Paul A. Huckfeldt - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance & Accounting Paul B. Toms - Chairman and Chief Executive Officer Alan D. Cole - President Michael W. Delgatti - Executive Vice President of Corporate Sales and President of Hooker Upholstery.

Todd A. Schwartzman - Sidoti & Company, LLC.

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the third quarter of 2014. [Operator Instructions] As a reminder, this conference call is being recorded.

It is my pleasure to introduce your host, Paul Huckfeldt, Senior Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation..

Thank you, Kate. Good afternoon, and welcome to our conference call to review our sales and earnings for the fiscal 2014 third quarter and first 9 months, both of which ended on November 3, 2013. We certainly appreciate your participation this afternoon.

Joining me today is Paul Toms, our Chairman; and Michael Delgatti, the President of Hooker Upholstery and Executive Vice President of Sales for Hooker Furniture Corporation; and Alan Cole, President of Hooker Furniture Corporation. During our call today, 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 SEC filings and the press release announcing our 2014 third quarter 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.

We strongly encourage listeners to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission, especially our 2013 annual report on Form 10-K filed with the SEC on April 19, 2013.

Our 2013 annual report contains critical information, regarding known risks and uncertainties we face, information about our critical accounting policies, commitments, contractual obligations that are not reflected in our consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new businesses.

We also encourage you to read our fiscal 2014 third quarter report on Form 10-Q, which we anticipate filing with the SEC later this week. Earlier today, we reported net sales of over $59 million for the fiscal third quarter, which was over $2 million or 4% higher than the same period last year.

Net income for the quarter decreased by about $317,000 to $2.1 million from $2.4 million last year.

The decline in net income was driven by increased discounting in our casegoods business to clear out pre-discontinued inventory, as well as costs of a production ramp up in Sam Moore and startup costs of the new H Contract and Homeware brands, partially offset by the higher net sales.

For the fiscal first 9 months, sales increased 7.6% to $171 million. Net income was $5.9 million, representing a 20% increase compared to last year. We reported earnings per share of $0.20 in the fiscal 2014 quarter compared to $0.23 last year. And year-to-date earnings per share of $0.55 a share compared to $0.46 a share last year.

Now I'll ask Paul Toms to comment on our results..

Thanks, Paul, and good afternoon, everyone. On the revenue side, we're pleased with the sustained positive momentum of 5 consecutive quarters of increased sales compared to the prior year quarter. As we reported in this morning's press release, this was our -- one of our strongest shipping quarters in the last 5 years.

More specifically, it was our second-largest shipping quarter in 5 years, exceeded only slightly by last year's fourth quarter, which had an extra week. Incoming orders and backlogs are also solid as we enter a historically strong retail selling season for furniture.

Demand is up for both casegoods and upholstery compared to a strong quarter a year ago. The recent October High Point furniture market, which was one of our best written business in 3 years, bolstered our positive momentum. A particularly well-received new upscale casegoods collection is scheduled to ship from Asia before the end of our fiscal year.

Like several of our other best-selling collections, this is positioned in the upper end of our product line in both price and quality. While our business continues to perform well at the upper end, we are proactively addressing the good and better price niche as well.

During the quarter, we hired a seasoned merchandising executive at Hooker casegoods with expertise in developing good and better-priced wood furniture. In calendar year 2014, we expect to bring a strong assortment of good and better casegoods to market.

Our goal is to have the strongest possible offerings at all 3 levels of good, better and best merchandise. We believe this will increase our competitiveness and give us further opportunities to grow sales and increase market share. On the income side, earnings were lower in the just-completed third quarter than in the 2 prior years.

But we also had startup costs for both H Contract and Homeware brands that we didn't have in either of the prior third quarters. For the Homeware brand, we had some additional expenses during the quarter related to preparing the homeware.com website for direct-to-consumer sales.

During the first week of November, we went live with a shopping cart on our Homeware website. These direct-to-consumer sales are in addition to our homeware sales through a number of top-tier Internet retailers such as Wayfair and Hayneedle, which began in August.

