Good day and thank you for standing by. Welcome to the Hooker Furnishings Second Quarter 2023 Earnings Webcast. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Huckfeldt, Senior Vice President and Chief Financial Officer. Please go ahead..

Thank you, Shannon. Good morning and welcome to our quarterly call to review financial results for our fiscal 2023 second quarter, which began May 2, 2022 and ended on July 31, 2022. 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 the SEC filing announcing our fiscal 2023 second 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.

This morning, we reported consolidated net sales of $153 million, a decrease of $9.6 million or 5.9% compared to last year’s second quarter driven by lower sales in our Home Meridian segment and partially offset by sales increases in the Hooker Branded and Domestic Upholstery segment, the addition of Sunset West results and the recovery in the H Contract.

The company reported net income of $5.5 million or $0.46 per diluted share compared to $7.5 million or $0.62 per diluted share a year ago.

For the fiscal 2023 first half, consolidated net sales were $300 million, down $25 million or 7.7% compared to last year’s first half, a period in which home furnishings and other industries benefited from a post-COVID demand surge.

We reported net income of $8.7 million or $0.73 per diluted share this year compared to $16.9 million or $1.40 per diluted share last year. Now I will turn the call over to Jeremy to comment on our fiscal 2023 second quarter results..

Thank you, Paul and good morning everyone.

At midyear, momentum at Hooker Furnishings is positive, strong backlogs, full production capacity at our domestic factories and our Asian suppliers and optimum inventory levels position us to grow sales across all three segments during the second half compared to the second half of last year which was significantly disrupted when virtually all of our Asian capacity was shutdown due to the COVID-19 pandemic.

As we assess the second quarter, there were five main drivers, highlights and initiatives that standout. First, factory production at our Asian suppliers ramped up to near full capacity, recovering from the COVID-related factory shutdowns beginning late last summer that significantly reduced inventories through the first quarter.

Inventory receipts at our U.S. warehouses increased each month. Looking ahead, without the production constraints we faced last year, the runway for accelerating product flow and shipments is clear. Currently, we have $34 million of inventory in transit with a high percentage of that inventory already sold and expected to be shipped soon after receipt.

Secondly, as a result of improved inventory flows, we fulfilled orders and reduced backlogs, enabling us to exceed our internal expectations for the quarter.

We were pleased to report sales gains in the Hooker Branded and Domestic Upholstery segments in the second quarter and our strong backlogs and inventory position us to grow all three segments as the second half progresses.

Third, the Domestic Upholstery segment achieved the sixth consecutive quarter of double-digit sales gains with an organic increase of 33% before the addition of Sunset West.

Although we experienced some disruptions in the delivery of raw materials, all four upholstery divisions were operating near full capacity with shipments exceeding prior year periods and our internal goals. Additionally, the Domestic Upholstery backlog is 5x the pre-pandemic levels in calendar 2019.

Fourth, the $28.3 million sales decrease at Home Meridian was driven by large retailers and its customer base who are rationalizing their inventory levels, along with some softening of e-commerce sales industry-wide. Approximately, 40% of the sales decline can be attributed to HMI’s exit from the unprofitable Clubs channel.

Finally, during the quarter, the Home Meridian segment executed a full High Point showroom remodel, secured additional space at our Savannah, Georgia distribution center and positioned new inventory in Savannah to support the introduction of the portfolio program, which will serve additional channels of distribution through a warehouse stocking program.

Except for launch next month at the High Point market, portfolio encompasses an assortment of over 1,000 ready-to-ship SKUs across four of HMI’s brands with no order minimums. The rollout will enable us to further diversify our customer base and distribution channels at HMI, allowing us to reach a vast network of independent retailers.

The fast growing interior designer channel also will now be able to leverage these HMI brands and their products for the first time. The portfolio program does not require additional overall inventory, but rather a change in the mix.

In addition to servicing HMI customers, the expanded distribution center will enable us to warehouse the Sunset West product line by year end, giving Sunset West logistical support to East Coast distribution for the first time. Like the rest of the furniture industry, we have faced economic and supply side challenges throughout the year.

