Paul Huckfeldt - VP of Finance and CFO Paul Toms - Chairman and CEO Michael Delgatti - President George Revington - President and COO, Home Meridian

Anthony Lebiedzinski - Sidoti & Company

Greetings, ladies and gentlemen. And welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the Second Quarter 2017, and First Half Conference Call. 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, Vice President of Finance and Chief Financial Officer for Hooker Furniture Corporation. Please go ahead.

Thank you, Stephanie. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for the fiscal 2017 second quarter and first half, which ended July 31, 2016. We certainly appreciate your participation today. Joining me are Paul Toms, our Chairman and CEO; Michael Delgatti, our President; and George Revingon, President and Chief Operating Officer of our Home Meridian division. 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 SEC filing announcing our fiscal 2017 second-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 $136 million, and net income of $5.3 million or $0.46 per diluted share for our 13 week fiscal quarter ended July 31, 2016. First-half net sales were $258 million and net income was $7.8 million, which converts to $0.68 per diluted share. This is the second quarter in which our consolidated results include results from Hooker's acquisition of the business of Home Meridian International, which we completed on February 1, 2016, the first day of our 2017 fiscal year. Home Meridian's results are not included in today – in the company's prior-year fiscal results, that will be referenced in our call today. For the second quarter and first half, consolidated net sales more than doubled compared to a year ago primarily due to the Home Meridian acquisition. This increase was partially offset by sales decreases in Hooker Furniture's legacy business, in both the quarter and first half. The acquisition of Home Meridian earlier this year resulted in some expenses that were not typically part of our operating results. We incurred about 100,000 of non-recurring deal-related costs in the second quarter, and about $1.1 million year-to-date. We expect to incur another 200,000 in the second half of the fiscal year, as we continue to integrate HMI into our organization. As part of the acquisition, we recorded significant intangible assets, including trade names, goodwill, the value of customer relationships, and the margin in the acquired backlog. Some of these assets are considered indefinite lived, while others will be amortized, mostly over a 10-year period. However, the margin of acquired backlog was fully amortized in the first half of fiscal 20Y17. We recognized around 800,000 in amortization expense in the second quarter, and $2.4 million in the first half. We expect to record about $330,000 of Home Meridian related amortization expense in each of the third and fourth quarters, and expect the amortization expense to be about $1.3 million a year after this year. Now, Paul Toms will comment on our second-quarter results.

Thank you, Paul, and good afternoon, everyone. Our results for the second quarter and first half can be described as mixed. For the second quarter in a row, we had about a 7% sales decrease in Hooker furniture's legacy business, driven by lower sales in the Hooker casegoods segment. The slowdown at retail we first noted during the 2016 fiscal year third quarter conference call persisted during the fiscal '17 first half. These conditions appear to have affected much of the home furnishings industry. In general, retailers of all sizes have not been as willing to make large inventory investments as they were last year and high ticket deferrable product categories like casegoods have been hardest hit during the retail slowdown. In our upholstery segment, after a strong start to the year, a vendor quality issue at our imported leather Hooker Upholstery line resulted in a slight sales decrease for the quarter and essentially flat sales for the first half. This resulted in about a $1 million negative impact on sales for the quarter, and is expected to have a similar impact next quarter. We are working with the vendor to recover our cost and to replace the un-sellable inventory as quickly as possible. In spite of these challenges, we are gratified to see operating margins improve across all segments of our legacy business in the quarter and to remain flat at Home Meridian, despite the addition of over $800,000 of amortization expense on acquisition related intangibles recorded during the quarter. We're pleased with Bradington-Young's profitability, held steady, and Sam Moore has continued its profitable performance with operating income improvements of over 80% and 60% respectively for the second quarter and for the first half. Contributing to our solid profitability performance, we did a good job of managing discounting throughout the first half. We also benefited from lower freight rates and low to nonexistent inflation from our Asian vendors. As we enter the second half of our first year combining Hooker Furniture and Home Meridian, our strategy to diversify by acquisition into faster growing distribution channels, product lines, and price points is being validated. Fortunately, we are large enough now, diverse enough and broadly distributed enough that weaknesses in some channel is offset by growth in others. For example, George will provide more detail shortly on the momentum that Home Meridian is enjoying in its emerging channels of distribution. Those channels including e-commerce, hospitality, international, clubs, and mass merchants are up 26% year-to-date. We're also beginning to realize some positive synergies of the combined companies, and benefit from benchmarking activities between the two companies. Some of the areas where we're already finding mutual benefit include realizing ocean freight savings by going to market together, renegotiating terms with some key vendors, additional product sourcing opportunities and cost savings, by selectively moving some of our back office functions to our Asia offices. Although it's a small component of our overall results, our all other segment delivered encouraging results for the quarter as well. H Contract, which provides upholstered seating and casegoods to upscale senior living facilities is profitable and growing nicely, reporting a 45% increase in net sales for the first half. While Homeware's net sales are down compared to last year, due to sourcing delays for our new repositioned product line, its operating loss decreased by over 65% from the prior year quarter. At this time I'd like to call on Hooker Furniture President, Mike Delgatti, to give more details about the performance of Sam Moore, Bradington-Young and Hooker Upholstery for the quarter, along with discussing our plans to stimulate business this fall, and our outlook for the October market coming up. Mike?