Another factor in reduced income for the quarter was the significant discounting required to hit our targets for sales of pre-discontinued casegoods collections and product lines. Much of the discounting revolved around groups or product lines that we are exiting, including the category of youth furniture.

Youth furniture has never represented more than 3% of our sales volume, although it is a SKU-intensive category, requiring a specialized approach. We made the decision late last year to exit the category as we believe our efforts are better focused in other more viable categories for us, such as collections and accent furniture.

We've been methodically exiting youth bedroom throughout the year and have reduced our inventories by over 1/2 from 7.5 million when we begun the process early in the year to about 3 million today. We expect our exit from the category to be mostly complete by the end of our fiscal year, February 2, 2014.

Although the discounting has had some short-term negative impact on profitability, we have been able to grow casegoods sales nearly 6% year-to-date in spite of exiting the category and believe that the long-term impact on profitability is positive as we redirect our focus where we can be most successful and competitive.

Overall, our inventories are still about 10% above targeted levels. We've adjusted our ordering but expect that it will be the first quarter of the next year before we experience the impact of those adjustments.

Inventory composition is improving with a higher percentage of active and in-line best-selling items and less pre-discontinued and discontinued products. We expect the current level of discounting will continue through the fourth quarter and expect discounting will return to more normal levels no later than the end of the 2015 fiscal first quarter.

In addition to the negative impact of discounting and start-up costs for our new ventures, higher labor costs at Sam Moore to meet demand that's increased 15% to 20% per year during the last 2.5 years has also impacted profitability.

Mike Delgatti will give further details on our upholstery performance momentarily, but before Mike begins, I want to share an announcement we made this morning following our Board of Directors meeting. Alan Cole, President of Hooker Furniture Corporation, has announced he will retire at the end of this fiscal year on February 2, 2014.

He will be succeeded by Mike Delgatti, presently the President of Hooker Upholstery and Executive Vice President of Sales for our company. Since Alan joined Hooker in mid-2007 as Executive Vice President of Upholstery Operations, it has been a privilege to work with him.

We greatly appreciate his profound contributions to Hooker Furniture, Bradington-Young and Sam Moore, as well as the 2 new business ventures he conceived and launched, Homeware and H Contract. The strategic vision and team-building he has brought to our organization will make this a stronger company for many years to come.

We're fortunate that we will continue to benefit from his experience and vision after his retirement as he will serve as a consultant to our company several times a year. At the same time, we're very confident in Mike, as he prepares to assume the presidency of Hooker Furniture Corporation.

Mike is extremely capable, has had an extraordinarily positive impact on our upholstery companies and has also made significant contributions during the last year as he added responsibility for sales in all divisions. Once he becomes President, he'll add responsibility for marketing and casegoods product development to his expanded role.

I look forward to sharing leadership with Mike as I have with Alan for the last 6 years. Mike will focus on domestic and international sales, merchandising, marketing and oversee all upholstery operations.

I will continue to focus on casegoods operations, supply chain, logistics, corporate services, investor and board relations, as well as the new Homeware and H Contract ventures. At this time, Alan has a few comments about his retirement..

Thank you, Paul. When I had the good fortune to join Hooker Furniture in 2007, the plan then was that I would stay 5 to 7 years. This coming April will mark my seventh year. I believe that the timing for this transition is as perfect as it could possibly be.

We've been very intentional in our succession plans for an orderly transition, and it's gratifying to see that our organization is prepared and well-positioned for that transition. With Homeware and H Contract successfully launched and moving forward, we couldn't have written a better scenario.

With good momentum on all fronts and our next generation of leaders in place, I'm looking forward to turning my attention toward my family and a very active retirement. Having Mike ready to step into the role of the presidency was what we anticipated when we brought him on board.

Mike is an exceptional executive and his impact on our company, particularly the upholstery companies, has been enormously positive. We began over a year ago to involve Mike in the total business including casegoods.

I'm thrilled to see Mike move into a role that he's so well prepared for, and he's demonstrated at every step of the way how well he can execute and produce outstanding results. Congratulations, Mike..

Thank you very much, Alan, for your confidence in me, for your leadership at our company and in our industry and also for your friendship.

