Hooker Furnishings Corporation
Q2 2009 Earnings Call Transcript

Published: 10 Sep 2008

[Operator:]

Welcome to the Hooker Furniture’s quarterly investor conference call reporting its operating results for the fiscal second quarter 2009. (Operator Instructions) It is now my pleasure to introduce your host, Larry Ryder, Executive Vice President of Finance and Administration and CFO.

[E. Larry Ryder:]

Good morning and welcome to our quarterly conference call to review our sales and earnings performance for the fiscal 2009 second quarter and first half which ended on August 3, 2008. We appreciate you participation this morning. Joining me today is Paul Toms, our Chairman, President and CEO. 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 second quarter 2009 results. Any forward-looking statements speak 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. Now let’s get underway with some opening comments from Paul.

[Paul B. Toms:]

As we said in our press release last night, the summer business environment proved to be even more challenging than we anticipated resulting in another disappointing quarter with financial performance below what we’ve achieved historically at Hooker Furniture. As we reported, our net sales for the second quarter of $64.6 million decreased 12% and net income of $2.1 million decreased 57% from the same period a year ago. For the first half net sales of $135.7 million decreased 10% while net income of $4.7 million decreased 49% compared to the fiscal 2008 first half. Our disappointing performance through the fiscal 2009 first half is driven primarily by the decline year-over-year in sales revenue due to the industry-wide business downturn that has been deeper and longer than most people expected. The company’s exit from domestic wood furniture manufacturing also has been a factor in our revenue decline along with lower average selling prices primarily due to the mix of products shipped. While it is beyond our control to change the difficult economic and industry environment, we’ve been busy this spring and summer addressing everything possible that is within our control to improve profitability and stabilize sales. We believe these measures addressed the challenges we’re facing and position us well to leverage and improve demand environment when that materializes. Key steps, initiatives and measures taken in recent months include

[E. Larry Ryder:]

As Paul stated we’re disappointed with our declining sales and profit even in this tough economic environment. We do however still strongly believe that we’ve established the right business model and believe we are working on the right initiatives to further refine our business and position us well when business conditions do improve. We believe our inventory position is appropriate for the current business conditions and we continue to maintain good cash position. Since the end of the last fiscal year the company has redeployed more than half of its available cash and cash equivalents. Cash and cash equivalents declined by $17.3 million since February 3, 2008. We used this available cash plus $1.9 million in cash flow from operations to fund the repurchase and retirement of common stock of $14.1 million, payment of cash dividends of $2.3 million, scheduled principal payments on our long-term debt of $1.3 million, capital expenditures of $1.3 million, and additional expenditures in connection with the acquisition of the Opus Designs youth product line of $181,000. Our cash generated from operations during the first six months of fiscal 2009 decreased $1.9 million compared with $23.8 million generated during the six month period ended July 29, 2007. The decrease was primarily due to a decrease in cash received from customers, higher payments made to suppliers and employees, and a decrease in interest income earned partially offset by a decrease in income tax payments. The decline in cash received from customers is primarily attributed to lower net sales. Payments to suppliers and employees increased as a result of higher inventory purchases and the Sam Moore operation. During the prior year quarter inventory levels were higher than in the 2009 first half. Consequently last year’s purchases were lower. Also payments to suppliers and employees for the 2008 first half only included the operating costs of Sam Moore for the three-month period following its acquisition in April of 2007. Working capital decreased by $13 million or 12.7% to $89.3 million as of August 3, 2008 from $102.3 million at the end of fiscal 2008 primarily as a result of a decrease in current assets. The company ended the fiscal 2009 second quarter with $15.8 million in cash and cash equivalents which compares to $33.1 million at the end of the 2008 fiscal year. Inventories were $57.8 million, a 14.4% increase from $50.6 million at the end of the 2008 fiscal year. The increase in inventories was largely due to an increase in imported wood furniture inventory in preparation for the fall selling season, lower sales than anticipated during the summer, and an increase in raw materials related to Bradington-Young’s leather upholstery lines. At the end of the 2009 second quarter assets totaled $161.2 million decreasing from $175.2 million at February 3, 2008 primarily due to decreases in cash and cash equivalents and accounts receivable partially offset by an increase in inventory and cash surrender value of life insurance policies. The company’s long-term debt including current maturities decreased to $6.6 million at August 3, 2008 from $2.9 million at February 3, 2008 as a result of scheduled debt repayments. Shareholders’ equity at August 3, 2008 decreased to $129.2 million compared to $140.8 million at February 3, 2008 due to common stock repurchases and dividends paid partially offset by net income earned for the period. During the 2009 fiscal year the company has spent $14.1 million to repurchase 798,000 shares of the company’s common stock. Since February 2007 the company’s Board has approved and the company has spent $50 million in total authorizations to repurchase 2.5 million shares of the company’s stock. We believe that the repurchase of Hooker shares has represented prudent use of the company’s excess cash and has enhanced shareholder value. That concludes our formal remarks.

