Hooker Furnishings Corporation

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the second quarter. 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 at that time, please press star and then the number one on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huxfeld, Vice President, Finance, and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Michelle. Good morning and welcome to our quarterly call to review financial results for our fiscal 2020 second quarter, which ended on August 4, 2019. We appreciate your participation today. Paul Toms, our chairman and CEO, and Doug Townsend, co-president of our Home Meridian Division, will join me for our prepared remarks. For the question and answer portion of the call, several of our business unit heads will be available to take questions, including Michael Delgatti, president of Hooker Domestic Upholstery and Emerging Channels, Home Meridian co-president Lee Boone, 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. 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 second quarter results. Any forward-looking statement speaks only as of today. We undertake no obligation to update, revise any forward-looking statement to reflect events or circumstances after today's call. This morning, we reported consolidated net sales of $152 million and net income of $4.2 million, or 35 cents per diluted share, for our fiscal 2020 second quarter, which ended August 4, 2019. Compared to last year's second quarter, our net sales decreased 16.4 million, or 9.7%, and net income decreased 4.5 million, or 52%. Earnings per diluted share decreased 52%. from 74 cents a year ago. For the fiscal 2020 first half, consolidated net sales were 288 million with net income of 6.1 million or 52 cents per diluted share. Net sales were down 7.6% or 23.8 million compared to last year's first half. Earnings per diluted share decreased to 52 cents from $1.34 last year, a 61% decline from the prior year first half. Paul Toms will now comment on our fiscal 2020 second quarter results.

Thanks, Paul, and good morning, everyone. As we expected after our first quarter, business in the second quarter was significantly impacted by tariffs on finished goods and component parts imported from China, as well as weak retail demand through the first eight months of this year. In addition, lingering effects of several cost-related issues Issues that began late last year at Home Meridian deflated our performance in the quarter. We believe the macroeconomic challenges related to the tariffs and soft retail conditions are affecting many companies in the furniture industry. Looking across our industry, many public furniture companies are reporting weaker sales and reduced earnings. Business disruptions from the 10% tariff imposed last September and the additional 15% tariff imposed June 15th this year have impacted both our top and bottom line. Revenues have been negatively affected by tariff rhetoric and turbulence in the marketplace and by tariff-related price increases. These tariff dynamics have reduced retailer and consumer demand. Profitability has been negatively impacted by higher costs, which have also lowered margins. Despite all the headwinds, I believe we're doing a credible job executing various measures to mitigate the impact of the tariff on our business going forward. These include negotiating vendor price concessions, passing through modest price increases to our retail customers, the first of which was put in place last fall and the most recent one in mid-June. And most importantly, we're well on schedule in shifting production away from China While slightly over 40% of our product line was imported from China at the end of our most recent fiscal year, we expect about 22% of our products will be produced in China by the end of this fiscal year. The lower year-over-year sales trend that began in the first quarter continued in the second quarter. Home Meridian's 14% or 13.8 million sales decline had the most impact on lower consolidated sales while sales in the hooker-branded segment and all other decreased modestly by 1.1 million or 2.8% at hooker-branded and 1.4 million or 5.3% at all other compared to the prior year of second quarter. Home Meridian revenues were hit harder by tariff disruptions because the company's base of larger retailers went into the year over-inventory and delayed reorders until late in the second quarter. As we approached the end of the quarter in July, retailers appeared to complete their inventory rebalancing, and we began to see retail demand improve at HMI. HMI divisions Pulaski, Samuel Lawrence Furniture, and Samuel Lawrence Hospitality all finished the quarter with double-digit increases in their backlogs. The incoming order picture also brightened in July on a consolidated basis. corporate-wide incoming orders are trending positively compared to both last quarter and the year-ago period. Since July, large retailers have been asking us to expedite orders so they can stock up for the upcoming fall selling season, which is traditionally the strongest of the year for furniture sales. Backlogs also are improving, with six of our 11 business units reporting higher backlogs than a year ago. While the sales trend was a bit weaker in the second quarter compared to the first, net income doubled, primarily because of better performance at HMI. HMI operating results improved to nearly break-even compared to the $5 million operating loss in Q1. Income at home meridian was nonetheless subdued from the lower top line, tariff-related margin deterioration, inflated warehousing costs from increased inventories, and other operational disruptions and resourcing costs caused by the tariffs. Taking a closer look at each of our segments, I'll begin with hooker branded. Net sales for the hooker branded segment decreased 1.1 million or 2.8% in the fiscal 2020 second quarter, driven by a low single-digit sales decrease in the hooker case goods division, partially offset by net revenue growth in the mid to upper single digits at hooker upholstery. Hooker Upholstery continues to benefit from an expanded product offering and higher average prices for more SOFA and sectional sales in its product mix. Momentum at Hooker Upholstery is also strong with incoming orders up over 20% in the second quarter. At Hooker Case Goods, we passed on some tariff-related price increases. In general, Case Goods are a high-ticket discretionary purchase. In an environment where retail sales are already weak and you layer in the tariff dynamics, it just gives another reason for the consumer to postpone the purchase. Despite the sales decline and increased product cost, Hooker Branded was still highly profitable with over 30% gross profit margin and 10% operating income margin during the quarter and for the first half. It's actually stocked approximately six months of case goods inventory in our Virginia warehouses and The impact of tariffs was felt much more on the demand side than in margins in the second quarter, although margins were not entirely unaffected, and we recorded about $500,000 of increased LIFO expense in the quarter. All other includes domestically produced upholstery divisions, Braddington Young, Shenandoah, and Sambor, along with its contracts, reported a net sales decrease of $1.4 million, or 5.3%, from $27.1 billion in last year's second quarter to $25.7 million in the fiscal 2020 second quarter. Lower sales were driven by sales decline in our upholstery manufacturing divisions due to lower demand, partially offset by continued growth of H contracts. and furnishings for senior living and retirement facilities. Targeted sales efforts, product line expansions, innovations, and mid-year product introductions have paid dividends in this segment, with three of the four divisions reporting double-digit order increases in July. Under a new division president, Sam Moore is starting to grow again, with incoming orders up nearly 16% in July and and backlogs up 2.5% compared to the prior year's second quarter end. Despite a sales decrease, all other gross profit increased in absolute terms and as a percentage of net sales due to lower materials cost and better cost containment. This segment reported operating income margins of 6.8% for the fiscal second quarter and 8.3% for the first half. Now I'd like to call on Doug Townsend, our HMI co-president, to give more detail on the HMI segment performance this quarter.