Thank you, Paul, and good afternoon everyone. Considering the quality issue that Paul referred to in our imported upholstery line impacting the quarter, the upholstery segment as a whole performed well. Profitability was up for the segment, both as a percentage of sales and in absolute dollars. Orders were essentially flat, and sales were down about 4% for the quarter. As Paul noted, Sam Moore's operating profitability improvements continued this quarter. We attribute the operating income improvements to greater manufacturing efficiencies, a better job of managing inventory obsolescence, cost reductions, and higher gross margin products and programs. Sam Moore sales grew in the mid single digits during the second quarter. We're getting a lot of positive response to our new SMX program, which is an in-stock quick ship program, featuring 10 chairs, 8 recliners and 4 upholstery groups. In addition to boosting sales, the program also increases manufacturing efficiencies, by driving more production through a focused number of SKUs. At Bradington-Young, profitability held steady and was essentially even with last year. While sales were slightly down, our order rate for the quarter was up 7.5% year-over-year. Growth at Bradington-Young continues to be driven by the success of the Luxury Motion upholstery program introduced last fall. For the October furniture market, we will introduce a new mechanism to the Luxury Motion program. The mechanism allows the consumer to reposition the headrest, to provide customized support to the head and neck area. It's a feature that truly enhances the comfort, and should make a strong product category even better. Although we lost significant sales momentum at Hooker Upholstery due to the quality issues we faced this quarter, which will also impact the third quarter, we are still servicing those retailers who buy from us on a direct container basis with no disruption. We expect to be back in full service position by October. Directionally, Hooker Upholstery is sound. We started off the year with a double-digit sales increase and significant gains in operating income, compared to last year. Once we get past this inventory issue, business will improve for Hooker Upholstery. As the Hooker Furniture casegoods and upholstery segments gear up for the traditionally strong fall and winter selling seasons, we have a number of strategies to stimulate demand and sales. First, we are fast-tracking product development, production, and shipping time for new introductions. For example, we are already shipping a couple of our best selling new casegoods collections from the April market, so they will be on retail floors much earlier in the fall than is typical. In addition, we identified a major new casegoods collection in May at our design meeting, with retailers called Hill Country, and are already pre-selling it before the official introduction at the October market. It is on order to be delivered to retail floors late this year, and will be in stores for the winter season, impacting sales in our fiscal fourth quarter. We also have several national digital campaigns set for the fall, including a Labor Day promotion on home office that just ended and a major campaign planned for October, featuring our top-selling casegoods collection. As we look to the fall selling season, when the consumer becomes more home-centric, we are optimistic. We are well positioned with good product across all brands, and solid marketing programs to support those products. Now I'd like to turn the call over to George Revingon, President and Chief Operating Officer of Home Meridian, to give us an overview of their quarter.

