Paul Huckfeldt - Senior Vice-President & Chief Financial Officer Paul Toms - Chairman of the Board, Chief Executive Officer Michael Delgatti - President, President, Hooker Upholstery

Matt McCall - BB&T Capital Markets

Greetings, ladies and gentlemen, welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the First Quarter 2016 earnings period. 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, please go ahead.

Thank you, Kailey. Good afternoon and welcome to our quarterly conference call to review our sales and earnings for the 2016 first quarter, which ended May 3, 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 our 2016 first 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 $61 million and a net income of $3.5 million or $0.32 per diluted share for our 13-week fiscal quarter ended May 3, 2015. Net sales for the quarter were essentially flat, decreasing by less than 1% or $440,000, compared to the prior year quarter. Net income increased nearly 24% or $668,000 Earnings per share increased to $0.32 per share compared to $0.26 a share in the prior year quarter. Now, Paul Toms will comment on our first quarter results.

Thank you, Paul, and good afternoon everyone. Overall, this was a solid quarter and we are pleased with our ability to grow profits more than 20% in spite of flat demand and inconsistent retail conditions around the country during the period. As we reported in our press release earlier today, consolidated operating income increased nearly $1 million or approximately 24%, driven primarily improvements in our upholstery segment. Combined Sam Moore, Bradington-Young and Hooker Upholstery, improved operating profitability by $900,000 year-over-year through cost reductions and increased manufacturing efficiencies. Our casegoods segment built on last year's strong performance by again generating an operating profit margin of over 10% this quarter, driven by lower discounting and quality-related costs in spite of higher product and shipping cost. Moving forward, we believe, we can continue to make incremental improvements in casegoods' profitability performance. Despite the flat casegoods sales in the segment and soft demand during the period, we continue to see higher retailer confidence and the ability to sell large ticket, bedroom, dining room and occasional furniture. This trend, which began during the 2014 calendar year, indicates a continued recovery in the casegoods segment of our industry. There were a few short-term and seasonal factors that deflated revenues during the quarter. First, late deliveries of several key introductions from the October 2014 high point furniture market, experienced delayed shipments of these products to retail stores until the beginning of the current quarter, delivery of these collections are presently rolling out on retail floors. Sales across all brands were negatively impacted by lower oil prices, which softened business especially in Texas and Oklahoma, two top-sites for Hooker Furniture revenues. More recently, at the end of the last month, we were pleased to hear reports from retailers around the country that Memorial Day sales were particularly strong, even for retailers in Texas and Oklahoma. This was an encouraging indicator that consumers are responding to aggressive promotions during holiday sell periods. At the end of the quarter, Sam Moore's Bedford, Virginia operations went live on the conversion of its enterprise resource planning system to a new platform. The ERP system conversion, we have been working towards two years was implemented the weekend of May, and the transition has generally gone very well. Our new business ventures, H Contract and Homeware, each had double-digit, year-over-year growth in the quarter, including a 50% growth rate in H Contract revenues. At this time, I would like to call on our President, Mike Delgatti to give a report on the April high point market and more details about the performance of our upholstery companies this quarter. Mike?

Thank you, Paul, and good afternoon. As Paul mentioned, significant operating income improvement in our domestic upholstery operations was a highlight of the quarter. At Sam Moore, it was exciting to see a dramatic year-over-year improvement in operating income on the strength of better manufacturing efficiencies and cost reductions. This profitability performance improvement was achieved despite the fact that sales were actually down for Sam Moore during the quarter. Employees were also challenged during the quarter by the conversion of Sam Moore's ERP system to a new platform in early May, requiring much time and effort on their part. As Paul mentioned, their work over the last two-and-a-half years to transition to the new system paid off with successful go live conversion during the first weekend of May. Also during the quarter, Sam Moore introduced Sam Moore Studio, a comprehensive retail merchandising program aimed at enhancing the shopper experience through better display and selection. The studio program was very well received at the spring, high point market and we already have 30 commitments from retailers. We expect to increase these commitments by at least 50% by the end of the quarter. We believe this program will help us grow our business with each retailer through gaining more retail floor space and achieving higher productivity in that floor space. The Sam Moore Studio will create a destination for the brand within participating retail stores and help us tell our value proposition in a more compelling way to consumers. We will appreciate the ability of customized their upholstery through fabric, finish and trim options. Moving on to bring Bradington-Young, our upscale leather upholstery brands had particularly strong quarter on the top-line and bottom-line with a solid year-over-year improvement in operating profitability. Bradington-Young's top-line continues to be boosted by ongoing successes of the comfort at home retail merchandising program, and more recently by the luxury Leather Motion upholstery program introduce last fall. We believe, this is the most comprehensive and versatile high-end motion upholstery program in the industry. It is selling well at retail and continuing to gain new placements. Sales at Hooker Upholstery, our imported leather upholstery line were down about 10% for the quarter. Just as last year when Hooker Upholstery came on stronger in the second half of the year, we expect improving business as we move through this year as well. We have strengthened the opening price points for Hooker Upholstery and are seeking to be more creative and innovative in our design and color direction. We are also pursuing a strategy to diversify the Hooker Upholstery product line and as a part of that strategy, we introduced a bar stool and counter stool program in the April high point furniture market. It was very well received and continues to be ordered at a brisk pace. The bar and counter stool program was one of several strong introductions at the April furniture market for Hooker Furniture's brands, where our attendance was up in the mid-single digits compared to April market a year ago and a favorable development for both, Bradington-Young and Hooker Upholstery, we have seen a welcome stabilization of leather prices. Going into the market, our strategy in casegoods merchandising was to strengthen our better price points and our good, better, best assortment within the accent and occasional categories and in whole home collections. This strategy was successful and we had a big hit with our Skyline collection and urban contemporary, well-crafted and highly figure cathedral cherry veneers. As we move through the summer, we will be busy developing our Cynthia Rowley whole home collection set for introduction at the October high point furniture market. We recently showed renderings of the collection to major retailers at a dealer design meeting and they were extremely excited and enthusiastic about the style direction of collection. Now, I would like to call on Paul Huckfeldt to give us more details on our performance during the first quarter of fiscal 2016.

