Paul A. Huckfeldt - CFO, SVP, Finance and Accounting Paul B. Toms Jr. - Chairman and CEO Michael W. Delgatti Jr. - President and President of Hooker Upholstery.

Todd Schwartzman - Sidoti & Company.

Greetings, ladies and gentlemen and welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the 2015 Fiscal Year and Fourth Quarter. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions].

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Senior Vice President, Finance and Chief Financial Officer for the Hooker Furniture Corporation. Sir, you may begin..

Thank you, Abigail. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for the 2015 fiscal year and fourth quarter, which both ended on February 1, 2015. We certainly appreciate your participation this afternoon. Joining me today are Paul Toms, our Chairman and CEO; and Michael Delgatti, our President.

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 press release and SEC filing announcing the 2015 annual and fourth 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.

This morning we reported consolidated net sales of $244.4 million and net income of $12.6 million or a $1.16 per share for our 52-week fiscal year ending February 1, 2015.

Net sales for the year increased about $16 million or 7% compared to $228 million for the fiscal 2014 year, primarily due to higher average selling prices in all segments and lower discounts in our casegoods segment.

Net income for the year increased nearly 59% to $12.6 million compared to $7.9 million in the prior year and earnings per share were a $1.16 this year compared to $0.74 last year. For the 2015 fourth quarter, sales increased $7.3 million to almost $65 million, a 12.7% increase compared to net sales of $57.6 million for the fourth quarter last year.

Fourth quarter we reported consolidated net income of $4.3 million compared to $2 million in the fourth quarter of fiscal 2014. Now Paul Toms will comment on our 2015 results. .

Thanks Paul and good afternoon everyone. Throughout this fiscal year profitability and sales performance improved across all segments of our company, with the year ending as one of the best in recent memory.

After we reported the highest quarterly net sales in six years for the third quarter momentum continued to build resulting in an outstanding fourth quarter that surpassed our expectations and made for a great year.

Along with gains in sales and profitability we've made considerable progress on multiple operational and strategic fronts throughout the year.

We're pleased with significant improvements made in operating profitability this year as we reported in the earnings release earlier today, consolidated operating profitability increased by $6.5 million or nearly 53%, primarily due to casegoods segment operating profitability improvement of $5.1 million and an increase in upholstery segment operating profitability of nearly $1 million.

After lagging behind upholstery sales for a few years it was gratifying to see both an overall industry recovery in casegoods and specifically to see our casegoods segment lead the company in sales and profitability growth this year.

Our $10 million increase in casegoods shipments was driven by stronger, broader product assortment, 60% growth in our container direct volume and 40% growth in our international business as well as lower discounting.

A more focused merchandising effort and opening of our Vietnam distribution center to service a mixed container program helped us gain traction in the better price points of our good, better, best assortment.

At the same time strong collections in the best category, both through new introductions and long running classics continued to be our top sales performers.

Our efforts over the past two years to improve sales and operational planning, processes really paid off this year helping us achieve significantly lower discounting while having the right mix of bestselling products and stock to ship on a timely basis.

The move a year ago to restructure our sales management team from a product-based to a geographic-based organization also contributed to reduce discounting and enhance profitability.

This change allowed us more face time and strategic relationship building with individual customers, allowing us to better address the needs and nuances of each retailer we serve and add values in ways beyond just price. I believe we've been able to better address the market dynamics of each retailer.

While sales in the upholstery segment increased at somewhat slower rate than casegoods domestically produced upholstery lines, Sam Moore Furniture and Bradington-Young to as well as our imported leather line, Hooker upholstery combined shipped to achieve single digit revenue gains in the both the fourth quarter and the fiscal year.

In addition, Sam Moore made significant strides in improving their service to retailers, reducing delivery times to four to six weeks during the second half of the year.

Our top line also benefited from two new strategic initiatives Homeware and H Contract, which are aggregated on in the all other segment, contributed $5 million of sales for the year. And H Contract reported a small operating profit.

