Hooker Furnishings Corporation

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the fiscal 2020 first quarter end year. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star then 1 on your touch-tone telephone. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Paul Huckfelt. Vice President, Finance, and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Ashley. Good afternoon, and welcome to our quarterly conference call to review our financial results for the fiscal 2020 first quarter, which ended May 5, 2019. We certainly appreciate your participation this afternoon. Paul Toms, our Chairman and CEO, and Lee Boone, Co-President of our Home Meridian Division, will join me for our prepared remarks. For the question and answer portion of the call, several other of our business unit heads will be available to take questions, including Michael Delgatti, President of our Hooker Domestic Upholstery and Emerging Channels, Home Meridian Co-President Doug Townsend, Jeremy Hoff, President of our Hooker Branded Segment, and Ann Jacobson, our Chief Administrative Officer. 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 2020 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 $135.5 million. and net income of $2 million or 17 cents per diluted share for our fiscal 21st quarter ended May 5th, 2019. Compared to last year, our net sales decreased 5.2% or 7.4 million and net income decreased 72% or $5.2 million. Earnings per diluted share decreased from 61 cents a year ago. Paul Toms will comment on our fiscal 2020 first quarter results.

Thank you, Paul, and good afternoon, everyone. Our disappointing earnings performance in the first quarter was driven primarily by several cost-related issues in our home Meridian HMI segment. Reduced demand and soft retail conditions across the home furnishings industry drove the consolidated 5% sales dip, which also weighed on our earnings for the quarter. Given the sales decline and the impact of a 10% tariff on furniture and furniture component parts imported from China, our hooker branded segment and all other performed reasonably well for the quarter. But we have strategies for improvement in all of our businesses. The cost-related issues at Home Meridian included a large quality chargeback, higher freight and demurrage costs, as well as costs associated with higher inventories. In addition, Home Meridian's margins were more affected by the 10% tariff on imports from China than our other business units. Due to the nature of HMI's customer base, as many of its customers had large orders already in the pipeline at lower free tariff prices. However, increased pricing and resourcing strategies are in place. Our plan to shift production out of China to non-tariff countries is mostly on schedule. In fact, the shift is accelerating during the current quarter and is expected to be mostly complete by the end of the fiscal third quarter. As we reported in our fourth quarter earnings release in mid-April, orders and backlogs were down in February and March and continue to be down throughout April. Reduced demand negatively impacted sales across all our business units and was experienced consistently across the industry according to the reporting of most public furniture companies and what we've heard from conversations with our retail customers. We've been encouraged, however, by the mid-single-digit uptick in orders during the fiscal May period in our hooker-branded segment. We believe Home Meridian's order rates remain below prior due to many of their larger customers still delaying receipt of shipments and placement of reorders in response to the softer retail environment faced in the early part of the year. We expect to see home Meridian orders start to improve during the fiscal 2020 second quarter and for second half performance to be much better for this segment. Due primarily to loss of margin in the HMI segment, gross profit and operating income both decreased approximately $6.5 million in the quarter. The decreased operating profit in the hooker-branded segment was mainly attributable to lower net sales. We're addressing all these challenges with strategies to improve profitability in each of our businesses. While we do expect the challenges to persist throughout the summer, we're more optimistic about the fall selling season. We believe that many of these issues negatively impacting profitability at Home Meridian are unlikely to reoccur. These include the large quality-related chargeback, which was confined to a single customer and limited product, demurrage costs, excess freight costs at year-end, delayed implementation of tariff-prompted price increases, and postponed shipments to a few large retailers. While the lion's share of our operating units are in the residential furniture industry, it's noteworthy that both of our non-residential business units, Samuel Orange Hospitality and H contract reported significant sales increases during the quarter. SLH sales more than doubled and ended the quarter with a backlog nearly 70% higher than during the same period last year. H contract had an approximate 40% sales increase, along with improved gross margins and operating profits. Other business units that performed well in the quarter included Hooker Upholstery, which had a 3% sales increase and incoming orders 5% higher than a year ago. In the home meridian segment, Eccentrics Home, which is dedicated to emerging channels such as e-commerce, grew sales by nearly 20%. Turning now to the economy as a whole, the most significant macroeconomic development so far this year has been the increased tariff imposed on furniture and furniture components imported from China. Finished furniture and component parts shipped from China after May 10, 2019, became subject to an additional 15% tariff. The additional amount brings the total tariff on furniture imports from China to 25%. As of February 2019, Booker Furniture Corporation imported over 40% of our product line from China. By segment, our strategies to address the increased tariffs include, at home Meridian, the company's PRI, Value Priced Upholstery Division, is resourcing production away from China, projecting that 90% of production will be in non-tariff countries by the fall. Other divisions are moving production to non-tariff countries to a lesser degree. Home Meridian is also receiving vendor price concessions from many Chinese producers and raising prices to customers where possible. Hooker Case Goods and Hooker Upholstery are passing on most of the increased tariff costs beyond the amount offset by vendor concessions in the form of a surcharge that can be reversed if and when tariffs are dropped or reduced. Hooker Upholstery is moving a significant portion of their production outside of China during the coming six months. At Hooker Case Goods, a long-term relationship and the specialized craftsmanship of the company's main Chinese vendor makes moving entirely away from China a less desirable action. However, tariffs will be priced into all new items, and the vendor is opening a factory in Vietnam. where some production can be shifted. The company is continuing to develop production in alternative countries and is receiving vendor price concessions from Chinese producers. Domestically produced upholstery divisions, included in all other, are enacting selected price increases and receiving vendor concessions to help mitigate the impact of tariffs on component parts imported from China. Taking a closer look at each of our segments, I'll begin with the hooker branded segment. As mentioned, given the sales decline and the business disruptions from the initial 10% tariff, this segment performed well. On that sales in the segment, we're down 3.2 million or 7.4%. The segment was still highly profitable with a 13% operating margin during the quarter. An upper single digit sales increase of hooker case goods was partially offset by Hooker Upholstery's 3% sales increase. All other, which includes domestically produced upholstery divisions, Braddington Young, Shenandoah, and Sam Moore, along with each contract, reported a net sales decrease of 1.2 million, or 4.2% from 29.5 million in last year's first quarter to 28.3 million in the current first quarter. Lower sales were driven by reduced shipments in our domestic upholstery manufacturing divisions, partially offset by continued growth at each contract, which specializes in furnishings for senior living and retirement communities. Profitability performance in the segment was solid, with the segment reporting an operating income margin of approximately 10%. A new Sam Moore division president joined the company shortly after the end of the quarter, and will focus on growing the top line through helping Sam Moore transition into a more robust, full-line upholstery resource with a broader selection and better selling programs. At this point, I'd like to turn the call over to Lee Boone to give more detail on the HMI segment this quarter.