growth in the second quarter with sales up 44% in the quarter as new sales initiatives and new customers increased demand in that segment.
For the quarter consolidated incoming orders were flat versus the prior year and backlog at the end of Q2 was down 9.7%.
Both the order and backlog trends have improved significantly from Q1.
Q2 operating results improved to breakeven also a substantial improvement from the last reported in Q1.
Second quarter income performance, while a step in the right direction was nonetheless reduced by lower topline sales continued tariff related product cost continued warehousing related expenses from our Q4 product returns and other operational disruptions caused by the tariffs.
Major initiatives to improve results are well underway and can be summarized as follows.
Firstly, our China exit strategy, our strategy to avoid tariffs on imports from China as well as reduce the uncertainty resulting from our country's current trade relationship with China is to resource production away from China as much as feasible.
Prior to the tariffs approximately 44% of major my products were manufactured in China as of August approximately 29% of our production remains in China and that number will continue to come down.
Our progress Resourcing upholstery production for our PR I Division has made even more dramatic progress than that.
Prior to the tariff 100% of PR I production was manufactured in China and as of August that percentage has decreased to less than 36%.
We would like to move faster, but additional production capacity in Vietnam and other countries is coming online slowly given our long standing history, and deep business relationships and Vietnam, Hmm is well positioned to secure new production capacity as they become available.
Our second strategy is our PR I turned around as mentioned Piura is making good progress moving production out of China, which is the most critical factor in providing competitive products and then returning to target profitability.
In addition, we are implementing select price increases where necessary and eliminating some unprofitable business. The combination of these efforts is delivering results.
Peter I performance improved from net contribution loss in Q1 to positive contribution in Q2. Further we are on we are on track to continue increasing the PR on net contribution as we move forward Resourcing.
On the growth front, new sales initiatives are in process to grow the PR I topline through our clubs channel our mass channel and our traditional Mega accounts.
A portion of the new growth efforts are in better products targeted to premium retailers, we can effectively sell higher prices, which normally carry enhanced profitability.
The majority of this new merchandise is part of an exciting new brand launch at the October market that will create significant incremental growth and profit opportunities.
As made public last week home Meridian has signed a contract with Terry Bradshaw to endorse and promote an exclusive line of Pierre I motion upholstery to the retail trade and the consumer.
Given terry's enormous popularity across all ages and demographics, particularly in the entertainment and sports Entertainment markets. We believe he is a perfect fit for the target motion upholstery customer.
Already we've had multiple major retailers commit to carry the brand we expect the Terry Bradshaw branded products to begin shipping in late Q4.
Another initiative is our clubs is reorganizing our clubs business.
We are restructuring our clubs businesses business organization to enhance controls ensure performance and deliver the bottom line results. We expect from that channel. Our clubs business will now operate with a dedicated PNNT structure and more importantly, we will consolidate and report to a single executive leader Jay Jordan, who was hired in May to direct our entry into the mass channel will assume responsibility for leading our clubs business. Jay has proven experience in the club channel as well as with Big box stores and is a natural fit for this role we have already identified and are implementing multiple operational improvements to our clubs business procedures. Furthermore, we are focusing our clubs merchandising efforts on specific proven product opportunities that are established sellers and fit our core competencies.
Other growth strategies. In addition to growth in clubs and branded sales we have growth strategies in other parts of our business as well, although our traditional mega accounts have experienced slow retail conditions. All year, we have nonetheless succeeded in developing and selling multiple new product placements within the traditional Mega account channel that we expect to generate over $50 million in new product sales on an annualized basis.
While not all of that business is incremental it still is a healthy indicator of our strength within that segment.
In addition, we are focusing our fast growing ecommerce business with year to date sales up 16% on the best retailers in the channel. This focus will enable us to grow faster with the biggest players and will result in better business partnerships faster growth and more profitable sales within the channel.
Last quarter, we announced the launch of a new division to focus on the mass retail channel. This division named Jim idea has developed approximately 40 RTC a case good SK use planned for introduction at the October furniture market.
The RT category is new for HMH and represent significant incremental growth opportunity for our company.
Another new product product category, we introduced last year performance laminate dining and bedroom collections are at retail stores, now and selling very well.
We will continue to invest in new products and customers in this product segment.
Finally.
Mixed product container shipments from from a consolidated warehouse in Vietnam is a new service model and we just introduced earlier this year.
This service is particularly attractive to the mid size accounts and major retailers, who prefer to buy smaller lot sizes of product to be a direct container.
This service enables those retailers to enjoy direct container values, while managing their inventories more precisely.
Another ongoing initiative as margin improvements, we have multiple margin improvement initiatives and process to improve our bottom line. These initiatives include the aforementioned production resourcing efforts away from China, as well as Resourcing to lower cost suppliers. In several cases, we are resourcing Vietnam based production to other lower cost to Vietnam factories to improve margins.