While our profitability increases were driven by casegoods and over 90% operating income improvement at Sam Moore, continuing profitability improvement at Bradington-Young and H Contract's operating profit all played an important role as well. The profitability performance for the year says a lot about the leverage in our business model.

At this time I'd like to call on our President, Mike Delgatti to give more details about the performance of Sam Moore, Bradington-Young and Hooker Upholstery as well as our accomplishments in merchandising and marketing initiatives at the company this year. .

Thank you, Paul. Our Upholstery segment also made progress this year on strategic merchandising programs, operations and in servicing our retailers while growing sales and increasing operating profitability by 50% or nearly $1 million. Sam Moore achieved a 7% sales increase and Bradington-Young increased sales by over 4%.

After a slow start to the year Hooker upholstery had increases in both sales and incoming orders during the fourth quarter. Focusing on each company individually, I'll begin with Bradington-Young which built on the sales and profitability improvements of the previous year.

New product lines and retail merchandising programs helped stimulate the business. In particular, last fall we introduced a comprehensive motion upholstery program offering 22 different pieces in four different arm styles, all with the option of power motion.

Our emphasis on style, quality and premier C cushions [ph] and comfort along with the ability to quick ship special orders in four to six weeks was very well received and benefited sales in the fourth quarter and so far in the current quarter.

Our comfort at home retail display program is still going strong in around 150 dealers, our SoYou [ph] custom order retail program is also doing well. What this tells us is that retailers gravitate towards upholstery programs with multiple options as it makes their floor space much more productive.

Today's more fashion conscious and style savvy consumers also enjoy these programs that allow them to personalize their product according to their taste and decorating schemes. We introduced another retail program last Summer BY Express, a recliner program that ships within 72 hours of receipt of an order.

This program also stimulated sales for Bradington-Young beginning in the second half of the year. In light of all the new retail merchandising concepts and a number of manufacturing efficiency improvements we believe Bradington-Young is on solid footing to achieve additional profitability this year and beyond.

While Sam Moore's operating results were below expectations for the year we were pleased in the improvement and operating income from last year, while growing sales. We particularly were pleased with the improvement in service to an industry standard four to six week’s shipment of products to retailers.

In order to build on this momentum and gain more retail floor space we will be introducing at the spring high point market next week the Sam Moore studio program, a comprehensive retail merchandising program aimed at enhancing the shopper experience through better display and selection.

This program will allow us to tell the Sam Moore story of fashion and customization and will facilitate shopper selections of custom fabrics, finishes and trend details through a mobile swatch and touchscreen system. We believe this will help us gain more retail floor space and achieve higher productivity in that floor space.

The Sam Moore studio will also help us tell the value proposition of the Sam Moore brand in a more compelling way to consumers who will appreciate the ability to customize their upholstery through fabric finish and trim details.

Fiscal 2015 marked the first full year of the re-branding of our imported leather upholstery line from Seven Seas to Hooker upholstery. This has now been fully implemented and very well received and we believe this will have a long range positive impact.

The Hooker upholstery line for example has now shown on the Hooker Furniture website benefiting from the high consumer traffic on the site, referrals to retailers through our Find it now feature and gaining much more consumer exposure. Our digital marketing efforts as a whole have made great strides this year.

We launched two new websites for Hooker Furniture and Sam Moore. The websites offer industry leading features. These include responsive design, which recognizes the device, the consumer is using to access the site and optimize the screen layout for the best experience and a live chat option.

Since launching this feature we've hosted over 10,000 unique chat sessions directly interacting with consumers. The National Digital Advertising and Social Media campaigns we executed this year were very successful as well.

Our fall campaign for example which focused on our Rhapsody collection achieved nearly 90 million consumer impressions, lifted website visits over 50% during the period and resulted in a noticeable increase in overall casegoods orders and sales.

At this time I'd like to call on Paul Huckfeldt to give us more details of our performance during the fourth quarter and fiscal year. .

