Hooker Furnishings Q4 2024 Earnings Call Transcript

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April 11, 2024

There are 6 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to Hooker Furnishings' 4th Quarter 20 24 Earnings Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to Paul Hochschild.

Operator

You may begin.

Speaker 1

Thank you, Twanda. Good morning and welcome to our quarterly conference call to review our financial results for the fiscal 2024 Q4 and full year, both of which ended on January 28, 2024. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We certainly appreciate your participation today. During our call, we may make forward looking statements, which are subject to risks and uncertainties.

Speaker 1

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 2024 results. Any forward looking statement speaks only as of today, and we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after today's call. This morning, we reported consolidated net sales of $433,000,000 for the fiscal 2024 fiscal year, a decrease of $150,000,000 or 25.7 percent as compared to last year. This decline is attributed to industry wide soft demand and the exit of unprofitable product lines in our Home Meridian segment, which accounted for about $21,000,000 of the reduction in revenue. Despite the sales decrease, profitability increased compared to the prior fiscal year due primarily to the absence of a $24,000,000 inventory write down in the current period in our Home Meridian segment as well as increased profitability in our Hooker Branded segment.

Speaker 1

We recorded a consolidated operating income of $12,400,000 and net income of $10,000,000 or $0.91 per diluted share. For the fiscal 2024 Q4, which began on October 30, 23 and ended on January 28, 2024, consolidated net sales decreased by $34,000,000 or 26 percent to $96,800,000 due to sales decreases in all three segments also driven by the soft demand for home furnishings. We reported net income of $593,000 or $0.06 per diluted share compared to a net loss of $17,000,000 almost $18,000,000 or $1.60 per diluted share in the prior year Q4. The fiscal 2023 4th quarter loss resulted from the $24,000,000 inventory write down related to unprofitable ACH product line and other excess inventories in the Home Meridian segment during that period. Now I'll turn the call over to Jeremy for comments on our fiscal 2024 full year and Q4 results.

Speaker 2

Thank you, Paul, and good morning, everyone. During a challenging year, we are proud of our team's accomplishments and discipline as they successfully restructured our HMI business model, improved profitability and strengthened our balance sheet. At the same time, we reinforced belief in our strategic growth initiatives by continuing to make the necessary investments to fuel long term expansion, While taking comprehensive steps this year to reposition HMI for sustainable profitability, we simultaneously executed an array of long term growth initiatives including the launch of the new M Modern lifestyle brand, new showroom openings, a new enterprise resource planning operating system and the acquisition of Bobo Intriguing Objects to enhance our ability to be a whole home furnishings resource. Despite difficult business conditions for the home furnishings industry and the 25.6% consolidated sales decrease, our operating income of $12,400,000 and net income of $10,000,000 or $0.91 per diluted share for fiscal year were significant improvements over the prior year as Paul noted. During the year, we also strengthened our financial position and balance sheet, increasing cash by $24,000,000 to over $43,000,000 at year end and adjusted our inventory levels to align with demand, resulting in a $35,000,000 or 36 percent reduction, including the successful liquidation of HMI's obsolete inventories.

Speaker 2

Fiscal 'twenty four was a pivotal year for us as we move forward from the initial COVID crisis but still feel some of the effects. Since 2020, we have navigated through some of the most volatile macroeconomic conditions of our 100 year history. The severe initial downturn of the pandemic followed by a demand surge for home furnishings, supply chain disruptions, inventory inventory unavailability, historically high ocean freight costs, significant inflation, higher interest rates, a sluggish housing market and a temporary shift in discretionary spending away from home furnishings. Against the backdrop of these disruptions and recent weak industry wide demand, we've strengthened our financial position, made strategic investments to expand our addressable market and continued our over 50 year history of dividend payments, including our 8th consecutive annual dividend increase. We are also excited to announce changes to our organization, which we believe will ideally position us for growth into the future.