Thanks Mike. Consolidated net sales decreased for the fiscal 2016 first quarter, primarily due to decreased unit volumes in both, our casegoods and upholstery segments, partially offset by increased average selling price in those segments. Unit volume decreases in our casegoods segment were primarily due to decreases in container direction to retailers during the quarter. That was partially offset by increases in non-container shipments. The shift from container to non-container sales contribute to higher average selling prices as did another quarter of lower discounting. The decline in upholstery segment net sales was due to decreases at both, Sam Moore and Hooker Upholstery, partially offset by increased volume at Bradington-Young. Our all other segments contributed positively to sales in the fiscal 2016 quarter compared to the prior year period, but is still very small component of our overall sales. We believe, the decrease in our fiscal 2016 first-quarter sales results compared to our 2015 results was primarily due to overall inconsistent conditions at retail and some product availability challenges due to some expanding lead times and late deliveries of some of our more popular October market introduction in the casegoods segment. We expect that the late deliveries we experienced in the first quarter to be less of an issue going forward. Overall, average selling prices increased 4.9% during the quarter, primarily due to lower discounting, the mix of products shipped and some price increases to offset cost increases. Consolidated gross profit increased in the fiscal 2016 quarter, primarily due to improved Upholstery segment gross profit, due to greater operating efficiencies, including better materials management, labor efficiency, decreased use of contract manufacturing and lower medical claims expense, as well as adjusting or exiting certain low-margin sales arrangements. In the casegoods segment, gross profit increased due to better discounting, lower discounting and product mix and lower returns and allowances as a result of better quality experience on products which began in the second half of last year and carried into this quarter. Consolidated selling, general and administrative expenses were essentially flat decreasing slightly as a percentage of net sales in an absolute terms, primarily due to decreased medical claim expenses, due to plan, design changes and better claims experience, also, decreased contributions of [ph] quality furniture, which was another benefit of our improved quality experience and decreased banking expenses due to changes in some of our sales policies. These decreases were partially offset by increased professional service expenses related to increased compliance and consulting cost. Operating income for 2016 quarter were $5.2 million or 8.6% of net sales compared to $4.2 million or 6.9% of net sales last year. Our balance sheet remained strong with cash and cash equivalents of nearly $41 million. This allows us to invest in the inventory receivables and the cost of growing our two new initiatives, which Paul mentioned earlier. We remain debt-free and have $13.5 million available under our revolving credit facility, remains in place until July of 2018. Earlier today, we declared a dividend of $0.10 a share, which represents 1.6% dividend yield at today's share price. Now, I will turn the discussion back to Paul Toms for his outlook.

Thanks Paul. While we are encouraged by strong Memorial Day sales reports from our customers, inconsistent and sluggish retail conditions on a day-in-and-day-out basis have caused demand to be relatively flat throughout the first quarter and during the first four weeks of the current quarter. In addition, key economic indicators such as consumer confidence have been inconsistent, while most key housing indicators such as new home sales, new housing starts, existing home sales and household formations appear improved year-over year. Our outlook for the second quarter is a demand environment that is similar to the first quarter. Longer term, we will remain optimistic both, with our core business and our new ventures and all indications are that the fall selling season in second half of the year should be strong. This ends the formal part of our discussion. At this time, I will turn the call back over to our operator Kailey for questions. Thank you.

Thank you. Our first question comes from the line of question comes from line of Matt McCall with BB&T Capital Markets. Your line is now open.