Thanks, Mike. As you heard net sales were up in our casegoods segment thanks to higher average selling price, which was the result of continuing strong sales of our best price point products and lower discounts.

Discounting was much lower than last year because we've done a better job managing inventory obsolescence, had less excess inventory to dispose of and we've been able to discount excess inventories less, being able to be more selective in our promotions.

Selling less excess inventory and exiting the Opus and Envision product line resulted in a modest decline in our unit volume but the lower volume was more than offset by higher average selling prices.

Net sales in the Upholstery division increased due to increased average selling prices in both our leather and fabric upholstery divisions but was partially offset by lower unit volume particularly in our imported leather upholstery company.

As Mike reported Hooker Upholstery got off to a slow start earlier in the year and while they are back on track now the slow start negatively impacted their full year results.

Overall average selling prices increased 11% during the fourth quarter and slightly over 9% for the fiscal year, primarily due to lower discounting and mix of product shift and some modest price increases.

For the full year gross profit increased by $8.1 million to $62.8 million and gross profit as a percentage of net sales increased to 25.7% from 24% in the prior year.

In addition to increasing net sales the favorable impact of lower discounting also improved our gross margin on a dollar for dollar basis, so reduced discounting was the primary factor in the gross profit improvement for the year.

Beyond the discounting though we were able to hold our core cost of goods steady on imported products and we were able to reduce domestic upholstery manufacturing costs somewhat as a percentage of net sales which also contributed to our gross margin expansion.

Gross profit for the fiscal 2015 fourth quarter increased both in absolute terms and as a percentage of net sales to $17.5 million or 27% of net sales. This compares to $14 million or 24.2% in the same period a year ago and was driven by the same factors as our full year results.

Selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales during the fiscal 2015 year. Higher SG&A was due to increased commission expense due to higher sales and higher bonus expense due to higher earnings especially in the casegoods segment.

We also incurred higher salaries benefits and marketing costs in our all other segment as we grow those new business ventures, H Contract and Homeware. Operating income for fiscal 2015 fourth quarter was $6.5 million or 10% of net sales compared to $3.5 million or 6.1% of net sales in the fiscal 2014 fourth quarter.

For the fiscal year operating income was $19 million or 7.8% of net sales compared to $12.5 million or 5.5% of net sales in fiscal 2014. Our balance sheet remains strong with cash and cash equivalents of over $38 million, which allows us to invest in inventory, receivables and the cost of growing the initiatives we spoke about earlier.

We remain debt free and have $13 million available under our revolving credit facility which remains in place until July 31, 2018. In March we declared a quarterly dividend of $0.10 per share which represented at the time a 2.1% dividend yield at the share prices at the time. And now I will turn the discussion back over to Paul Toms for his outlook..

Thanks, Paul. While our business was hitting on all cylinders in the fourth quarter incoming orders slowed somewhat as is typically the case during Q1. During February and March the first two months of our fiscal ‘15 first quarter demand was consistent with the same period in the prior year, but down high single digits compared to the fourth quarter.

In addition ocean freight rates have increased approximately $750 per container on average since July which necessitated a small price increase to our customers on March 30th which should offset the impact of the increased freight rates that are beginning to flow through our inventories.

We have seen business begin to pick up during the second half of March. Overall economic conditions are favorable to the furniture industry with new home sales and existing home sales the strongest in recent memory. Housing affordability remains good and significant improvements in the employment rate and job growth are both positive indicators.

We are optimistic that housing and furniture retailing will continue to strengthen as we move through this year and believe we are well positioned at Hooker with the fresh and sellable product line across all brands and the right inventory to service our customers through the country and across the globe.

This ends the formal part of our discussion and at this time I'll turn the call back over to our operator Abigail for questions..

Thank you. [Operator Instructions]. Our first question comes from the line of Todd Schwartzman from Sidoti & Company. Sir, your line is open..

Hi good morning, good afternoon guys..

Hey Todd. .

First question I wanted to ask Mike.