Speaker 2

We have consolidated merchandising for our legacy brands under a Chief Creative Officer designed to drive creative excellence and deliver a more integrated and aspirational presentation in our approach to the market. This move is expected to position Hooker as a whole home consumer centric resource to its customers, drive synergies among our brands and ultimately drive increased sales and earnings when demand returns. As we celebrate our 100th year of business, the adaptability that's been integral to our culture since 1924 continues to be vital to our success today and will drive us forward as we start our next century. Now I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

Speaker 1

Thank you, Jeremy. The Hooker Branded segment increased net sales by these sales decreased by $49,000,000 or 24% compared to the prior fiscal year, primarily due to soft demand for home furnishings. This decrease was further amplified by strong sales in the prior year driven by the surge in demand after the initial COVID crisis and fulfillment of historically high backlog carried over from fiscal 2022. Despite the sales decrease, gross margins increased significantly due the combination of reduced ocean freight costs and the lingering impact of price increases implemented in the prior year. For fiscal 2024 Hooker Branded achieved $16,800,000 in operating income with a 10.8% operating margin compared to $22,000,000 and a 10.7 percent operating margin last year.

Speaker 1

For the fiscal 2024 Q4, net sales decreased by $14,000,000 or 27% compared to the prior year Q4. While incoming orders remained flat compared to last year's Q4, the backlog was 25% lower than the previous year end, but remains 40% higher than the fiscal 2020 year end. In April 2023, we relocated and expanded our High Point showroom to create a wider audience for our Hooker Legacy and Sunset West product lines, while opening 2 smaller showrooms in Las Vegas and Atlanta. We set attendance records at both the spring and fall high point markets with year over year increases of 92 percent 86%, respectively. The collective impact of our new showrooms in these markets has more than quadrupled our customer contacts annually, which we believe will begin to show substantial benefits as furniture demand improves.

Speaker 1

Moving to our Home Meridian segment. Segment sales net sales decreased by $73,000,000 or 34% compared to the prior fiscal year due primarily to soft demand for home furnishings, which resulted in reduced sales across all channels, including traditional furniture chains, mass merchants and e commerce. Additionally, the exit of unprofitable businesses accounted for about 26% of the sales decrease within the segment. On a positive note, Samuel Lawrence Hospitality achieved robust sales growth with a 38% increase, thanks to a strong rebound in the hospitality industry. Despite reduced revenue and gross profit, gross profit was $24,000,000 compared to a gross loss of $2,600,000 in the prior year.

Speaker 1

This significant improvement was primarily due to the absence of a $24,000,000 write down of ACH inventories and other excess inventory. The company made significant progress in restructuring HMI to focus on its core business and product lines, allowing the segment to achieve profitability in the Q3 for the first time since calendar 2021 and to improve fiscal year gross profit, setting it on a path to sustained profitability. The segment reported an operating loss of $5,500,000 or 3.9 percent, a $31,700,000 improvement from the prior year and part of a trend of reduced losses over the last few years, which we believe will result in a return to profitability for the segment. For the fiscal 2024 Q4, net sales decreased by $15,000,000 or 35% compared to the prior year Q4. Incoming orders at HMI outpaced all segments, increasing by over $74,000,000 more than doubling compared to the prior year.

Speaker 1

This rising demand is an affirmation of HMI's efforts to strengthen product offerings and focus on core profitable businesses such as Pulaski, PRI and SLH. To a lesser extent, the absence of order cancellations from exited businesses in the current year impacted the order improvement at HMI. The year end backlog was 16% lower than the previous year end, but increased by 30% compared to the fiscal 2024 Q3 end. And since the end of the year, we've seen the backlog grow by about another $15,000,000 Moving to domestic upholstery. The domestic upholstery segment's net sales decreased by $30,000,000 or 19% compared to the all time record sales this segment achieved in the prior fiscal year, which resulted from the fulfillment of historically high order backlogs.

Speaker 1

All four divisions experienced sales decreases driven by reduced demand for home furnishings. But gross profit and margin decreased both gross profit and margin decreased due to a combination of decreased net sales and under absorbed overhead when operating at reduced production levels during the year. On a more positive note, all four divisions benefited from more stable raw material costs. For the fiscal 2024 Q4, net sales decreased by about $5,500,000 or 16% compared to the prior year 4th quarter. Incoming orders increased across all four divisions in fiscal 2024.

Speaker 1

The year end order backlog was 36% lower than the prior year end. Domestic upholstery backlog remains 7% higher than the fiscal 2020 year end, excluding Sunset West, which was acquired on the 1st day of the company's 2023 fiscal year. Moving to the balance sheet. Cash and cash equivalents stood at $43,200,000 at the fiscal 2024 year end, an increase of $24,000,000 from the prior year end. Inventory levels decreased by $35,000,000 from the prior year end due to adjusted inventory planning based on current demand and our business structure.