Thank you, Mike, and good afternoon. In the Home Meridian segment of Hooker Furniture sales were up 1.2%. Orders were up 4.8%, and the order backlog was up 6.4% year-over-year for the quarter. Since the end of the quarter our order backlog has improved further. In spite of the sluggish environment, our core strategies are working, and we're having tremendous growth in our emerging categories, and emerging product categories. These channels, which total about 40% of the total business, include clubs, e-commerce, hospitality, international accounts and mass merchants, and are up approximately 26% year-to-date. Many of our mega accounts are included in these channels. These gains helped to offset lost volume with a couple of our larger accounts, and softness with our kick-out category, which includes regional and larger retailers. Sales in e-commerce grew 32% year-to-date. The primary driver of this growth is our strategy to change our product development process for all the emerging channels. Instead of funding the channels primarily with products from traditional segments, we are reorganizing our product development team to create products exclusively for these emerging channels. Hospitality shipments are up 41% as a result of an expansion of our sales representation and marketing efforts. This has created the largest order backlog in our history for this segment. In the mass channel, we have targeted five mega accounts, with whom we have vendor status, and we believe will be major accounts for Home Meridian in late 2016 and grow significantly in 2017. These are all major mass merchant accounts, with national retail footprints. We've adjusted our Home Meridian organization from product development, to warehousing, and sales operations and marketing to support these channels, and we have made significant investments to grow them further. These investments include warehousing, information systems, call centers, project management teams, and product development support. We're also refocusing our product assortment on emerging product categories, that are more important in the emerging channels. The fastest growing product category is fashion upholstery which includes upholstered headboards, accent chairs, ottomans, and benches. For Home Meridian, this category grew 87% year-to-date, and still has significant potential. We're currently exploring strategies which will make fashion upholstery an even more important part of the company's offerings. The success of the emerging channels has occurred, as we've experienced shift in our traditional furniture retail channels, which are down about 8% year-to-date and still represent 60% of the total business. While some of the decline was driven by a general slowdown of furniture consumption, a majority of the decline came from two of our larger accounts, which have been stressed by the competitive environment. The exceptional success story within our traditional channels is our Highway To Home launch with country music star, Eric Church. This collection, which is primary for traditional channels, has surpassed all expectations. The three whole home collection collections and motion upholstery groups have been produced, shipped, and are on retail floors now. A major national TV campaign featuring the Highway To Home furniture collection, with Eric playing his top-rated song Springsteen, has proved very effective. Eric has just been nominated this year for five CMA awards, the most of any country music artist. This ad campaign brings together music, furniture, and television advertising, in a way that's really never been done before and creates an emotional response between the viewer and the brand. It should lead to significant business in our third and fourth quarters. This collection has deepened our relationship with some of our best customers, and created new placements with other major accounts. In addition, we're expanding the checks into e-commerce channels this fall and have additional collections planned. HMI has 15 customers, which it classes as mega accounts. These are customers with the potential to generate $10 million of sales or more annually, and also the ability to support proprietary products and services. We have strong programs in place, and a robust portfolio of design projects in the pipeline for these customers. Compared to sales for the same six months last year, 12 of the 15 mega accounts are growing or even with a weighted average growth rate of 41%. Going forward, our strategies are to identify and focus on the mega accounts, create proprietary products and services, leverage globalization, expand product categories to our fastest-growing sales channels, and continue to develop on-trend products in styles that are casual, industrial, and material-based. The culture and structure of Home Meridian has allowed us to be able to identify important trends in the industry and adjust quickly to take advantage of them in the marketplace. We believe our cart adjustments demonstrate that our core strategies are working, and that we are on target in both emerging channels and style categories. Now, I'd like to turn the call back to Paul Huckfeldt.