What percent of your deliveries in the quarter were made in that four to six week window?.

Around 60%. .

And what is that, just to refresh, what was it a year ago in Q4?.

A year ago was probably close to 40% and let me clarify one issue and that is a part of that 60% reflects dealer's desire for us to ship their orders at a future date. They program out and are not necessarily looking for their product to be produced and shipped within that four to six week window..

Got it, okay. Regarding the gross margin for the quarter, I think you've covered some of the puts or takes, some I would like to just maybe delve a little bit more into that.

I know Paul Huckfeldt you mentioned that the ASPs are up 11%, I think, is that correct?.

Right..

Okay. Can you maybe speak to some of the other puts and takes, maybe some more color on the mix shift and also I'm not sure, I may have missed it if you did quantify the relief that you had in discounting on a year-over-year basis, but just kind of maybe speak to how that factored into the gross margin.

It seems that when you have fired on all cylinders, as you said, Paul Toms it seems that in the past when you've done so it's also been in a Q4.

I'm just wondering if what is it that tends to be seasonally unique for you guys, where you have more frequently than not when you have that kind of tailwind it's in the fourth quarter of a given fiscal year..

Discounting accounted for, for the year $3.5 million to $4 million of the difference. And I think I said there is about a $1 million turnaround in our upholstery operations most of which is at the gross margin line too. Fourth quarter tends to be good. We had great volume. You couple that with, I think we saw a good discounting experience in Q3.

So I think we talked about that on the call then too. So we've got two quarters of good discounting and then you spect some good volume on top of that, upholstery had good results or much better results than they did the same fourth quarter last year was a tough quarter for Sam Moore. So you have -- hit on all cylinders is the right description.

It's nothing special, nothing unusual, just good volume, low to continued low discounting which we attribute to focus on accounts and also focus on inventory management. It takes a while to build those disciplines and they're starting to payoff. .

And on mix shift, I know that casegoods grew faster than upholstery in the quarter, so within upholstery clearly you've made some inroads in custom versus none, that's got to be a margin boost.

What can you say about the mix and I know you've spoken to the better category of price points, so what can you say more specifically within casegoods that may have helped the mix in Q4..

We have become a collections focused or centric company. And those collections include bedroom and dining room, home office, occasional home entertainment. And what we're finding is that the two fastest growing areas of our business, casegoods business are bedroom and dining room, followed by occasional.

In our largest business segment albeit a modest difference today is home office and we're even experiencing growth in that category today.

So through collections, again we're growing bedroom dining room and pulling through other product categories with those collections specifically home office, occasional and we’re even doing more home entertainment business through that collections effort. .

Great, and on the freight cost side, when does that $750 per container increase reset?.

We’ve been experiencing that for several quarters with our fairly small inventory turns, it’s started [ph] a cycle in cost of goods sold. We have some price increases coming that will help offset that. We expect to see something in that ballpark when we renegotiate our freight rates, this spring -- mid-spring.

So I don’t think that that’s material to right now and we have taken price increases to recover that. .

Right and to expand on that Todd it isn’t like we experienced an exact $750 increase on every container. We had maybe 40% of our containers that shipped at the rate that we negotiated last May but containers that we didn’t contract for under that rate were subject to increases as much as $2000 but on average an increase of about $750 since July. .

And in terms of the ripple effect of the port situation you think that it’s Q2 when we see that fully in the rare view just one more current quarter and that’s it or there some more lingering affects you might expect?.

The port conjunction you hear about the most is on the West Coast ports where they have the labor slowdown and we don’t really bring that much product through West Coast ports.

Some of our container direct business take customers from Texas West comes through West Coast ports but 80% of our business is shipped out of warehouse or warehouses in Virginia. That all comes to East Coast ports and primarily Norfolk.

So one is impacted by the West Coast problems that were so well publicized but actually there is congestion on the East Coast as well and specifically at Norfolk and we’ve been impacted by that and I don’t think the impact has taken truckers a lot longer than it should to pick up containers at port and it messes out how long they can be driving in a day and takes what should be a day trip and turns it into something more than that.

