HOFT - NASDAQ

Hello, and thank you for standing by. Welcome to Hooker Furnishings Fourth Quarter 2024 Earnings Webcast. [Operator Instructions] I would now like to hand the conference over to Paul Huckfeldt. You may begin.

Thank you, Tawanda. Good morning, and welcome to our quarterly conference call to review our financial results for the fiscal 2024 fourth quarter 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. 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 statements to reflect events or circumstances after today's call. This morning, we reported consolidated net sales of $433 million for the fiscal 2024 fiscal year, a decrease of $150 million or 25.7% as compared to last year. This decline is attributed to an industry-wide soft demand and the exit of unprofitable product lines in our Home Meridian segment, which accounted for about $21 million 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 million inventory write-down in the current period in our Home Meridian segment as well as increased profitability in our Hooker Branded segment. We recorded a consolidated operating income of $12.4 million and net income of $10 million or $0.91 per diluted share. For the fiscal 2024 fourth quarter, which began on October 30, '23 and ended on January 28, 2024, consolidated net sales decreased by $34 million or 26% to $96.8 million 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 million, almost $18 million or $1.60 per diluted share in the prior year fourth quarter. The fiscal '23 fourth quarter loss resulted from the $24 million 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 fourth quarter results.

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 and 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 furnishing resource. Despite difficult business conditions for the home furnishings industry, and the 25.6% consolidated sales decrease, our operating income of $12.4 million and net income of $10 million 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 million to over $43 million at year-end and adjusted our inventory levels to align with demand, resulting in a $35 million or 36% reduction, including the successful liquidation of HMI's obsolete inventories. Fiscal '24 was a pivotal year for us as we move forward from the initial coverage 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 unavailability, historically high ocean freight cost, 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 eighth 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. We have consolidated merchandising for our legacy brands under a Chief Creative Officer, designed to drive creative excellence in delivering 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.

Thank you, Jeremy. The Hooker Branded segment increased net sales decreased by $49 million or 24% compared to the prior fiscal year, primarily due to soft demand for home furnishing. 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 to the combination of reduced ocean freight costs and the lingering impact of price increases implemented in the prior year. For fiscal '24, Hooker Branded achieved $16.8 million in operating income with a 10.8% operating margin compared to $22 million and a 10.7% operating margin last year. For the fiscal '24 fourth quarter, net sales decreased by $14 million or 27%, compared to the prior year fourth quarter. While incoming orders remained flat compared to last year's fourth quarter, 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 two 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% and 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. Moving to our Home Meridian segment. Segment sales -- net sales decreased by $73 million 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 million compared to a gross loss of $2.6 million in the prior year. This significant improvement was primarily due to the absence of a $24 million 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 third quarter 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 $5.5 million or 3.9%, a $31.7 million 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 '24 fourth quarter, net sales decreased by $15 million or 35% compared to the prior year fourth quarter. Incoming orders at HMI outpaced all segments increasing by over $74 million, more than doubling compared to the prior year. 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 third quarter end. And since the end of the year, we've seen the backlog grow by about another $15 million. Moving to domestic upholstery. The Domestic Upholstery segment's net sales decreased by $30 million 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. All four divisions experienced sales decreases, driven by reduced demand for home furnishings. Both gross profit and margin decreased due to a combination of decreased net sales and underabsorbed 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 fourth quarter, net sales decreased by about $5.5 million or 16%, compared to the prior year fourth quarter. Incoming orders increased across all four divisions in fiscal '24. 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 first day of the company's 2023 fiscal year. Moving to the balance sheet. Cash and cash equivalents stood at $43.2 million at the fiscal '24 year-end, an increase of $24 million from the prior year-end. Inventory levels decreased by $35 million from the prior year-end due to adjusted inventory planning based on current demand and our business structure. During fiscal '24, $55 million of cash generated from these operating activities funded $11.7 million of share repurchases, $9.7 million of cash dividends $6.8 million in capital expenditures, including investments in the new High Point, Atlanta and Las Vegas showrooms, $5 million for continued implementation of our ERP system, $2.8 million of principal and interest payments on our term loan and $2.4 million for the BOBO acquisition. We completed the share repurchase program, which began in the second quarter of last fiscal year, spending a total of $25 million to purchase and retire 1.4 million shares of our common stock. In addition to our cash balances, we have an aggregate $28.3 million available under our existing line of credit and $28.5 million 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 paid for 53 consecutive years. Now I'll turn the discussion back to Jeremy for his outlook.

