HOFT - NASDAQ

Good day. Thank you for standing by. Welcome to the Hooker Furnishings Corporation Third Quarter 2024 (sic) [2025] 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. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker host today, Paul Huckfeldt, Chief Financial Officer. Please go ahead, sir.

Thank you, Olivia. Good morning, and welcome to our quarterly conference call to review our financial results for the fiscal 2025 third quarter, which began July 29 and ended October 27, 2024. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We 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 2025 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. Our fiscal 2025 third quarter and nine month results were adversely affected by the ongoing low demand in the home furnishings industry as well as charges totaling about $7.5 million, including approximately $3.1 million of restructuring costs related to the company's previously announced cost savings plan. $2.4 million of bad debt expense related to the bankruptcy of a single large customer and $2 million of noncash impairment charges to certain trade names under the Home Meridian segment. These factors resulted in an operating loss of $7.3 million and a consolidated net loss of $4.1 million or $0.39 per diluted share in the third quarter. Consolidated net sales were $104 million, a decrease of $12.5 million or 10.7% compared to the same quarter of the previous year. For the nine month period, consolidated net sales was $293 million, a decrease of $43 million or 12.9% compared to the same period of the previous year. This decrease was also due to low demand affecting the home furnishings industry and the absence of $11 million of liquidation sales from the unprofitable ACH product line, which the company exited last year. The company reported a consolidated operating loss of $15 million and a net loss of $10.2 million or $0.97 per diluted share attributed to lower overall sales, higher ocean freight costs at Hooker Branded, under absorbed indirect costs at Domestic Upholstery as well as the $7.5 million in charges mentioned earlier. Now, I'll turn the call over to Jeremy to comment on our fiscal 2025 third quarter results.

Thank you, Paul, and good morning, everyone. Despite sustained macroeconomic challenges and the charges recorded in Q3, we are encouraged by the sequential quarterly improvement in our core business profitability and by the results of our cost reduction efforts which will be more fully realized beginning fourth quarter. These improvements reflect our team's focus on managing controllables and reducing nonstrategic costs in a difficult environment while investing in impactful initiatives to expand our addressable market and growth opportunities, including our recently announced global licensing agreement with Margaritaville. We're also encouraged by positive developments in the macroeconomic environments such as cooling inflation and recent interest rate cuts in September and November, which should begin to increase demand for furnishings. Our October High Point Market introductions were positively received with significant placements across the board. In addition, we had the best retail placement market to date at outdoor furniture specialist Sunset West. The early feedback of three major casegoods collections for Hooker Branded gave us the confidence to place initial cuttings early before these groups were officially introduced in October. As a result, the collections will ship this month with a second cutting in January, increasing our speed to market by six months. This puts us in a strong position for the coming fiscal year with our available product assortment. In anticipation of increased demand and the typically stronger fall selling season, we built up Hooker Branded inventory by $11 million or 40% compared to previous quarter end. In addition, we are aggressively producing our top collections to ensure we will be in stock during the first quarter of fiscal '26. These inventories are high-quality assortments centered on our best-selling and most profitable SKUs. Now, I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