Speaker 1

During fiscal 2024, dollars 55,000,000 of cash generated from these operating activities funded $11,700,000 of share repurchases, dollars 9,700,000 of cash dividends, dollars 6,800,000 in capital expenditures including investments in the new High Point Atlanta and Las Vegas showrooms, $5,000,000 for continued implementation of our ERP system 2,800,000 of principal and interest payments on our term loan and $2,400,000 for the Bovo acquisition. We completed the share repurchase program, which began in the Q2 of last fiscal year, spending a total of $25,000,000 to purchase and retire 1,400,000 shares of our common stock. In addition to our cash balances, we have an aggregate $28,300,000 available under our existing line of credit and $28,500,000 of cash surrender value of company owned life insurance. Aligning our inventories with current demand has contributed to the increase in cash during the year and we have disciplines in place to help prevent future inventory spikes. Our capital allocation priorities right now are continuing to invest in organic growth and strategic initiatives and maintain a strong balance sheet until the demand environment improves while continuing to pay a meaningful dividend, which we've paid for 53 consecutive years.

Speaker 1

Now I'll turn the discussion back to Jeremy for his outlook.

Speaker 2

Thank you, Paul. Home furnishings industry demand is exceptionally soft and about 2.5 months into the new fiscal year, year to date consolidated orders are down in the mid single digits as compared to the same prior year period. However, we believe the investments and improvements we made in the past year will be a springboard to higher profitability, especially as demand improves. Economic indicators are mixed, giving us a cautiously optimistic outlook. Home furnishings industry demand is soft and consumer confidence ticked down recently after several months of improvement.

Speaker 2

Indices measuring consumers' of both the current situation and future expectations worsened over the last month despite what appear to be encouraging signs including easing inflation and likely interest rate cuts. However, there are some positives as well. We're encouraged by recent strong growth in building permits and single family housing starts, recent decreases in mortgage interest rates, continuing positive employment data and the stock market's strong performance. Our consolidated order backlog has increased from $72,000,000 to about $85,000,000 since the end of fiscal 2024. We are confident we've made the right strategic investments in sales channels, people, systems and products and that we are positioned to grow as the economy gains momentum.

Speaker 2

Going forward, we intend to use the strength of our balance sheet and variable cost model to weather current economic volatility until consumer confidence improves and demand normalizes. We are looking forward to the spring High Point market that opens this week and expect strong attendance as we offer an exciting assortment of new products across divisions. At the market, we are kicking off a year long celebration to chronicle our 100 year history of design leadership, culture and legacy of giving. As we prepare to embark on our 100th year, we are privileged to celebrate this incredible milestone with our employees, our partners and our communities. In 2024, we will honor our anniversary with a variety of activities, none more important than those that demonstrated heritage centered around enhancing the lives of the people we touch.

Speaker 2

Throughout the years, our team has put integrity and our philanthropic culture at the forefront of everything we do. So it's appropriate that as the cornerstone of our 100th year anniversary celebration, the company is launching a signature philanthropic program, 100 Acts of Kindness, designed to amplify our spirit of giving in an even more meaningful way during our centennial year. The nationwide program aims to further enhance the lives of those in need, broadening our reach to communities across the U. S. This ends the formal part of our discussion.

Speaker 2

And at this time, I will turn the call back over to our operator, Towanda, for questions.

Operator

Thank you. Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

Speaker 3

Good morning and thank you for taking the questions. So first, congratulations on your 1 100th anniversary and sort of nice to see the improved balance sheet as well. So Jeremy, as you said, it's been a crazy last few years for sure since COVID. So I guess maybe just to kick things off, for the Q4, can you just talk maybe about unit volumes versus pricing? I mean, certainly pricing went up during COVID and then came down.

Speaker 3

So just wanted to get a better framework as far as just overall top line, what happened with unit volumes and pricing during the Q4? Then I have a couple of other questions as well.

Speaker 2

Yes, Anthony. Just one moment please. We're working on it.

Speaker 3

Got you. Okay.

Speaker 2

Appreciate your comments on the 100th year and the few years we've had. Thank you.

Speaker 1

Well, you'll see the details in the K, which we'll file, I hope, tomorrow morning or by midday tomorrow. But generally, unit volume is down, pricing is pricing is down a little bit, particularly in our in HMI pricing is down a little bit. But But it's mostly unit volume that's down at this point.

Speaker 3

Got you. Okay. Thanks. Yes, I'll take it.