Thanks. Good afternoon, guys.

Hey, Matt.

Hi, Matt.

Let's start with, one word I do not think I heard was free and any type of pressure on the cost side from freight. We had anticipated a little bit more gross margin pressure on the on the casegoods side from some freight rate issues. Can you just talk about what you saw on the quarter and maybe did we misunderstand or did the pressure that resulted just coming a little lighter than you expected?

Matt, this is Paul Toms. I would say our freight rates in the last quarter are probably slightly less than they were in the two previous quarters, still elevated over last year probably by 15%, what we experienced in Q1 last year, but maybe 5% to 10% less than we experience in the previous couple of quarters. We did have a price increase effective March 30th, that was to mitigate the impact of freight cost increase that we experienced last year and anticipated for this year. We did just signed contracts for the coming year and I think we are signing contracts at about the rates we are paying today, so again maybe 15% above last year, but not as high as they were at peak in the last couple of quarters.

Okay. Is there a dollar number that you can point to as much freight was up year-over-year just from a margin pressure perspective?

What you would be saying in total what we were seeing versus per container?

No just your total what you reported on your cost of goods line. How much freight took that number higher?

I do not know that. I mean, Paul may have a better idea on that.

The impact was about maybe 1%.

But we have again offset that with the price increase that - taken hold about now.

Right.

It typically it takes maybe six weeks to start seeing backlog get shipped and orders entered at new prices…

Right.

Right. Okay. Point of pressure live quarter should be offset neutralized going forward?

It starts when you get back close, Matt, because you have got that pressure, you have got the price increases cycling in, you have got product mix question so, when you are building this into your model I am not sure that you can say well we are going to raise your margins 1% or drop.

Sure. Got it. Okay. If I will recall correctly, the EBIT margin target in case goods was always around at 10% level. It seems like you are pretty steadily there now. I think you said that there is opportunity for further improvement. I mean, Paul Toms, I think you said that. Can you talk about the drivers of the improvement and where you think that new margin target should be and when we can get there?

I would not set a different target, Matt. Although I did say I think we can improve incrementally from where we are and I think the biggest driver of that improvement will be if we are able to grow sales and leverage the fixed cost that we have, but the model is pretty good in terms of throwing off additional revenue when we get over the breakeven point. I do not see a lot lower cost, say, for discounting. I think, we are probably about as lean as we are going to get quality. We are not quite on target, but we are close to the quality cost that we would have anticipated, so it is really more just with increased sales leverage in those.

Got it. All right, and then I will ask the same question. I guess this might be for Mike, when you talk about the upholstery side of the house what is the way we should look at the upholstery margin opportunity and as you progress through this year and then in longer-term?

Well, there clearly is opportunity on the upside. The greatest the opportunity will be with the Sam Moore brand making good progress in that area. Like Paul said, for BY volume is our best opportunity to improve profitability performance and BY is also making some good strides and improving operating income and Hooker upholstery once again it is leveraging the volume against the a fixed cost. We have had some challenges growing that brand. We had some strategies in place, so we believe we will turn around revenue performance, and as we do that, we anticipate our profitability to improve as well, but the good news is that at the end of the first quarter all upholstery brands were profitable.

Mike, can you put any more detail like what is the potential for the margin across the Upholstery segment? Can you get, I have got in my model the target 7%. I might have made up that number, but is that a reasonable target? If so, over what time period?

I think, BY is there and Hooker Upholstery is really close. You know, we hope over the next three, four quarters Sam Moore to achieve a level in that the 6%, 7% range and there is opportunity beyond that as well which is where BY is in terms of operating income performance today on the consistent basis.

Mike, I will just fill in Sam Moore maybe off [ph] this quarter that may affect upholstery, because the short-term effects of ERP go live.

Yes. Okay that was actually my last question. I think I can't remember which Paul said it or maybe was you Mike, but you said the implementation has gone generally well. Has there been any type of issues call, service delays, anything like that?

Yes. There has been some interruption to service scheduling issues, which have caused us to delay the completion of some orders. There have been some issues that have impacted manufacturing efficiencies. Now, we are producing and shipping everyday and have from day one. We do believe we will fall short of our budget for May, but what will help us out is the fact that it say a five-week a period, but we are addressing the issues very aggressively as they come up and we do anticipate things to smooth out over the next, I do not know, couple of months or less. This quarter, I do not - you would not want to just to use this quarter.

Right.

Got it. Okay. Thank you guys. Good luck.

Thanks, Matt.

Thank you and I am showing no further question. At this time, I would like to turn the call back over to the management for closing remarks.

All right. Well, this is Paul Toms, and on behalf of the three of us, we appreciate everybody joining us today. We are glad we could report good results this quarter and we expect reporting again next quarter, so we look forward to being back together within about 90 days. Thank you for joining us today.

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