However, we are confident that our proactive responses and successful mitigation efforts, along with the many strategic initiatives underway have poised us to finish this year in a strong position. Now, I want to turn the discussion over to Paul who will discuss highlights in each of our segments..

Thanks, Jeremy. Beginning with the Hooker Branded segment net sales decreased by $2.9 million or 5.8% compared to the same period a year ago. Both Hooker Casegoods and Hooker Upholstery achieved an uptick in sales during the quarter. Inventory receipts at our U.S.

warehouses increased monthly during the quarter as our Asian suppliers resumed production and shipments after delays earlier this year resulting from COVID-related shutdowns last year, which allowed us to better fulfill orders and reduce backlogs during the quarter.

At the end of the quarter, inventory levels increased by $33 million compared to the prior year end and by $15 million compared to the previous quarter and we have about $25 million in transit in the Hooker Branded segment.

A large percentage of the in-transit inventory is sold orders, which will help us work our backlog back to more normal levels over the remainder of the year.

On the income side, we were able to maintain solid profit margins during the quarter as we transitioned through price increases and surcharges added last year and the beginning of this year to help mitigate rising transportation and product costs.

Incoming orders in the Hooker Branded segment decreased as compared to the prior year quarter, a time when home furnishings benefited from dramatic, but unsustainable post-COVID demand.

Quarter-end backlog was at a comparable level to the prior year second quarter, but it was 21% lower than its fiscal 2022 year end due to increased shipments during this quarter. Hooker Branded backlog is still 4x higher than pre-pandemic level in calendar 2019.

At Home Meridian, net sales decreased by $28 million or 32% compared to the prior year quarter due to lower sales at mass merchants and furniture chains from retailers who accelerated their orders in the prior year and are currently rationalizing their inventory levels.

Also, about 40% of the sales decline is attributable to HMI’s exit from the unprofitable Clubs channel, which we have discussed in previous quarters. Sales in the e-commerce channel were also down as sales in this channel returned to pre-pandemic levels and growth rates.

These decreases were partially offset by continued recovery in the hospitality business and the launch of the Pulaski Upholstery division, which is targeted at medium price points, not currently serviced by our other divisions.

We fully anticipate HMI will achieve sales growth in the second half of this year as they recover from inventory availability problems, which began in the second half of last year. And as they exit unprofitable channels to focus on building a more diverse, sustainable and consistent core business.

We are looking forward to the upcoming introduction of the portfolio warehouse stocking program Jeremy mentioned earlier.

We are in stock and ready to service this program when it launches at the High Point market next month and are excited about the opportunity to further diversify our HMI customer base and distribution channels, reaching hundreds of independent furniture retailers and the interior design channel for the first time.

Incoming orders and backlog decreased significantly as compared to last year when demand was exceptionally strong. Customers were ordering further into the future and orders were not converting to shipments as quickly as expected. Additionally, mass merchants continue to rationalize their inventories to match current demand levels.

At quarter end, HMI’s backlog levels were similar to levels at the same time in calendar 2019.

Turning to Domestic Upholstery, it achieved its sixth consecutive quarter of double-digit sales gains with organic growth driving a net revenue increase of about $8 million or 33% as compared to the prior year quarter before considering the addition of Sunset West results.

As Jeremy noted, there were some disruptions in delivery of raw materials for production. However, all three divisions were operating near full capacity with shipments exceeding prior year periods as our internal goal.

Gross margins decreased in the fiscal 2023 second quarter due to significantly increased raw material costs partially offset by overhead absorption on higher sales volumes and improved labor efficiency. Incoming orders decreased due to current lead times and high backlog.

Quarter end backlog was at the same level as the prior year quarter, but was 8% lower than fiscal 2022 year end as higher shipments began to reduce that backlog. Domestic Upholstery backlog at year end – at quarter end was 5x the pre-pandemic level of calendar 2019.

On our balance sheet, cash and cash equivalents stood at $11.7 million at second quarter end down $57 million compared to the balance at the fiscal 2022 year end due primarily to a $56 million increase in inventory.