[Operator:]

(Operator Instructions) Our first question comes from Analyst for Matthew McCall - BB&T Capital Markets.

[Analyst for Matthew McCall:]

I had a quick question on the domestic wood business, the more aggressive discounting there that impacted the margins. How much business is still there to work through? I kind of thought that was pretty much all behind you guys.

[Paul B. Toms:]

Right now the remaining domestic wood inventory represents about 1.5% of our finished goods inventory. At selling price at cost it’s higher than that, maybe a little less than 3%. It’s not a significant amount but it’s still there and we are working through it. I feel like we’ll work through it by the end of this fiscal year. But if you were to compare back to prior periods, I think in the second quarter of last year there was about $4 million in volume and there was $7 million in volume in the first quarter. So the fact that we’re selling smaller amounts of it this year and we’re selling it at a more discounted value makes the comparisons very difficult on that particular product.

[Analyst for Matthew McCall:]

I know you commented that your youth furniture line was up year-over-year driven primarily by Opus. Did you comment on what level of contribution Opus had to your top line? Is it still running at about that $7 million annual run rate? Is that right?

[Paul B. Toms:]

That’s for the first half; maybe slightly less. But I think we anticipate for the year it’s going to fun right at $7 million or $7.5 million annualized.

[Analyst for Matthew McCall:]

What about Sam Moore? Did that show any growth this quarter? Was the first half growth primarily the inclusion in Q1?

[Paul B. Toms:]

Sam Moore on a versus prior year basis is experiencing the same sorts of sales declines as Hooker and Bradington-Young.

[Analyst for Matthew McCall:]

I’m trying to figure out the back half. Is the seasonality that we saw in the second half last year still be applicable to this year do you think? It looks like your inventory ramp at the end of Q2 was similar to the levels that you had on the books last year. A little bit higher. Should we expect 52% to 55% of full-year revenue to show up in this second half again or do you think Q3 may be a little weaker given your comments over the next couple of weeks?

[Paul B. Toms:]

We think the third quarter is going to be better than the second quarter just for seasonality. I think the demand compared to a year ago, same quarter last year, is probably off proportionately but the third quarter is typically our strongest quarter; the second quarter is typically our weakest. So I think you will see some improvement quarter-over-quarter and I would say the second half of the year somewhere between 52% to 55% is probably a fair guess of how much of the business would fall in those two quarters.

[Analyst for Matthew McCall:]

Looking at the gross margin lines, is the discounting expected to continue? Maybe help me understand what the discounting impact is. I don’t know if it can be quantified to how that specifically impacted your gross margins but I guess what I’m trying to figure out is, is the 30% level that we saw in Q1 possible again once you get your price increases through and offset some of the raw material pressure and the increased labor from overseas?

[Paul B. Toms:]

30% gross margin achievable with the price increase?

[Analyst for Matthew McCall:]

Yes.

[Paul B. Toms:]

I don’t know that we forecast margins but I do think we should see some improvement in margins with the impact of our price increase that we implemented September 2. That price increase averaged about 7.2% across our line. We also have had significant cost increases earlier in the year from our Chinese suppliers, for case goods and imported leather and we’ve also seen container costs, freight, ocean container costs go up pretty significantly. However I will say I think recently it seems like the dollar has at least stabilized against the Chinese currency and our ocean freight contracts have an inflation/deflation clause in them that’s tied to the price of oil. And with oil coming down I don’t know that we’ll see it immediately; I think it trails back a quarter but I think certainly within three months or so we should see some stabilization and maybe decline in the cost of ocean freight.

[E. Larry Ryder:]

As Paul pointed out in his comments earlier we have strived to take a lot of costs out of the business during the summer months. That should bode well for us as we get into the fall stripping out some of the overhead expenses that we pick up primarily in SG&A, reduction of employees that he talked about as well as other cost reductions. And also the inventory that he talked about building in anticipation of the better fall months should serve us well in that a great deal of that inventory came in before the price increases.

[Analyst for Matthew McCall:]

I don’t guess you guys quantify the overall expectation of cost savings from your recent announcements?