Thanks, Jeremy. Beginning with Hooker Branded. Net sales decreased by $4 million or 10.7% in the fiscal third quarter, compared to the prior year period, due primarily to lower average selling prices. While gross revenue in this segment decreased by 6.7% compared to the previous year's third quarter, discount increased by 390 basis points, due mainly to higher discounting on excess inventories. Unit volume decreased by a modest 2.1% compared to the previous year's third quarter, but exceeded the first and second quarters of this fiscal year. For the quarter, the segment reported an operating loss of $1.7 million on historically low third quarter net sales. This result included approximately $1 million of severance charges related to our cost reduction plan. Incoming orders decreased by 13% year-over-year. The quarter-end backlog was 30% lower than at the end of the prior year's third quarter, but remained 18% higher than pre-pandemic levels, which were at the end of fiscal 2020 third quarter. For the nine month period, net sales decreased by $14 million or 11.7%, also due primarily to lower average selling prices, resulting from the price reductions implemented in the previous year in response to reduced ocean freight costs. Unit volume was essentially flat, decreasing by about 1% compared to the prior year nine month period. Turning to the Home Meridian segment. Net sales decreased by $5.1 million or 11.8% in the third quarter compared to the prior year third quarter due to reduced unit volume. Over 40% of the sales decrease was attributable to the loss of a major customer following its bankruptcy. Sales through major furniture chains and independent furniture stores decreased though these decreases were partially offset by an 8% increase in sales in our hospitality business, marking two consecutive quarters of higher revenues. Incoming orders increased by 8% compared to the previous year's third quarter, while decreasing modestly by 2.9% for the nine month period despite the absence of orders from the discontinued ACH product line and the large customer bankruptcy. Quarter-end backlog was 32% higher than the prior year third quarter backlog. Despite increased net sales -- decreased net sales, Home Meridian achieved a gross margin of 20.5%, its highest level since the acquisition in 2016. The restructuring efforts at Home Meridian over the recent years have shown meaningful results towards creating sustainable profitability, including significantly reduced allowance, improved product margins and lower fixed costs across nearly all of this segment. For the quarter, the segment reported an operating loss of $3.7 million, driven by $2.4 million in bad debt charges due to the previously mentioned customer bankruptcy. $2 million in noncash intangible asset impairment charges and $233,000 of severance costs related to the cost reduction plan. For the nine month period, net sales decreased by $19 million or 16% in large part due to the absence of $11 million in ACH liquidation sales, which accounted for approximately 60% of the sales decrease and 75% of the unit volume decrease. Sales decreased in nearly all channels during the period, except for the hospitality business, which experienced a 23% increase. Lastly, the Domestic Upholstery segment, net sales decreased by $3.2 million or 10% compared to the prior year third quarter due to decreased sales at Shenandoah, Bradington-Young and HF Custom attributable to the persistent low demand. This decrease was partially offset by a 9% increase in sales at Sunset West, which has delivered year-over-year quarterly sales growth for three consecutive quarters this fiscal year. Gross profit decreased due to lower net sales, but the gross margin remained stable. For the quarter, the segment reported an operating loss of $281,000, a sequential improvement compared to the $1.3 million in operating losses recorded in each of the fiscal 2025 first and second quarters. These results also included approximately $560,000 of severance costs related to the cost reduction plan. Incoming orders decreased by 4.8% during the quarter and the quarter-end backlog was 30% lower than the prior year third quarter backlog. Excluding Sunset West, the order backlog remained consistent with prepandemic levels at the end of the fiscal 2020 third quarter. For the nine month period, net sales decreased by $10.6 million or 10.8%, also due to decreased sales at Bradington-Young, Shenandoah and HF Custom, partially offset by a 10% increase in Sunset West net sales. Turning now to cash, inventories and capital. Cash and cash equivalents were $20.4 million at the end of the third quarter, a decrease of $22.7 million from the previous year-end in January. Inventory levels increased by $4.7 million from year-end, driven primarily by a $6 million increase in Hooker Branded inventories. During the nine month period, we used cash and cash equivalents on hand to fund $7.4 million of dividends, $2.8 million to further develop our cloud-based ERP system and $2.7 million in capital expenditures. In addition to our cash balance, we had an aggregate of $28.3 million available under our existing revolver at quarter-end and as well as $29 million in cash surrender value of company-owned life insurance. We expect to finalize the refinancing of our credit facility and pay off our term debt in the coming days. As Jeremy mentioned, we're aggressively building inventory to support three new major casegoods collections as well as our best-selling and most profitable SKUs to accelerate speed to market and product availability for both current and next fiscal year. The inventory build is also driven by what is expected to be a longer-than-typical Lunar New Year holiday in Vietnam and expected longer post-holiday ramp-up period resulting from the extended holiday and lower production demand in Vietnam as well as potential US East Coast port strike in January of 2025. Earlier this week, we announced the payment of our regular quarterly dividend in December, which we believe demonstrates our confidence in the company's future success. Now, I'll turn the conversation back to Jeremy for his outlook.

Over the last few months, the key economic indicators that impact furniture sales have been trending positively, such as interest rate cuts, which drive home mortgage rates and cooling inflation. Additionally, in November, a leading real estate industry group stated its belief that the worst of the housing inventory shortage is ending and forecast an approximately 10% increase in home sales for 2025 with mortgage rates stabilizing around 6%. And October year-over-year furniture store sales rose for the second month in a row. Lastly, consumer sentiment rose in November to its highest level since April and the stock market continues near all-time highs. While the macroeconomic outlook is improving, our team has continued to focus on the controllables and improvements already underway at Hooker Furnishings. Our balance sheet, financial condition and management team should well equip us to navigate any remaining challenges as we focus on maximizing efficiencies and with the cost reductions while simultaneously investing in expansion strategies that will position us for revenue and profitability growth when demand fully returns. 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. [Operator Instructions] Our first question coming from the line of Anthony Lebiedzinski with Sidoti & Company. Your line is now open. Anthony, your line is open. Please check your mute button.

Can you hear me now?

Yes.

Yes. Sorry about that, yeah, I was on mute. So good morning to all of you and thanks for taking the questions. So first, just curious, so since the election, have you guys seen any notable changes in demand from your customers? It seems like just talking to others in the industry. They talked about the election being a sort of distraction for the end consumer. So curious to get your thoughts on what you've seen so far?

Yes. So we've noticed that we've had a noticeable positive bump in order rates since the election for sure.

That's good to hear, certainly encouraging. And then in terms of the three new casegoods collections. You talked about the speed to market, certainly driving that. How impact, I'm sorry, how impactful could that be for the fourth quarter as you look to get those products to retailers?

Well, it definitely gives us a better shot at some better shipments at Hooker Branded because we're going to ship first cutting in November, second cutting in January, specifically to direct container customers that, that will affect first. But I think the more significant part of it is the fact that we're putting those collections in position for the next fiscal year to gain the full benefit of those hitting floors for the entire year and not half of the year.