We are also increasing our sourcing base in Malaysia as that country continues to develop and offer strong values relative to China and Vietnam.
We're also selectively raising prices to counter various recent cost increases such as higher production costs in Vietnam freight and freight associated expenses and higher government directed compliance issues.
Finally, we have a comprehensive cost reduction exercise underway to reduce overhead inventory and spending commensurate with the challenging business climate.
Specifically, we are reducing 8% of our headcount through attrition and a hiring freeze.
We have already begun reassigning staff to cover responsibilities of current and pending vacant positions.
The largest portion of our staff reductions will occur in China, as we exit that country in favour of tariff free production in Vietnam and Malaysia.
Our largest spend on an annual basis is for the inventory to service our business. Our inventories have increased recently some of which was intentional to service our growing ecommerce business and some as a result of lower sales. We are targeting a 14% reduction of inventory by Q1 of next year, which will allow us to eliminate warehouse space and free up cash.
These reductions will come from a new more accurate forecasting process the reduction of certain customer based inventory programs and selling off excess inventory.
Additional targeted spending reductions are occurring across all call centers, including showrooms photography printing travel operations and product distribution.
Looking forward, we expect significant improvement in our operating results as our remediation actions gain traction.
Ending on a positive note consolidated orders have recently improved as retailers begin to place orders for the fall selling season.
As of the end of August HMH orders were up 6.4% versus the prior year and backlog has increased within 3% of last year, both trends reflect continuing continued improvement over Q1 and Q2.
At this time I'd like to turn the call back over to Paul Huckfeldt, who will elaborate further on our quarterly results. Thank you Doug.
Consolidated average selling prices increased 4%.
Mostly due to favorable product and customer mix that was not sufficient to offset the unit volume decrease of 13.6%, which resulted from lower order volumes in both of our reporting segments and all of it.
Unit volumes were down high single digit to low double digits across our segments.
Consolidated gross profit decreased 6.8 million to $28.8 million in the fiscal 2022nd quarter and decreased from 21.1% to 18.9% as a percentage of net sales.
Okay branded gross profit decreased both in absolute terms and as a percentage of net sales due to lower Hooker case, good sales and to a lesser extent increased product costs, partially offset by increased sales and higher gross margins are hooker upholstery division, which is benefiting from the wealth place product introductions last year and has made good progress mitigating the impact of tariffs.
In the home Meridian segment gross profit declined significantly in absolute terms and as a percentage of net sales.
Home Meridians gross margin was negatively impacted by several factors. In addition to other cover tariff and freight costs and some lower gross and some lower margin sales programs that we've been working to improve.
Some of those items included about 900000 in quality charge backs.
Excess freight and handling cost of about 950000 at about 350000 of higher warehouse costs during the quarter.
Despite the sales decline gross margin increased in absolute terms and as a percentage of net sales in all other due primarily to lower material costs in our domestic upholstery units as well as increased sales and profitability.
Each contract.
These gains were partially offset by higher direct labor and overhead cost as a percent of sales attributable to the lower production in order volumes.
Consolidated selling and administrative expenses decreased in absolute terms, but increased as a percentage of sales due to the lower net sales pace in the quarter.
Selling expenses were lower due to lower volume lower sales volume in the quarter and we also recognized a prevalent previously deferred gain of about 275000 related to the sale of a former distribution center, which partially offset the absence of a million dollars gain on company owned life insurance that we recorded last year.
For these reasons operating income for the fiscal 2022nd quarter.
Decreased $6 million to $5.8 million.
Operating income decreased operating margin decreased from 7% to 3.8%.
Our cash balance increased nearly 2 million from the fiscal 2019 year end to $13.3 million.
So far this year, we've generated $11 million in cash from our operating activities much of it from the collection of accounts receivable and 1.4 million in proceeds from the sale of a former distribution facility, which we hit owner finance.
I should also note that we adopted assay 842 lease accounting at the beginning of the year. This new standard put about $43 million of new assets and a similar liability on our balance sheet at affect some of the comparisons to last year's balance.
At the end of the fiscal 2022nd quarter, we had access to almost $28 million on our revolving line of credit and almost at about 25 million of cash surrender value of our company owned life insurance, which gives us some financial flexibility and security.
Now I would like to turn the discussion back to Paul Toms for his closing remarks and that outlook. Thanks Paul.
We remain cautiously optimistic about the second half of the year and still expect that retail business and demand will improve to better levels. Beginning this fall.
Traditionally the strongest season of the year for furniture sells.
Requests from some large retailers to expedite orders or they'll have adequate inventory for the fall selling season have been encouraging.
Our tariff mitigation strategies and sourcing shift away from China are well underway.