Turning now to the performance of our upholstery operations during the third quarter, I'd characterize the most recent quarter as very good in terms of shipments and orders for Sam Moore, Bradington-Young and the Seven Seas Seating imported leather line. Incoming orders were up for all 3 upholstery lines compared to a strong quarter a year ago.

Looking at each brand individually, I'll begin with Bradington-Young. We continue on a solid path to sustained profitability in our domestically produced leather line, achieving this quarter our 15th consecutive month of operating profitability.

Our profitability would have been even higher but was negatively impacted by Bradington-Young production of some Sam Moore products to help reduce Sam Moore's backlog.

While we did achieve our goal of reducing the backlog, this negatively impact Bradington-Young's profitability due to the lower unit average of Sam Moore's products compared to Bradington-Young. We were gratified to mark our second-best market ever in written business for Bradington-Young at the recent October High Point furniture market.

The strength of our market was driven by our introduction of a highly customizable special order program called So You! that allows the consumer to pick the sofa, sectional or chair silhouette she wants, the leather she wants and also customize the arm, leg and tailoring detail.

This program plays into our strength as a domestic producer, with the ability to ship a customized products to the consumer in 4 to 5 weeks. To date, we already have around 80 placements of this program and dealers applaud So You! for its potentially to increase both customer satisfaction and sales per square-foot.

Our concern at Bradington-Young, and at Seven Seas for that matter, is the increase in raw materials prices for leather and plywood. These increases have come in recent weeks with increasing frequency and present a real challenge. For our imported leather products, we're challenged to stay competitive in a more price-sensitive niche.

At Bradington-Young, we're challenged because we are already in the premium-price category and have taken previous price increases earlier this year. It's difficult to come out of the October market and have to take price increases on new introductions before they ever ship to dealers.

While our demand is solid at Bradington-Young with incoming orders up almost 10% over a strong quarter last year, we know it would be even stronger with these raw material price increases -- without these raw material price increases, excuse me.

While demand is up for all 3 brands, Seven Seas is our most robust upholstery unit currently with incoming orders up 26% in the fiscal 2014 third quarter. After starting the year slowly, sales are picking up momentum at Seven Seas and operating income is above budget.

At Sam Moore, we're disappointed in another operating loss despite a 20% net sales increase due to a high labor cost from overtime and training of new employees as we continue ramping up production to meet demand.

We have made significant progress in boosting our capacity and have reached a turning point where our capacity has now exceeded our order rate. This will allow us both to improve our service to retailers and to move to profitability. We estimate we're about 1/4 away from transitioning from the breakeven level to making a profit.

While progress has been slower than we would like, we remain quite bullish about the long-term future for both sales and profitability at Sam Moore. Short term, as we head into the winter selling season, we believe all upholstery units are well-positioned with retail placements around the country to continue to grow sales and market share.

At this time, Paul Huckfeldt is going to share further details that drove our performance this quarter, as well as review our balance sheet.

Paul?.

Thanks, Mike, and congratulations on your promotion. I look forward to working more closely with you in the future. Our quarterly results were driven by a number of factors. I'll review them by income statement category.

Net sales increased due to higher average selling prices in both operating segments as we continue to see a shift in our mix towards higher-priced product offerings. The increase in ASP was slightly offset by a 0.6% decline in unit volume.

Casegoods unit volume was essentially flat with an increase of less than 0.5% compared to the prior year quarter, with a mix change push average casegoods selling prices up nearly 3%. Upholstery unit sales declined about 3%. Leather upholstery unit volume down 8% due to some of the factors Mike discussed, while upholstered fabric volume was up 3.6%.

Overall, upholstery average selling prices also increased and were up about 9% due to product price and mix changes.

Gross profit margin for the second quarter remained essentially flat in absolute terms but declined to 23% of net sales compared to 24% a year ago, primarily due to increased discounting in the casegoods segment as a result of our efforts to decrease levels of slow-moving and obsolete inventory and higher domestic upholstery manufacturing costs as a percentage of net sales due to the continuing excess labor cost as we trained new upholsterers at Sam Moore to handle the sales volume increases they've been enjoying for the past 2 years.