Speaker 2

Go ahead. Sorry.

Speaker 3

I was going to say that I'll look at the 10 ks when it's filed for the details. But go ahead Jeremy.

Speaker 2

That's perfect. That's what we should do. Thank you. Yes.

Speaker 1

Univines are down about 20 ish percent. Yes.

Speaker 3

Got you. Got it. Okay. All right. Thanks for that color.

Speaker 3

And then so overall, nice improvement in the gross margin, certainly significantly above versus last year. Certainly, it is down from the Q3 when you had some LIFO benefit, I believe. But then just looking forward, I guess, given the various puts and takes in the business, how should we think about your availability I'm sorry, your ability to sustain these gross margins?

Speaker 1

I think during the quarter, we had some ups and downs, but I think 4th quarter gross margin is probably indicative of what we should sustain going forward.

Speaker 3

That's very helpful. Okay, great.

Speaker 1

We're not seeing a lot of discounting.

Speaker 3

Okay, Got it. Okay. And then, so you guys talked about seeing so far in this fiscal year, you're already 2.5 months into the new 1st fiscal quarter here. You say you're down mid single digits in terms of orders. So how should we think about this in terms of revenue for the quarter or anything you can mention?

Speaker 3

I know sometimes there is a lag between orders and when that translates into revenue. So maybe can you help us square that away, how to think about that from a revenue perspective?

Speaker 2

I think, Anthony, from a revenue perspective, being that we went into the Q1 from the Q4 with lower backlogs, We see a fairly conservative view on that, but we're encouraged by the increased order rate that is building our backlog. I believe I mentioned the number around it's up around $15,000,000 same time last from same time last year. So we're encouraged by that, but it didn't hit that really didn't hit us until partway through the Q1, which is probably going to impact Q1 more from a revenue standpoint and then we'll continue improvement in the second.

Speaker 1

Yes. And some of the a lot of that's it's in Home Meridian, which typically has a little bit longer order to shipment cycle.

Speaker 3

Right.

Speaker 1

So it's going to be it's going to push it out.

Speaker 3

Okay. That's very helpful color. And then as far as the upcoming market here, you talked about some of the new products that you're introducing. Jeremy, are there any particular product collections or anything that you're excited about that's a showcase at market?

Speaker 2

I was in the both showrooms yesterday and we have really good introductions on really all sides of the business. I will say, as far as improvement just because of where we've been before, HMI continues to gain momentum with their new products. And as we Pulaski has been definitely leading. They really in my opinion were able to get started earlier in their improvement on the product side. PRI and Samuel Lawrence continue to gain momentum.

Speaker 2

And whenever you fall into the place we did from a I'll call it a lack of focus, We had a lot of other businesses we need to get out of. Whenever you go through that, it takes you can't just improve something in a market or 2 and get something back. But Samuel Lawrence is definitely on their way back and we're seeing that in a lot of ways. But our partners that we speak with and that are giving us commitments and placements, they are giving us that feedback which candidly is where I'm getting it, right? So I'm very encouraged by their improvements and where they're headed.

Speaker 3

Got you. Got it. And the last question before I pass it on to others here. So could you expand on the recent management changes in terms of your merchandising functions? Are there also benefits that you expect maybe from an expense standpoint as you look to consolidate your merchandising strategy?

Speaker 3

Just overall, just wondering, Jeremy, if you could provide additional color on that. That'd be helpful. Thank you.

Speaker 2

Well, I'll start with the latter part of your question. We didn't do it to save money. We did it to invest in what we'll call the most profitable side of our business. And if you go back to early 2000 when we started the purchase, we had the purchase of B. Y.

Speaker 2

Brains De Jong and then we had the purchase of Sam Moore later on of course HMI and Shenandoah. But as you look at that legacy model with really in the Showplace building you have Hooker Casegoods Hooker Upholstery, HF Custom, M and Bradenton Young and then Sunset West and Bobo intriguing objects, which is a lot. You really the way things are bought, sold, viewed today and with our capabilities to be a whole home resource, it made sense for us to create a Chief Creative Officer position in order to get the different companies throughout legacy aligned so that we can truly become a whole home resource. If you picture these different talented groups working together, but not really having an ability to work across those different lines that's limiting our ability to grow if we don't figure out a way to really head the same direction aesthetically and really move in a more powerful way together.

Speaker 1

Becoming a marketing company.