Thank you, Paul. Home furnishings industry demand is exceptionally soft in 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. Indices measuring consumers' assessments 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 million to about $85 million since the end of fiscal '24. 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. 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 the demonstrated heritage centered around enhancing the lives of the people we touch. 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. And at this time, I will turn the call back over to our operator, Tawanda for questions.

[Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

Good morning, and thank you for taking the questions. So first, congratulations on your 100th anniversary. And it's certainly 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 fourth quarter, can you just talk maybe about unit volumes versus pricing. I mean, certainly, pricing went up during COVID, then came down. So I just wanted to get a better framework as far as just overall top line what happened with unit volumes and pricing during the fourth quarter? Then I have a couple of other questions as well.

Yes, Anthony, just one moment, please, we're working on it. I appreciate your comments on the 100th year and the few years we've had. Thank you.

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 down a little bit, particularly in HMI, pricing is down a little bit. But it's mostly unit volume, it's down at this point.

Go ahead. Sorry.

No, I was going to say that I'll look at the 10-K when it's filed for the details. But go ahead, Jeremy.

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

Unit volumes are down about 20-ish percent.

Got it. Okay. All right. Thanks for that color. And then -- so overall, a nice improvement in the gross margin sort of significantly above versus last year. Certainly, it is down from the third quarter when you had a 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 - or I'm sorry, your ability to sustain these gross margins?

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

That's very helpful. Okay. Great.

We're not seeing a lot of discounting.

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 first fiscal quarter here, you said 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 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?

I think, Anthony, from a revenue perspective, being that we went into the first quarter from the fourth quarter with lower backlogs. We see a fairly conservative view on that, but we're encouraged by the increased order rate that's building our backlog. I believe I mentioned the number, around -- it's up around $15 million 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 first quarter, which is probably going to impact first quarter more from a revenue standpoint, and then we'll continue improvement in the second.

Yes. And some of -- a lot of that -- it's in Home Meridian, which typically has a little bit longer order to shipment cycle. So, it's going to push it [down].

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 at the showcase at market?

I was in the both showrooms yesterday, and we have really, 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. And whenever you fall into the place we did from a -- I'll call it a lack of focus, and 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 two 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 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.

Got it. And the last question before I pass it on to others here. So, can 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? Just overall -- just wondering, Jeremy, if you could provide additional color on that. That would be helpful. Thank you.

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 BY. Bradington-Young, and we had to purchase of Sam Moore. Later on, of course, HMI and Shenandoah, but as you look at that legacy model with really in the show place building, you have Hooker Casegoods, Hooker Upholstery, HF custom and Bradington-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.

Becoming a marketing company.

Yes.

Got it. All right. That makes a lot of sense. All right. Well, thank you very much. Best of luck. I'll pass it on to others.

Thank you, Anthony.

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

Good morning.

Good morning, Dave.

Just hoping 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?

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 -- 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.

But also more specifically, we really didn't have the inventory issues on the Hooker side of our business. we had the S&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.

And also getting out of the ACH business that was the only really inventory-intensive business in the Home Meridian segment. And so, we're out of that business completely. So I would not expect significant fluctuations in inventory.

Understood. That's very helpful. And then just from a more supply chain view. What are you seeing in terms of shipping or you've 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?

From a shipping -- from an ocean freight standpoint, I think we saw some delays when shipping lines went around the Horn 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 safe. This downturn, obviously, factories need work, too. So, I think we've actually seen an improvement in some delivery times.

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 beat your interest from an acquisition standpoint, 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?

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.

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

Thank you.

[Operator Instructions] Our next question comes from the line of John Deysher with Pinnacle. Your line is open.

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 fourth quarter? And what was the backlog at the end of the quarter again, please?

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

And regarding capital allocation, I think you bought back $25 million worth of stock, 1.4 million shares works out to about $18 a share. Stock price today is about $1 above that $18 a share. It's currently, it looks like it's going to open around '19. I'm just curious if the Board has given any thoughts to implementing a new buyback program given where the current stock price is.

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 share repurchase is an important part of our strategy. economic stability is probably more so.

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

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.

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

Correct.

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

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

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.

Thank you. I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fiscal '25 first quarter results in June. Take care.