During the second quarter, we received $25 million in term loan proceeds to replenish cash used to make the Sunset West acquisition in early in the first quarter. At quarter end, inventory stood at $131 million, including $34 million in transit to our domestic warehouse.

With this record amount of inventory, our cash levels have dropped temporarily, because a high percentage of the in-transit inventory is sold we expect to quickly convert inventory to shipments and for cash balances to improve by later in the fiscal year.

This higher inventory also positions us well for the typically stronger sales in the second half of the year. In addition to our cash balances, we had $27.9 million available on our revolving credit facility to support our working capital. Finally, I’d like to mention capital allocation.

In our earnings release this morning, we announced a $0.20 per share dividend, which reflects a dividend yield of about 5% of our current share price. And what started late in the second quarter, our share repurchase program is now well underway, and we purchased 360,000 shares or about $6 million of company stock at.

Now I’ll turn the conversation back to Jeremy for his outlook..

Thank you, Paul. We’re closely monitoring economic disruptors like inflation, rising interest rates and a slowing housing market. At the same time, we see many reasons for optimism as the U.S. enjoys strong levels of employment, rising household incomes and continuing strength in consumer spending.

We are watching as yet another sizable generation enters into their prime furniture purchasing years.

While incoming orders are down, we have substantial backlogs to ship, and we believe the reduction of incoming orders from retailers is temporary and more a result of rightsizing their inventories and a significant decline in normalized consumer demand.

Based on what we have heard from our retail partners, we expect sales to uptick during the fall and holiday season as usual. We also expect that order rates will align more closely with the pre pandemic ordering environment, a trend we have observed in recent weeks.

We believe organic growth will be buoyed by several new strategic initiatives, including our recent entry into outdoor furniture, expansion of our presence in the interior design channel in all segments, along with the post-pandemic recovery within the hospitality and contract businesses.

As we discussed earlier, HMI’s portfolio program launches at the upcoming October High Point market, which we believe accelerates the expansion of our Home Meridian customer base.

We are preparing for a strong second half of the year and based on our backlogs and solid inventory position, we are on track to increase sales in all three segments and to finish the fiscal year on a positive trajectory. This ends the formal part of our discussion. And at this time, I will turn the call over to our operator, Shannon, for questions..

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

Good morning, gentlemen. And thank you for taking the questions..

Good morning. .

Good morning..

So – Hi, good morning. So firstly, just the question on the backlog. Is it possible to get a number as far as on a consolidated basis.

What’s the backlog now? And how does that compare to a year ago or year-end?.

At the end of the quarter, backlog was $201 million compared to – last year, the backlog was even bigger, it was 3 plus but more normalized that 200 is still much higher than prior, let’s say, at the end of ‘19, it was – at the end of fiscal ‘19, it was $100 million.

So we’re still double that number, but it’s $100 million from this time last year, but we weren’t shipping last year..

Got it. Understood. I know yes, there was a lot of inventory constraints, which started really kind of accelerated in August, the shutdowns in Vietnam. So all right. So your comments in the press release as well as on the call, I mean, seem more optimistic than your peers that have reported lately.

Kind of what gives you that confidence? And do you have an early read on how your retail partners performed during the Labor Day holiday weakened?.

I’ll start with the last part. We heard positive things about a lot of Labor Day sales from our retail partners. That was all from our standpoint, positive news. Regarding our optimism has first of all, it has a lot to do with – if you look at 81, we had 70% of our capacity in Asia shut down for COVID.

So when you compare where we are now this year versus what happened to us last year, we’re heavier in casegoods. We’re heavier in that type of sourcing, I think, than the others that you’re probably speaking about.

So I think that’s a big part of why we’re as optimistic as we are that we can really finish this year a lot stronger than we did last year..

Okay. Yes, thanks, Jeremy for that. And then – yes. In terms of the exit from the Clubs channel, is that totally complete or is there anything else to be done? I know that it was a large impact on HMI’s results.

But just wanted to get a sense as to whether that’s over and done with now?.

I can tell you that backlog is zero. So when you ask if it’s complete, there is a tail that I’ve talked about on previous calls, and that could continue for some period of time. But obviously, we’re not feeding that anymore.