Thanks, George. I've already mentioned the deal-related costs and the intangible amortization, which were not regular components of our results. Looking at more typical items, consolidated net sales increased, primarily due to the addition of Home Meridian businesses, which contributed $80 million and $145 million to net sales in the second quarter and first half, respectively. In our traditional Hooker business, net sales for the fiscal 207 first half declined about $8 million or 7%, compared to the first half of 2016, primarily due to decreased unit volume in our casegoods segment, which is partially offset by increased average selling prices in all three segments of our legacy businesses. Unit volume decreases in our casegoods segment were primarily due to lower incoming order rates, reflecting the softer demand environment Paul Toms noted earlier. Container direct shipments to retailers were particularly hard hit, especially earlier this year, as retailers worked through inventories and showed a little less willingness to commit to larger inventory positions. This shift from container to non-container sales contributed to the higher average selling price, as did continued lower discounting, since we've been able to keep our slow moving and obsolete inventory at very manageable levels. Upholstery segment net sales decreased less than a percent on higher average selling prices, which offset the 3% decline in unit volume. Although still a small piece of our total, net sales in our all other segment grew 25% year-over-year, on both higher unit volumes and higher average selling prices, reflecting the steady growth of our H Contract business. Overall, average selling prices in our traditional Hooker business increased about 2.5% during the first half, primarily due to the mix of products shipped, lower discounting and fewer container direct shipments. But the increase in ASP did not offset the 9% decline in unit volume during that same period. For the year-to-date, consolidated gross profit increased, with the addition of Home Meridian's results. For the traditional Hooker business, gross margin improved, but gross profit dollars declined, primarily due to the decrease in sales volume in casegoods which negatively affected gross profit by about $1.4 million and more than offset the modest decreases in product cost driven by lower freight rates and improved upholstery segment gross margins. Consolidated selling and administrative expenses also increased with the addition of Home Meridian. Excluding the amortization of intangibles, Home Meridian's SG&A expenses are lower as a percent of sales, compared to the traditional Hooker business. So Company-wide SG&A cost as a percentage of sales were lower than the prior year. Within the traditional Hooker business, SG&A expenses were higher than the prior year, primarily due to the $1.1 million of acquisition-related professional fees I mentioned earlier. For these reasons, operating income for the fiscal 2017 first half was $12.2 million, or 4.7% of net sales, compared to $11.1 million or 9.2% of net sales for our legacy Hooker business in fiscal 2016. For the quarter, consolidated operating income was $8.2 million, compared to $5.2 million last year. The HMI segment contributed about $2.4 million to operating income, while the legacy Hooker businesses reported $5.9 million, despite the 7% sales decline from Q2 of last year. Our balance sheet remains strong, despite the use of cash on hand and debt to acquire the assets and businesses of Home Meridian. At the end of the quarter, we had cash and cash equivalents of over $39 million available to provide the required working capital and to service our acquisition-related debt, which stood at $50.5 million as of the end of the quarter. We also have access to $29 million on our revolving line of credit and about $22 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility. Last week, we also announced the quarterly dividend of $0.10 per share, which represented about a 1.7% dividend yield at the share price at the time. Now I'll turn the discussion back over to Paul Toms for his outlook.

Thanks, Paul. To be clear, we're disappointed in our top line performance for the quarter. However, we're confident that the drivers of this underperformance are short-term, and that we can work through them in the second half of the fiscal year. We're more convinced than ever that the Home Meridian acquisition was an excellent strategic decision for Hooker Furniture. Our strategy to diversify by acquisition into faster-growing distribution channels, product lines, and price points, is being validated, especially as we see the robust growth Home Meridian is achieving in its emerging channels business. Based on solid Labor Day sales results, the timely placement of new products and programs at retail early this fall, the strong backlog of orders at Home Meridian, and a planned national promotion on our top selling Hooker casegoods collection, we have a cautiously optimistic outlook for the second half. As we head into what is typically the best-selling season of the year for furniture, the housing market is the strongest, since the downturn eight years ago. Consumer confidence is trending well. We're in a strong inventory position to service our customers and flow best-selling products to retail during the fall and winter and remain confident about the long-term success of Hooker Furniture Corporation, especially with the addition and contributions of Home Meridian to our company. Finally, in the last week there's been a fair amount of press around the Hanjin Shipping bankruptcy announced. We believe that will likely increase our short to medium term ocean freight costs, which will minimally increase product cost in all of our operating segments to varying degrees. However, inventory availability is good. We have six months of inventory of Hooker casegoods already in the house at the older freight rates, and we will take additional steps as necessary to mitigate any increased cost, as the situation dictates. That ends the formal part of our discussion. At this time, I will turn the call back over to our operator, Stephanie, for questions. Thank you.