And reduced we're reducing costs and non essential spending along with delaying some capital expenditures until the environment improves.
We expect the benefits of our tariff mitigation strategies and Resourcing efforts will begin to be felt in the third quarter and increasingly thereafter.
Even with the uncertain economic environment, we're proactively taking many steps to expand our company.
Including launching new business units and product line extensions at the fall market, we will introduce a product licensing program at Piura Division with Terry Bradshaw that Doug mentioned.
Launch a new agent My division targeting mass merchants and introduce an expanded upholstery offering at Sam Moore.
We remain highly engaged as a management team and strategic planning.
And continue to benefit from having a diverse portfolio of 11 operating units across many different distribution channels price points and product categories.
We remain confident in our business model, our market position and the strategies, we have and believe we will adapt successfully any challenges ahead.
This ends our formal part of our discussion at this time I will turn the call back over to our operator Michelle for questions.
Ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchtone Telecom.
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Once again Thats Star then one to ask a question.
One moment for questions. Please.
Our first question comes from Anthony Lebiedzinski Lubinski of Sidoti Your line is open.
Yes. Good morning, Thank you for taking the question so.
First on the home Meridian. So you mentioned that it was hit harder by the tariff disruptions.
I know, there's obviously much greater exposure to large retailers. So just wanted to get a better sense as to what percentage of specifically h. in my sales.
Come from China.
You know as far as for the for the quarter.
To that number in your life.
No that we broke out for this quarter the amount or maybe for last year. You know like is there just to get it better better sense a for for just eight am I, specifically Q Q3, Q4. It was in the 44% range and around in this quarter or last couple of months and the 29% range.
No from China got it got it okay and.
You know as far as the excess freight costs or do you have any expectation where that will be in the third quarter.
It looks to be about 600000, that's been a rep I think that's going to wrap that up.
Got it okay, all right and so obviously you you're moving a schedule a as planned for your shift away from China, and you said it was going to be about 22%.
As far as your exposure by the end of the year or would you expect that number to decrease further next year or would it be kind of more or less kind of stable at that level.
It'll it'll decreased slightly from there will always be some products from China, and even with the tariff rates on them they'll still be a better value there than other places, but yeah, you don't keep decreasing but slowly from there.
Got it okay. Thank you for that.
And as far as your overall penetration as far as exposure to the E Commerce retail, which is really one of your bright spots. So what percentage of your <unk> consolidated sales are tied to.
E Commerce channel.
Yeah.
Anthony This is Paul Toms.
I think that number for on a consolidated basis would be about 15% of sales in that channel.
Got it okay and.
You talked about some of some new sales initiatives. Obviously, you mentioned the Terry Bradshaw for line as well so you know overall.
As the number of skews that you will introduce at the full market is that going to be kind of more or less consistent with other markets or would you say that number will be higher as far as new product introductions.
I can well, maybe it would be better to address that almost by segment Jeremy.
Broker case goods and import upholstery number product introductions would be comparable to past markets very comparable for pretty okay.
Collections pretty relative number of skews as well.
And Mike on the domestic upholstery, what's your sense of comparable.
One exception would be Sam or others.
Less emphasis on shares more emphasis.
Sofas Sectionals.
Got it okay.
Right sure My Lee.
Lieberman from home Meridian Meridian, the overall SKU count introduction will be about the same.
Terry Bradshaw collection represented about 75, skews that motion upholstery and entertainment accent items within our total count.
Got it okay and.
As far as the incoming order improvement that you cited I think.
Doug you had mentioned actually for.
HM I specifically the August numbers were up 6.4% versus the prior year do you have.
Paul perhaps maybe then just numbers for.
The cuts on a consolidated basis would you be able to share that how thats trending in August versus a year ago.
First quarter consolidated orders were.
About flat to last year, which is a big improvement over the first quarter.
<unk>.
Okay, but you don't have us specifically for the <unk>, because because you called out the the H. My numbers, which is certainly encouraging 6.4% improvement in August versus a year ago, but I'd be curious what July you outsourcing.
July specifically was up 20% a little bit.
Total company the total company a little that some of that some of that in domestic upholstery is the timing of.
When orders are received as a vacation shut down either in June or July .
But yet they were up to 20% for just putting on for July .
So either way I think were encouraging.
Yes, okay.
All right well, thank you very much and best of luck.
Thanks Anthony.
Once again to ask a question. Please press Star then one.
There are no further questions I'd like to turn the call back over to Paul Toms for any closing remarks.
Right, we really have no further remarks, we appreciate everybody joining us. This morning, we changed the schedule slightly from prior conference calls, where we tried to.
Put our.
Congress called closer to the release of.
Earnings that was a request we receive from.
Several investors and we'll continue to tweak that we look forward to being back with you in early December and.
Reporting better results than we did this quarter.
Thanks for joining us today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.