And to a lesser degree, some material cost inflation in upholstery [indiscernible]. Our selling and administrative expenses were a little over $650,000 higher than the prior year quarter, and increased as a percentage of sales from 17.2% to 17.7%.

The increase in spending was principally due to startup costs for our H Contract and Homeware division which are still in startup mode with limited revenues to offset expenses. These costs were reported in our casegoods segment, which somewhat skews the casegoods results.

Also impacting casegoods SG&A were higher bad debts expense as a result of a favorable adjustment we recognized in the prior year quarter.

And in upholstery selling and administrative, these costs decreased as a percentage of net sales due to higher net sales and were essentially flat in absolute terms compared to the prior-year period, higher commission expense on increased sales volume, and increased benefits expense due to higher medical claims costs were offset by a lower advertising and advertising supplies expense.

These factors contributed to a 140 basis points decrease in operating margin in the third quarter compared to the same quarter a year ago. Our balance sheet continues to remain strong and stable. At quarter end, we had cash of nearly $30 million, up $3.6 million from year end.

Higher cash balance is due primarily to lower accounts receivable and a reduction in inventory levels from the year end, which more than offset capital spending and dividend payments we made during the year.

The remainder of the year, we expect to spend between $700,000 and $800,000 on capital expenditures, primarily on our ERP implementation and other projects to improve manufacturing capacity and efficiency, as well as some normal maintenance spending. We continue to be debt free.

We have about $13 million available under our revolving credit facility, which we amended late last quarter, and now remains in place until July 2018. With that, I'll turn the discussion back to Paul Toms to discuss his outlook..

Thanks, Paul. Business has been reasonably steady all year, with sales up each quarter on a year-over-year basis. We have solid economic fundamentals on our side, including conditions for an improved housing market, consumer confidence at a 5-month high and the stock market pushing all-time highs.

We're generally still bullish on both the short- and long-term basis. We realize we're going up against an outstanding fourth quarter last year that included an extra week.

However, based on current revenue and earnings momentum, a very successful October High Point Market and the strength of our product line, we believe we can continue to grow and gain market share in our segments of the home furnishings industry.

This concludes our formal remarks, and at this point, I'll turn the call back over to our operator, Kate, for questions..

[Operator Instructions] Our first question comes from the line of Todd Schwartzman with Sidoti & Company..

To Alan, my congratulations and best wishes in your new endeavors and life changes as well.

What was the pace of written business like throughout the quarter, Paul?.

I would say it was pretty steady. I mean really coming out of the summer, we saw the pretty much normal uptick that we typically do around Labor Day, and I can't say that it was stronger in August than it was in October. I think the quarter -- most months were up versus the prior year across all divisions..

And advertising was down year-over-year, correct?.

I think, we said it was down -- yes, as we talked about selling and administrative for the 9 months..

Does that continue or it has that continued into Q4?.

I don't know that I can answer that, Todd.

And I guess, I should point out, too, when we talk about advertising, we're, I think, grouping in some of the things that we do advertising materials here, which would be catalogs and things -- swatches that we do for our customers, as well as any advertising expense where we're working with our retail partners to promote, maybe in a local market.

So some of that could be timing. I don't know that we intentionally dialed back advertising in the third quarter or have any intentions to in the fourth quarter. I think some of that could have been timing or maybe even last year, we had a lot fall into a quarter that would have made the comparison look that way..

Just trying to drill down kind of on S&A with respect to the sequential decline in Q3, not just versus Q2 but first quarter as well -- even on the higher volume and as you noted earlier, the H Contract, Homeware still in startup mode and certainly were in startup mode in the third quarter.

Yes, I think you add to that the fact that you had called out higher commissions year-over-year. I'm just trying to get a sense of the factors contributing to that sequential decline in that line for the quarter..

The decline is only in -- or it's actually just flat in upholstery. In casegoods, we're up, primarily because of the additional costs of the H Contract and Homeware..

So what are the sources of the decline then? As -- on a consolidated basis from Q1 and Q2 of this year?.

Across [ph] Q1 and Q2..