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

Yes. Good afternoon, and thanks for taking the questions. So first off, looking at the Home Meridian segment, appreciate the level of detail, as far as breaking down the emerging channels and as well as the traditional customer base. Looking at the latter component of that, can you tell us as far as the magnitude of the weakness that you have seen in your traditional customer base at HMI?

Yes. This is George. So it varies quite a bit. There's certain segments of it that are doing okay. If you kind of look at the really small and independent dealer, that segment is weak, and that's down double - almost double digits. And then within the total category that we quoted there, there are two larger accounts that are down pretty significantly, but we still have vendor status. But we're still doing new products with them. We're still a very, very important vendor to them. But their business has just shifted pretty significantly.

Okay. Got you. Okay. And as far as the casegoods business, I know you've talked about -- I think, Michael, you mentioned speeding up the process for product development. Can you give us a sense as to how much that time period has shrunk now, and is this something that you can keep doing on an ongoing basis, or is this just sort of a one-off that just you're doing for the fall season?

No, we actually believe that going forward, as we improve the product development process and focus on speed to market, this will be more the norm than the exception. So we're making every effort to be sure that happens and bring to market new, fresh and what we feel are saleable products, as quickly as we possibly can.

Okay. Got it. And then the upholstery issue that you talked about, are you confident that this will not go beyond the third quarter?

We are. It was a moisture issue, which created some mold. Fortunately, we were able to quarantine most of the product. As I mentioned, customers that are buying a direct container basis have not been affected. And based on orders on the water and in production, we should be back in a strong inventory position by October, and be in a position to service our growing backlog.

Okay. That's good to hear. As far as the Hanjin Shipping bankruptcy, any sort of idea, I know you said it will depend on the different degrees for the operating segments, but can you give us a sense, perhaps quantify any potential impact this could have?

Anthony, this is Paul Toms, and I'll take a stab at that. We are daily speaking with the freight lines, ocean shippers, the NVOs, trying to determine the impact that the capacity that Hanjin represented being taken offline will have on steam ship line's ability to pass surcharges, peak season surcharges, and it really is hard to quantify at this time. I think the latest thinking and all this has happened in the last five or six days. The latest thinking is it really is a minimal impact and we hope limited to maybe six or eight weeks. It would obviously impact product categories that we import complete products in the box, more than it would hides that we impact for Bradington-Young domestic manufacturing facilities or frames that we might import for Sam Moore. I think the impact in our domestic manufacturing is very minimal. And on the company's, Home Meridian's business as well as Hooker Casegoods and Hooker Upholstery, a little more of an impact but, again, I think it's minimal. It's offset in large part by the amount of inventory we have at Hooker in the warehouse and in Home Meridian's case, a lot of their product is sold FOB factory in Asia. So any increase in freight cost would actually be the responsibility of some of the large retailers that are handling their own logistics. So I don't think it's a major issue, but it's really hard to quantify at this time, and it's very fluid.

Okay. Thanks for that color. And lastly, can you give us an update on the Cynthia Rowley line, how that's doing, any comments there?

Sure. Cynthia Rowley product line began shipping earlier in the year. Around 45% of what we have shipped has been sold to our international customers, who seem to be doing particularly well with the collection. We have it placed with a number of retailers throughout the US, and I believe this fall will be the first true test of the success level we'll achieve with that collection.

Okay. Thank you.

Thank you.

Thank you. That concludes the Q&A session. I will now turn the call back over to Paul Toms for closing remarks.

All right. Well, we really don't have anything else to add beyond what we've already said, but we appreciate everybody participating in the call today. Look forward to delivering another quarter of even better results three months from now. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone, have a great day.