So we feel like we’re going to be – we’re going to eventually be out of this, but I’m just saying there could be a little more of the downside..

We believe we’re accrued properly for the sale, you’ve listened to us long enough to know that that’s been – sometimes we’ve been surprised by that..

But we’re saying all that, we’re very encouraged by where we are in the process of getting clear out..

Got it. Understood. And then kind of a longer-term question on HMI. So looking back, historically, calendar ‘18, that segment did roughly $387 million in revenue, approximately $20 million in operating income. Obviously, since then, you have exited from the Clubs channel business, which was a big piece of the overall revenue.

But now focusing on more profitable sales channels, so you’re introducing a new portfolio program as well. Longer-term, I mean, where should that business be – and I’m just speaking for HMI just with this question.

I mean how do you see this next few years can we get back to those type of profitability in that segment? What are your thoughts there?.

We can get back there. We had to almost have a reset with some of our businesses we’ve been in that were hurting us at pretty, as you know, large levels. So I would say that not only are we going to get back to there, but we’re going to get back to there with a much more concrete foundation to grow additionally from.

So if we – right now, we’re going from what I would call somewhat of a quick sand foundation with the bad businesses to more of a concrete foundation. And then once we have that, it’s going to be much more sustainable and much more predictable.

And when you talk about the earnings that you referenced, that had a lot of things in it like Clubs that, I would say, probably juiced up some of those earnings, it’s probably a bad word to say, but it’s just when you look at the tail that we’ve experienced, we’ve become cognizant that maybe that wasn’t exactly what it appeared to be..

Okay. Got it..

And we have – so Anthony, just to expand on that, there is – it’s a three-pronged strategy there, which is – we are going to – we’ve got now that we’re getting out of bad businesses that we lose money on. We’re expanding our customer base. And through that, we’re also going to increase our overall contribution margin.

And also one other thing is we’ve reduced – we’ve significantly reduced the overhead on that side of the company, which is going to allow us to do a lot – make a lot more money and be a lot more profitable even if it’s a $250 million, $260 million business..

Okay. So you expect ultimately the operating margins for HMI could be higher than they were at their historical peak.

So based on everything you said, even with a smaller revenue base, is that fair to say?.

Absolutely..

Okay. Got it. Got it. Perfect.

And then in terms of just switching gears here, just for Domestic Upholstery, you referenced the higher raw material costs, how much was that as far as an impact and the – where do you see the raw material costs in the back half of the fiscal year?.

We believe it’s stabilized somewhat. If you go into last year, it was almost like you couldn’t keep up with the number of price increases throughout the different raw materials in our domestic manufacturing.

So we feel like there has been a stabilization and even some areas of opportunity to actual negotiation, some things lower that had inflated due to what was going on. So we feel pretty – a lot better than we felt last year about that question..

Okay. Got it. Okay. And a couple of more questions, if I may here. So as I look at the SG&A expenses for the quarter, they were down sequentially from the first quarter, and this is despite revenue growing again on a sequential basis relative to the first quarter.

So – was there anything unusual in the first quarter or here in the second quarter? And just kind of to think about the run rate of expenses going forward?.

I think that this quarter is probably normalized now. We had some excess costs like getting out of the North Carolina warehouses as we move to Savannah. So bearing in mind that about 6% of SG&A – 6% of sales is a variable SG&A, which is our commissions and some other costs like that. Otherwise, I think that this is a pretty normalized run rate.

So adjusted for the variable costs, and I think you can project based on this quarter..

Got it. Okay. And then my just last question is on – just on inventory. So really kind of a two-part question here. So first, I know you guys talked about the – there is a lot of in-transit inventory.

But just curious as to how much of the year-over-year increase of inventories because of inflation? And the second part to the question is just kind of ballpark estimate as to how we should think about your inventories, where you think they’ll be at the end of the fiscal year? Thank you..

So I’m going to divide it in two sides. So on one side of our business, the HMI side, we had about a 1% difference in increase in inventory in units and roughly a 26% increase in dollars. So that’s pretty much – that’s the number I think you’re looking for. On the other side of the business, we had about a 6% or 7% decline in units of inventory.