[E. Larry Ryder:]

This year I think it’ll be about $2 million in cost savings for the fiscal year 2009.

[Analyst for Matthew McCall:]

Did any of that show up this quarter? It looks like despite the lower top line you had about 50 basis points of sequential SG&A leverage.

[E. Larry Ryder:]

I don’t think much of those changes have shown up in the second quarter at all. It’ll all be third quarter and beyond.

[Analyst for Matthew McCall:]

Any help in the incremental versus Q1 costs at the Chinese facility added so we can kind of help to gauge a baseline on what the true SG&A level is now?

[Paul B. Toms:]

What facility? The distribution center?

[Analyst for Matthew McCall:]

The distribution center, yes.

[E. Larry Ryder:]

I don’t know that we have that and can really quantify that.

[Operator:]

Our next question comes from Todd Schwartzman - Sidoti & Company.

[Todd Schwartzman:]

When will you see the full benefit of the price increases you’re implementing now?

[Paul B. Toms:]

We saw a little bit of a surge in orders the week before the price increase so there’s a little bit of a backlog at all prices, but I would think you’d start to see some impact within the next month or so. Probably 60% to 70% of our business is special order. It’s a customer going into a store, maybe not seeing exactly what they want on the floor but going to a catalog and ordering. And those we would see immediately the impact because they’re ordered at the higher price. For the next month or so you may have a little higher proportion of stock orders that were placed prior to the increase than normal but we’ll see some impact starting this month and it’ll get significantly larger as we go forward.

[Todd Schwartzman:]

Can you talk about your allowance for docile accounts? Maybe quantify any change during the quarter if there was a change?

[E. Larry Ryder:]

Not much of a change really. Our analysis of accounts receivable that we do on an ongoing basis has not shown any particular weaknesses in the collectability of those accounts. We of course have our normal watch list out there but aging has remained fairly steady. We’ve been very fortunate to maintain good quality accounts receivables. So we don’t forecast a lot of problems in that area that we haven’t already reserved for.

[Todd Schwartzman:]

As far as the pockets of relative strength during the quarter, I could see why youth bedroom was up due to the inclusion of Opus Designs, but what was the driver on the home entertainment side and also what was either the percentage change in that category or dollar change?

[E. Larry Ryder:]

The percentage change would have been modest growth meaning mid-single-digit growth as opposed to shrinkage in almost every other category. As far as the reason, I don’t know that I can really give you the reason. In a sense home entertainment furniture average ticket size is probably going down because where we used to sell multiple pieces with an armoire in the middle to house older picture tube TVs, now we’re selling consoles a lot more frequently that may or may not have tiers and a light bridge and they’re designed to take plasma or LCD or DLP televisions. So average ticket’s gone down but obviously we’re selling more units in that product line. We probably saw some benefit maybe from the April market.

[Todd Schwartzman:]

In terms of total unit sales, what was the decline for the quarter? I don’t know if you quantify that.

[E. Larry Ryder:]

I do not have the numbers on unit sales.

[Todd Schwartzman:]

Or how much were ASPs down roughly?

[E. Larry Ryder:]

For the quarter Todd, it looks like they were down about 0.6%.

[Todd Schwartzman:]

That’s the selling price?

[E. Larry Ryder:]

Yes. Average selling price.

[Todd Schwartzman:]

To what extent has discounting continued in Q3? Did it get worse? Is it about the same?

[E. Larry Ryder:]

In Q2?

[Todd Schwartzman:]

Q2 to Q3 to date.

[Paul B. Toms:]

I would expect that we’re going to make similar efforts in the current quarter to stimulate sales and promote business as we did in the summer. And that’s on in line products across all three companies and there will be some impact also to move the remaining domestic inventory. So I think we’re well reserved against the remaining domestic inventory but I would say the pattern of discounts probably isn’t going to be significantly different in Q3 than it was in Q2.

[E. Larry Ryder:]

Let me correct something that I said earlier. I said 0.6%. It’s 6%.

[Todd Schwartzman:]

So ASPs were down 6% for the quarter?

[E. Larry Ryder:]

That’s correct.

[Todd Schwartzman:]

Is a re-up on the share repurchase authorization off the table for the time being?

[Paul B. Toms:]

The Board of Directors did not take any action yesterday in the Board meeting and I believe with our cash position being what it is right now, I think that’s probably off the table for a while anyway.

[Operator:]

There are no other questions at this time.

[Paul B. Toms:]

We really appreciate everybody being on the call today and look forward to talking with you again at the end of the third quarter.