Speaker 3

Yes. Got it. All right. That makes a lot of sense. All right.

Speaker 3

Well, thank you very much. Best of luck and I'll pass it on to others.

Speaker 2

Thank you, Anthony.

Operator

Please stand by for our next question. Our next question comes from the line of Dave Storms with Stonegate. Your line is open.

Speaker 4

Good morning. Good morning, Dave. Good morning.

Speaker 3

Good morning. Just hoping

Speaker 4

we could start great to see the inventory work you all have been able to do. How should we think about that going forward and any impact that might have on working capital? Assuming this market starts to rebound in the short to medium term, could we expect to see an inventory build at that point?

Speaker 1

Yes. We'll need to fund growth, but I think it's going to be pretty modest. Frankly, the whole COVID disruption caused inventory spikes. And we've since then, we've put processes in place to much better manage the inventories across the whole company. So yes, I mean, obviously if sales go up, we'll need more inventory, but I think it's going to be a pretty modest inventory build.

Speaker 2

But also more specifically, we really didn't have the inventory issues on the Hooker side of our business. And we had the S and OP process, the controls that Paul just spoke of, those were already on the Hooker side of our business and we simply expanded those controls over the HMI companies as well, which is why we believe we're in a really good position from an inventory standpoint.

Speaker 1

And also getting out of the ACH business, that was the only really inventory intensive business in the home Meridian segment.

Speaker 3

And

Speaker 1

so we're out of that business completely. So I would not expect significant fluctuations in inventory.

Speaker 4

Understood. That's very helpful. And then just from a more supply chain view, what are you seeing in terms of shipping? Or have you seen any disruptions with some of the geopolitical stuff going on around the Red Sea? Any issues with sourcing or capacity, just kind of an overall feeling of where that stands?

Speaker 1

From a shipping from an ocean freight standpoint, I think we saw some delays when shipping lines went around the heart of Africa instead of going through the canals, Added a little bit of cost, I don't think anything really appreciable. That seems to be pretty stable right now. Supply chains are, I think, in pretty good shape. This downturn, obviously, factories need work too. So think we've actually seen an improvement in some delivery times.

Speaker 4

That's perfect. Thank you. And then just one more. I know you laid out your capital allocation priorities. You do seem to have a lot of capacity should something peak your interest from an acquisition standpoint.

Speaker 4

Do you have a sense of what any ideal acquisition targets would look like? Or are you just more focused on what you already have in house?

Speaker 2

So the key word for us right now is what you said, which is focus. We actually are going to treat several of our businesses like they are new acquisitions at this point with the whole strategy to pull them together into this whole home environment, which we believe will be like creating a new part of our company that will be really position us we feel like for growth.

Speaker 4

That's all. Very helpful. I appreciate the color and wish you luck in this upcoming quarter.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of John Deysher. One moment. John Deesher with Pinnacle. Your line is open.

Speaker 5

Okay. Good morning. Thanks for taking questions and congrats on a good, solid year. Just a couple of quick questions. One, what was the orders for the 4th quarter and what was the backlog at the end of the quarter again, please?

Speaker 1

Backlog at the end of the quarter was 72,000,000 dollars Orders for the quarter were $94,000,000 up from $88,000,000 in the prior year.

Speaker 5

Okay, great. And regarding capital allocation, I think you bought back $25,000,000 worth of stock, 1,400,000 shares, works out to about $18 a share. Stock price today is about $1 above that $18 a share. It's currently looks like it's going to open around $19 I'm just curious if the Board has given any thought to implementing a new buyback program given where the current stock price is?

Speaker 1

Obviously, we'll talk about it. But I think with the economic uncertainty that we're facing right now, I think we're going to be pretty cautious about a buyback. Stability is probably as much as a share repurchase is an important part of our strategy, economic stability is probably more so.

Speaker 5

When you say economic stability, what exactly you're referring to?

Speaker 2

He's just saying that in a downturn that we're in currently, we're watching our balance sheet and we're doing things that are necessary to feed our organic business and our growth.

Speaker 5

Okay. So I got you. So growth and cash are taking priority at this point? Correct.

Speaker 1

Yes. I'm sure we'll have a conversation if the price falls.

Speaker 5

Yes. I encourage you to do so. But thanks and good luck. Thanks.

Speaker 2

Thank you.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Jeremy for closing remarks.

Speaker 2

Thank you. I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fiscal 2025 Q1 results in June. Take care.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

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