And we had, I believe, roughly a 27% increase in dollars in inventory. So you can see the delta on – when you talk units versus dollars, it’s significant..

That’s right..

Right.

And then as far as where you think inventories will be by the end of the fiscal year, any sort of ballpark estimate there?.

I would anticipate, they will either be relatively same ballpark or down roughly $5 million to $10 million..

Got it. Okay. Well, thank you very much and best of luck..

Okay. Thank you, Anthony..

Thank you. Our next question comes from JP Geygan with Global Value Investment Corp. Your line is now open..

Thank you. Good morning gentlemen. You have experienced the same cost pressures as many others in your industry and across other industries, for that matter, logistics, raw materials inventory, labor.

I know you have touched on a lot of those in Anthony’s questions, but maybe you could just talk about how we should be thinking about the cost generally going forward and in particular labor and as it might affect your ability to service your Domestic Upholstery backlog?.

I think I understood your question. We had a little glitch in the sound for a second, but I believe you are asking with the material – raw material disruptions that we have had, do we anticipate any reduction in our flow of production versus – because of that, is that pretty much the gist of it..

Well, raw materials, logistics and maybe with a focus on labor and as it affects your ability to run your production facilities, particularly domestically?.

Yes. We feel like our domestic production is getting kind of better by the day. We feel pretty optimistic about our second half and our ability to ship our backlogs and actually decrease our lead times and all the things that matter to our customers and their customers. So, all of that from our viewpoint is really positive..

Okay.

And then more generally, the increased costs that you have seen throughout the pandemic, to what extent had those either been mitigated by actions you have taken or just naturally decreased to what we might expect to be more normalized levels?.

Well, I think a lot of the mitigation things like freight have been price increases, which we have been able to get through in the right places. And we have also been pretty careful not to rec our demand with doing too much. But in that way, I believe we mitigate it.

In another way, to your point, freight rates have started to come down, there are some things that are becoming a little bit easier or not – I wouldn’t call them easy yet. They are just easier than they were last year. So, in those ways, that’s helping us in a way that we haven’t necessarily mitigated..

Okay. Moving on to the contract business, which you haven’t talked about for a number of periods, understandably. It seems like there might be an outsized opportunity in this area, especially with hospitality customers as demand comes going back and there could be some pent-up demand for furniture replacement going forward.

Maybe just talk briefly about what you are seeing ahead of you in that area?.

Yes. We are obviously – we are very much seeing an uptick. Hospitality is really good right now, and we are involved in a lot of different bids for projects and things are moving, whereas last year, it pretty much came to almost what you would call a stop.

There wasn’t much – there was not much investment in that area for hotels in the areas that they are trying to get business. So, all of that is really good, and we have been able to, we feel like, get a pretty good amount of business so far and our backlogs are good in that business, and we feel like it’s definitely headed the right direction.

On the contract side, senior living, which we target an age contract is still a little bit slower, but their business has still been pretty good. So, we are pretty encouraged by both of those areas for our company..

Okay. Great. Thanks. And then my final question really revolves around your sales channels. And of course, you have made a lot of changes in the way you think about approaching the market through various channels. One of the interesting forays you have made is with interior designers.

Can you put some more color around that initiative, the size of the opportunity and the economics of that particular channel as compared to your other distribution channels?.

Well, one thing we feel like we have learned definitely on the Hooker Legacy side, is that, that is a different consumer and a different channel entirely. So, we don’t feel like it overlaps with anything else we do is number one. Number two, a lot of it has to do with product availability. It has to do with technology.

So, having the right technology to service the designers is a big deal, which we already have on the Hooker Legacy side.

So, with our new ERP system spreading across the whole company, we are able to put that type of technology behind our efforts as well, where it’s a self-service, B2B site that they have access to for all of our brands and not just the Hooker Legacy brands.

Additionally, when we position ourselves from an inventory standpoint to be able to support that business, that’s obviously a big deal. And then last, having the customer care support that is extended to our other companies, not just the Hooker Legacy is what I see as the last major strategic piece to be able to do that type of business.