All right. That makes a lot of sense. And you've done a nice job improving the gross margin at HMI. Do you think you can further improve from here? What are your thoughts there, Jeremy?

I would say a little bit. And just to stress, most of that improvement was simply getting out of businesses we should not have been in which obviously takes the average very positive compared to where we were when we had businesses losing money, a low margin business like the ACH business, the fact that we're out of that, it's no longer a drag on the overall average. So that's been the biggest benefit for us. We do still think there's a little bit of room for improvement.

Got you. And so as far as the inventory situation here, so you talked about having excess inventories overall, your inventory was higher at the end of the third quarter than we expected. So how would you describe your current inventory position and the quality of that inventory and any sort of goal for your inventory at the end of your fiscal year?

I would call our inventory position, the best it's been probably, Paul, in probably two years.

I think so, yes.

And I say that not only because of the positive inventory we have on the Hooker Branded side that are some of our best SKUs, but not having the drag of something like ACH on the other side, which negatively impacts the entire inventory as well. So we really don't have the problem inventory within our system anymore like we did with the ACH. We only -- our increase is in really good SKUs.

Yes. We talked -- I know it might sound a little inconsistent. We talked about discounting, excess inventories and building inventory and what we're doing is cleaning up the inventory, getting rid of slow-moving stuff to free up the working capital to invest in better SKUs into new products and in our best-selling SKUs.

All right. Yes. That makes a lot of sense. Okay. And then lastly for me before I pass it on to others. So Jeremy, I know you were very upbeat about the Margaritaville launch when you announced this I believe in October. Can you provide any more details as to how impactful that deal could be for you guys?

Well, we believe it's going to be very impactful. What's interesting about the Margaritaville license from our standpoint is it really affects a lot of our divisions. It's not really just going to be a Hooker Branded thing, for example. It's going to be Hooker Legacy, that's going to really affect positively, we believe our contract divisions. There's a lot of opportunity with hospitality and through each contract that will give us an advantage with a lot of those jobs because Margaritaville is building a significant number of homes in areas that we'll be attached to in pricing those models and whatnot. So there's just -- it opens a lot of doors that would not be open otherwise.

Got you. Thank you very much and best of luck.

Of course. Thank you, Anthony.

Thank you, Anthony.

Thank you. And our next question coming from the line of Dave Storms with Stonegate. Your line is now open.

Good morning.

Good morning.

Hey, Dave.

Good morning. Just wanted to ask my first question around the macro demand environment going into this holiday season. Is there any potential to see continued discounting through the back part of this year?

Can you repeat that, Dave, there's a little bit of static or something on the line.

Apologies. Just around the macro environment and the holiday season coming up, is there any potential for continued discounting as you go into the back quarter of the year?

We don't believe any more than normal.

Normal, yes, normal promotions. E-comm, in particular, we tend to run some specials, but it's targeted promotions.

Understood. Thank you. And then just wanted to touch on the bankruptcy. Are there any other customers that you're seeing as highly at risk? And is there any recourse to recover some of that write-off?

Well, you probably know who that big customer is. And there's probably not a lot of recourse. We've done what we can to mitigate that business -- that loss. And that's really the only big customer that we -- there's always a small customer here or there that's bankrupt. We haven't really noticed a particularly significant change in the pace of bankruptcies or distressed receivables. But that was one that was just -- it was a big customer and we got caught.

Understood. And then I did have another question around the licensing deal. I was hoping you could speak a little more around the logistics and next steps. And maybe what early wins would look like? It looks like this is a decent amount of white space for you all.

Yes. And that's what you're mentioning is the reason we're going to launch in October. The temptation of course is to move faster than that and try to launch in April, but ride is going to be much more important and fast for us and we want to get this ride. So the logistics right now of everything are pulling that together from a Sunset West, our outdoor company is obviously heavily involved. All of our Domestic Upholstery is involved, Hooker Branded involved, contract is involved, hospitality. So right now, the biggest thing we're working on is pulling everything together the way it needs to be pulled together in order to make -- to put our best foot forward on a launch. So and that will continue until we get there.

That's very helpful. And then just one last question for me, two quarter around cost savings. Should we expect any further severance costs in 4Q? And then looking into the next year, should we expect the $10 million to be evenly spread out or would we expect that to be more back-end weighted as those cost savings ramp?

We don't expect significant additional, at this point anyway, we don't expect significant additional restructuring costs. We've got one more element, one more reasonably large elements of our cost savings program that we still need to execute. But I would say that most of it is going to be in place for the better part of the year. We haven't started really -- we haven't fully realized a lot of those savings yet, but we expect to start seeing those in the fourth quarter. And I would say that most of the $10 million will be evenly spread through next year.

Understood. That's all very helpful. Apologies. That's all very helpful. Thank you for taking my questions and good luck in the fourth quarter.

Thank you.

Thank you. And I am showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Jeremy Hoff for any closing remarks.

I would like to thank everyone on the call for their interest in Hooker Furnishings and wish you all a Happy Holiday season. We look forward to sharing our fiscal '25 full year results in April next year. Take care.