Todd, I really don't know that we're prepared to answer that. I apologize, but I can't think of anything off the top of my head that would have made spending decline in the third quarter -- actually commissions and royalty should have been up because it was a stronger quarter than the first or second.

We had typical spending for both Homeware and Contract that we had in prior quarters, benefits another big part of our selling expense, SG&A was typical or actually grew probably in the second and third quarter so I'm....

We did have heavier spending on samples, we had design show spending. We had some sales and marketing spending that's higher..

Okay. This is the best leverage since a year ago, since Q3 of last year as far as operating leverage at a time when I think I for one thought it was going to be weaker..

A little bit of it could be timing. I mean I think there are some things, as Paul just kind of pointed out, samples and advertising expense that don't always fall equally even year-to-year they don't always fall at the same time. So that could be some of it..

In Q2, we had some excess legal and audit costs..

Right and we did have compliance costs that weren't repeated in the third quarter -- that could have been a couple of hundred thousand. The other thing that falls unpredictably is professional fees for audit and legal. I don't know that we would have modeled in ourselves decreased SG&A for the third quarter..

Okay.

And how is Q4 shaping up on that front?.

I would say pretty typical spending. No big changes and nothing that's extraordinary..

On the tax rate for the quarter, came in about 3 points or so lower than a year ago.

What were the factors there?.

Over the last couple of years, we've had -- as incomes have changed and tax rates have changed -- last year, we had to adjust our deferred tax asset based on income levels. That cost is about 4% or so. This year, we adjusted our state deferred tax rates because of similar tax rate changes in some of the jurisdictions in which we file.

But the net difference between the 2 drove the effective rate down. So we're tweaking those tax rates constantly, and it was just a higher adjustment last year than this year. I would say....

So Paul, for fourth quarter, would 35, 36 be a good number? Or are we looking at something perhaps, lower than that?.

I would say 35 at the lower end of the range is probably closer..

Okay. And in terms of your longer- to intermediate-term sales goals for the new initiatives, I know you had previously spoken to $2 million to $3 million in sales each for H Contract and Homeware in what I call fiscal '14, what you guys refer to as '15.

But followed by $5 million to $6 million the following year and then $10 million, has anything changed on that kind of internal assumption?.

I think what we have today that we may not have had 3 months ago is some actual experience with Homeware. We just launched it August 1, at the beginning of the third quarter, and we did launch the direct-to-consumer site November 1, which would fall into the fourth quarter.

But I think with 3 years' history, we probably have cut our projections a little bit for the revenues for Homeware next year, and I would say now we're looking at more in the $2.5 million range for next year.

By the same token though, I think Contract has done pretty well, and I think we expect to a little bit better revenue-wise with H Contract next year than with Homeware. And we're looking at maybe a $4 million to $4.5 million revenue next year for H Contract..

And what's the source of the increased optimism on H Contract?.

I just think H Contract has kind of gained traction quicker than Homeware has. It's -- we were -- their product line partially, it's a few of the SKUs that were in the Hooker accents are in the Contract offering. They have been able to put together in upholstery package fairly quickly.

They've got a broader product line than Homeware does, and they have, I think, about 45 sales reps in place across the country, representing it. With Dave Williams, the General Manager of H Contract, has done a good job of getting out in front of people.

As you know, Contract is not really predictable and that doesn't come in equally, and you don't have floor placements or we're not selling people stock. But we are being quoted on projects, and we're seeing more and more designers go to our catalogs and quote us for their jobs.

So we're hopeful that, that will convert to the sales that we talked about. I just think it's further along and it's -- they're both start-ups but maybe that's a little less of a start-up than launching a new brand and new -- completely new type of product and market it through different channels than we've traditionally marketed through..

Yes, Contract's more like what we do already.

We're really building new channels, right?.

Alan, you might want to weigh in on that also?.

Yes, Paul. I would agree with that. What we found with Contract, the sales cycle on Contract from initial presentation to realization of orders is about a 12-month cycle. And we've been able to hit some of those cycles a little more favorably than that.

And we, frankly, think that we've also found a good opportunity in the senior living business -- senior living particularly the upscale portion of the senior living business is really searching for more residential-like product.