So, we feel like that’s a real growth opportunity for us in 11 out of our 13 brands..

Alright. Thank you. Appreciate the additional color..

Yes. Absolutely. Thank you..

Thank you. Our next question comes from the line of John Deysher with Pinnacle Value Fund. Your line is now open..

Good morning. Thanks for taking my questions. Just a couple of quick financial questions.

What were the orders for the second quarter versus a year ago?.

Orders for the second quarter, it’s going to sound really bad, but they were $63 million versus $193 million last year..

Sorry, Paul, you faded out $63 million versus what?.

$63 million versus $193 million. Again, last year was – I am not sure that’s a really fair comparison. But yes, so….

And a lot of that decrease was orders that were very far out planned because of the capacity issues from large retailers that they canceled those orders because they felt confident that they could get the production with a more normal lead time and not have to have that much on order..

Backlogs were 200 versus 320 at the same time last year. So, the backlog is still pretty healthy..

Yes. No, the $200 million is pretty good.

When you said inventory would be down $5 million to $10 million by year-end, was it down from the most recent quarter or down from year-end last year?.

Down from this quarter..

Okay.

So, down $5 million to $10 million from this quarter?.

Right..

Just to clarify, I answered that, and I said it could be anywhere from flat to down $5 million to $10 million..

Okay. Flat down to $5 million to $10 million. Okay, that’s helpful. What’s the status of the Savannah warehouse? I know last quarter I think there were some higher-than-anticipated expenses.

Are you up the learning curve there, or how is that shaping up at Savannah?.

We are definitely better off than we were. We are getting a lot less in charges that you get from inefficiencies and running a warehouse. I wouldn’t say that we have achieved our goals of really being a best-in-class facility, but we are a lot further along that path than we were previously..

When do you think it will be where it needs to be?.

I think probably, if I had to guess right now, I would say by second quarter next fiscal, we would really be maximizing the opportunity in Savannah. Some of that has to do with additional racking and things that we are trying to do to create efficiencies. It has to do with equipment that we have had challenges getting.

I will give you an example, pickers that are hard – they were extremely long lead times and creating efficiencies in the warehouse that just started even now having the right equipment which you can’t get a hold of because of lead times. So, things like that. We have done a better job with labor.

We have been able to get a lot more on our staff, but those are still challenges that we face. But it’s kind of getting better by the day.

But again, just to be totally candid, I think second quarter next fiscal would be a likely time and I would be really pleased with our efficiencies in that warehouse because there is so much savings opportunity for us being in California and the two North Carolina warehouses versus being in the one big Savannah warehouse.

Once we really maximize that, the savings really are exponential for where we were..

Any idea of what the contribution might be in terms of savings dollar-wise?.

Paul and I believe it’s around $2 million..

Okay.

So, an incremental $2 million between now and second quarter of next year, perhaps?.

No, I think we are giving you an annualized savings of $2 million..

Okay. Perfect..

And we are already seeing some of that, if you think about not having the transportation of containers to North Carolina and think – we were transporting those, so the drayage that we save is a big part of that savings, we are 70 miles from the Fort of Savannah. So, that’s a big difference..

That’s through speed of delivery efficiency because other warehouses were inefficient..

Okay. Good. That makes sense.

And finally, what is the anticipated CapEx budget for the total year at this point?.

It’s higher than normal because of Savannah and because of our ERP, we expect to spend $4 million more remainder of this year. If ERP shows – we have got some showroom remodeling and warehouse are big projects. And that’s not a CapEx run rate. I think when we normalize, we will be back to that $5 million or $6 million a year..

Just to make sure I heard you correctly. So, $4 million in the back half of the year, additional….

Correct..

Great. That’s helpful. Thanks and good luck..

You’re welcome. Thank you..

Thank you. And I am currently showing no further questions at this time. I would like to hand the call back over to Jeremy Hoff for closing remarks..

End of Q&A:.

Thank you, Shannon. I would like to thank everyone on the call for their interest in Hooker Furnishing. We look forward to sharing our fiscal 2023 third quarter results in December. Take care..

This concludes today’s conference call. Thank you for joining. You may now disconnect..