So there is an impact on the drayage from the port here and I don’t think that’s going to correct itself real quickly. We are looking at a couple of alternatives, other East Coast ports or even a barge service from Norfolk to Richmond to try to mitigate some of the congestion at the Norfolk port. .

Makes sense.

With regards to Homeware what was the operating loss and by how much did that narrow from last year in the quarter?.

It was about the same as the prior year. .

And are you targeting any point in the calendar as far as breakeven or is that just kind of work in progress?.

We’re not targeting anything in fiscal ’16 calendar for breakeven at Homeware I think we’re still in a building stage we’re still getting the product line filled about and figuring out the right price points for the e-commerce accounts that are distributing Homeware and I think we have growth by double the volume this year but there is still an operating loss that we’re budgeting, lesser than we had in fiscal ’15 but still a loss.

.

And as far as the SG&A associated with Homeware Manpower are you set for the foreseeable future or are there any plans for expansion there?.

I feel like we’re pretty well set and actually we’re taking some of the folks that we’re focused almost exclusively on Homeware last year and using them in other area of the business in addition to what they are doing at Homeware.

So specifically we have a healthy e-commerce business for Hooker and the other brands Bradington-Young, Sam Moore, Hooker Upholstery and some of the talent that has been focused on just homeware is also helping manage our e-commerce business and we have another program that we have with about 30 of our best customers called P3 where we help them establish a local e-commerce model for their territories, their marketplaces and those folks are also involved in that program..

And for H Contract what did you earn in the quarter?.

I think just a little bit better than breakeven maybe a percent or two or something on their volume..

Is that still from a long-term perspective is that still a viable business for you to be in?.

Very viable. We are seeing growth almost every month it seems like it’s growing a little bit and we have a very accomplish general manager running that business and it seems like we are getting good traction there..

And I know I have asked you in the past about the planned evolution of the products, the H Contract product.

Has there been anything to update us on there in terms of the breadth or depth of those offerings?.

Well, they continue to bring new products to market although at a much, much slower pace and smaller scale than we are used to in residential casegoods or upholstery.

So, but I think for that type of business we are bringing out what would be probably a normal amount of new product introductions and we’ve introduce, I am guessing 15 to 20 SKUs over the last couple of months..

Okay and have you encountered any issues, any concerns regarding the sales force selling into that channel?.

Well, the sales force distributes H Contract as a separate sales force and distributes Hooker, Bradington-Young or Sam Moore. It’s a contract sales force that carries other non-competing contract lines selling into the same types of distributions that our contracts reps do..

Great, thanks guys appreciate it..

Thank you..

Our next question comes from the line of Rubin Garner [ph] of BB&T Capital Markets. Your line is now open..

Good afternoon, thanks for taking my questions.

With the demand picking lately how much would you attribute this to share gains versus just general overall market improvement? And can you talk about what the retailers have been saying about trends and their expectations for the rest of ‘15?.

I think most retailers are optimistic about the prospects for a good year in home furnishing. There are some regional challenges relating to higher oil prices for example, but generally that remain optimistic..

And the share gains versus the general market?.

We believe that it’s really the growth that we’ve experienced is sum of both, yes business has been better but we also think we are making gains in the market share and it varies from brand to brand. Casegoods for example, 2015 was a particularly good year in terms of market share gain..

Okay, perfect. And so margins have been trending up in recent quarters but it seemed Q4 was a pretty big step up.

Can you talk about the components of that increase I think it was about 400 basis points on EBIT and can you talk about what the difference maybe was between Q4 and the prior quarters and maybe how to look at that going forward particularly with ocean freight rate increases and how of that was in the back half of the year and how much how different it is going to be going into the first half of this year?.

Biggest element of the improvement was reduced discounting, I don’t think we are going to reduce discounting a lot more. We also leveraged volume, that helped some and we had -- in the quarter we had a pretty big turnaround, I think I mentioned earlier is that we had a pretty big turnaround at Sam Moore. They had a horrible fourth quarter last year.