So the Hooker product and the modified Sam Moore product that we put into H Contract, has actually been even more timely than we had thought. So Contract has gotten off, if anything, a little faster than we might have expected. And we're pleased with that. As somebody said, I think, it's similar to what we already do.

In the H Contract line, it's almost a total learning curve. We went direct-to-consumer, as Paul pointed out, November 1, and we've made a lot of adjustments on how we're advertising, how we're promoting and so forth.

So we've got 2 different businesses that are kind of tracking on 2 different growth curves, primarily because we are fairly familiar with one of them. And the other one is -- there's a real -- it's just a real opportunity for us to get into a whole new channel and a whole new business.

So I don't know if I'm -- the question but I think that kind of summarizes it..

Sure. Yes. On the youth side, a little surprising -- maybe it shouldn't be -- to hear of the exit strategy.

But how has that decision affected relationships thus far with retailers and with the design and decorating community?.

Todd, as we pointed out in our remarks, I don't think we were ever a factor in youth bedroom. We've been in the category for about 6 years. Probably the most volume we ever did was around $6 million, which is 2% to 3% of sales. Maybe 4% of casegoods sales. That business is very fragmented.

My sense is even people that are really focused in it, specialized, struggle with it. It's, I think, very price-sensitive.

And it was clear to us that with the inventory commitment required and the amount of merchandising time required, showroom space, it was -- the results were disproportionately low to the effort and the investment that we were making. And that we could do better -- we could do that much volume with 1 good casegoods collection or more.

And so we decided a year ago really early this year to exit the category. We were candid with our customers and told them that we wouldn't be bringing out new groups.

However, we did have a lot of inventory, we had new catalogs that we had printed at the beginning of the year, and that as long as of the groups were performing at retail with the placements we had that we would work with them to support them and to help promote more. And we've been doing that for the last 10 months or so -- 10 months or 11 months.

So our customers, I think have been aware of what we were doing throughout. We've been transparent about it and I think -- I don't think it's a huge impact to any of our customers, that we're exiting the category..

Got it.

And on the leather costs, could you maybe quantify for us what you're seeing now?.

What we're seeing in terms of leather cost increases are in the range of 3%, 4%. Not across-the-board at this point but they have been significant and rather substantial in that they have affected some of our higher-volume leathers.

So the world market is such that the demand continues to exceed supply and as a result, we're seeing price increases far too frequently than we would like..

And last question, and thanks, is the -- on the upholstery side, or just overall for the fourth quarter gross margin just factoring in the improvements that you expect to have achieved by the end of the year.

Where does the fourth quarter gross margin shake out versus some of the prior quarters of this fiscal year?.

Yes, we probably need to take that by division, casegoods versus upholstery. I think casegoods gross margins would probably be fairly similar; discounting does have an impact on gross margins, and we expect discounting to be similar in the fourth quarter to what it's been in the third quarter, and even the second quarter.

We're seeing some costs increases from our suppliers, but we have anticipated those. And we've increased our prices in early September, I think, probably, enough to offset price increases we've received some from suppliers. Freight's kind of constant, freight's not really moving up or down, much at all.

So I don't see a lot of big swings in casegoods margins -- gross margins for the fourth quarter. And probably it'd be similar for Seven Seas import upholstery..

Correct, and BY domestic upholstery, we believe, the gross margins will remain steady even though we have spoke about cost increases. We have been able to introduce new product introductions at higher gross margin level and we are planning on passing along those cost increases with a price increase in the relatively near term.

Same on the Sam Moore side. Plus we anticipate even more gross margin improvement as we reduce our cost of sales, work less overtime and complete most of the training process of new employees..

That's going to be ticking up. I mean it's not going to skyrocket..

Correct. Correct..

And the Seven Seas margins?.

I think similar to the casegoods. I don't think you're going to see them change a lot quarter-over-quarter..

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks..

All right. I think Todd must have covered everybody's questions with his today. He was very thorough. We appreciate everybody joining us today for the third quarter call. We wish each of you a joyous, safe, healthy holiday season and prosperous new year. We look forward to reporting fourth quarter results in April. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day..