So that was a $750,000 turnaround from last year. So those are the three elements, although we had experienced increased freight rates to this point, most of that, like I said is because of, it is in inventory because of our -- just inventory turn cycle.

So really hasn't hit us until it will start to hit us in the first quarter and then we hope we expect to mitigate that beginning later in the first quarter with a price increase which should be fully implemented during the second quarter. .

Okay. And the $750 container cost increase.

What is the base that increase is on?.

That represents about a 22% increase in our container cost or about a 2% to 3% hit to our margins. .

Right. .

200 to 300 basis points. If we saw it on every container and every shipment out of market that we made but as Paul said, we did have a price increase that would offset the impact of the increased freight cost. We had the price increase on March 30th.

So we figure it will probably take six weeks for that price increase to really show up in our shipments, we got about a six week backlog on average of casegoods, so you would expect that to show up and probably mid-May which is, what the first month of the second quarter. .

And if you're comping against first quarter last year, discounting was a little bit higher so we'll mitigate a little bit of that instead of discounting. .

And we have had one other pleasant surprise with [indiscernible] and that's finally you're seeing some relief from fuel bunker surcharge standpoint. So I think the most recent quarter, we had a pretty good positive impact from fuel bunker surcharge..

Okay.

And the -- back on the December call I think someone asked about the fuel impact on the other raw materials and thought it maybe an overall net positive impact, did that changed at all in the last [10 full] months?.

I don't think fuel really shows up much other than container and that at often times not so much even there, seems like the adjustments were typically pretty small but I guess big decrease in oil prices late last year, the surcharge that was -- the recent adjustment was the largest one we've seen in years. .

And I don't think foam prices changed, much as you might think considering that they are petroleum-based product. .

Okay. And last one is, you guys are up to about $39 million in cash, can you update us on what's your capital allocation strategy is with that and then that's all for me, I appreciate you guys taking my questions. .

Well, that's a good question and we are always looking at acquisitions. We feel like we've got not only the excess cash but the borrowing capacity to make a meaningful acquisition. If absent being able to find an acquisition that fits us strategically.

We have a share repurchase plan in place and we always have the option of increasing the dividend which up until today has been a little bit over 2%, but our preference and I think most of our investors preference is to make a smart acquisition that would help grow the company beyond the organic growth and the strategic initiatives that we've been able to enjoy.

.

Great. Thanks guys. .

All right. .

Thank you. .

Our next question comes from the line of Lars Montagne [ph] from Imperial Capital. Your line is now open. .

Hi. I have a couple of questions, when you're talking about the higher freight rates and that's within cogs and you mentioned that you've seen a margin decline, is the margin decline only within gross margin or are you talking about net EBIT margins actually, the EBIT margins being down. .

It will flow through it’s a variable cost and it’s going to flow through, at least temporarily, we, like I said we are going to try to we'll mitigate that with the price increases but there is going to be a short term impact that flows through to operating income. .

Okay. And then second question are you getting any positive are you still getting positive response from your product line from the fall trade show and are there any early indications of high enthusiasm leading up to the April Trade show. .

Well, there is enthusiasm regarding the market. We did have a good premarket. So the initial response to our casegoods introductions specifically we're very positive. We do not show upholstery at the pre-market this time. As far as last October we're deriving benefit today from our upholstery introductions which ship sooner than casegoods.

Casegoods are just shipping now. So we've really don't have a retail history at this point in time. We're optimistic, just based on the number of placements coming out of the October market and the level of success we have with the collections that we introduced. But again no retail reports at this point. .

Okay, thank you. .

Thanks. .

I am showing no further questions at this time. I would now like to turn the call back to Paul Tom for any further remarks. .

All right. Well we actually don't have any additional remarks but we appreciate everybody's interest and thank you for joining us on today's call. We'll look forward to updating you in about two more months with our first quarter results. Thank you..

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