Hooker Furnishings Corporation

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call, reporting its operating results for the third quarter of 2020. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question during this session, you will need to press star, then 1 on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckbilt. Vice President Finance and Chief Financial Officer for Harper Furniture Corporation.

Thank you, Liz. Good morning and welcome to our quarterly conference call to review the financial results of our fiscal 2020 third quarter, which ended November 3rd, 2019. We certainly appreciate your participation this morning. 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, and Jeremy Hoff, president of our Hooker branded thing. During our call, we may make forward-looking statements which are subject to risks and uncertainty. 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 third 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 $158.2 million and net income of $3.9 million, or $0.33 per diluted share, for our fiscal 2020 third quarter, which ended on November 1st. Compared to last year's third quarter, our net sales decreased $13.3 million, or 7.8%, and net income decreased $5.4 million, or 58%. Earnings per diluted share decreased 58.2% from $0.79 a year ago. For the fiscal 2020 first nine months, consolidated net sales were $446 million, with net income of $10 million, or $0.85 per diluted share. Net sales were down 7.7% or $37 million compared to last year's first nine months. Earnings per diluted share for the first nine months decreased 60% to $0.85 a share from $2.13 in the prior year. Now I'll turn the call over to Paul Toms to comment on our fiscal 2020 third quarter results.

Thank you, Paul, and good morning, everyone. Significantly higher chargebacks and reduced volume from a single large retail customer at Home Meridian was the most significant driver in our lower third quarter sales and earnings. In addition, lingering effects of 25% tariffs on finished goods and component parts imported from China, along with spotty retail demand that's continued through the first nine months of the year, are other factors negatively impacting our results. The sales decline with the single major customer represented 70%, or $6.4 million of a $9 million volume reduction in the HMI segment. And approximately $3 million in excess chargebacks from the same retailer drove a $4 million operating loss for the quarter in that segment. That compares to operating income of about $5 million at Home Meridian in the same quarter a year ago. Despite the headwinds, we had positive achievements this quarter in several areas, including the improved gross profits and operating income as a percentage of net sales in our Hooker-branded segment, and all other, even though sales decreased modestly in both. We continue to build our cash position this quarter. Since the end of the last fiscal year, we've built our cash by over $13 million, ending the quarter with $24.5 million in cash and cash equivalents. We reduced inventories in the quarter, especially discontinued and overstocked items, as we adjusted inventory levels to our lower order and sales rate. We made progress in our sourcing transition to non-tariff countries, which are on schedule. We expect to reduce a portion of our overall product line imported from China from 40% at the end of our most recent fiscal year to approximately 22% by this fiscal year end, with further progress expected next year. Given the challenging retail environment and the continued impact of tariffs, we are gratified to improve profitability performance in hooker branded segment and our domestic upholstery and H contract divisions. While sales were down at each segment in the mid to low single digits respectively, gross profits and operating income as a percentage of net sales improved compared to the prior year of third quarter. Our hooker-branded segment achieved 190 basis point improvement in operating income margin, and our all-other achieved a 390 basis point improvement compared to prior year third quarter. Taking a closer look at each of our segments, I'll begin with the hooker-branded segment. Net sales for the hooker-branded segment decreased $2.8 million, or approximately 6% in the fiscal 2020 third quarter versus the prior year third quarter. Hooker Case Goods experienced lower incoming orders and reduced sales volume driven by lower consumer demand and soft home furnishings retail business condition. The impact of the 25% tariffs on imported furniture from China enacted over the past 15 months has generally resulted in a 10% price increase on that portion of the company's product line imported from China in this segment. pressing retail demand somewhat, particularly in case goods, which are a higher ticket purchase that consumers are more likely to postpone. The volume loss was partially mitigated by higher average selling prices as the division adjusted pricing to mitigate increased product costs and tariffs. Hooker Upholstery continued the growth momentum that division has achieved the entire year. A broader product offering with the product mix including more sofas and sectional sofas which have higher average selling prices are fueling Hooker Upholstery's growth. Our growth strategies for Hooker Branded are based around product line extensions, as well as a clear focus on our category or niche businesses. We're excited about the spring launch of a new casual dining initiative, along with the pre-cut of two major collections that will be available to ship in the second quarter of next year. Booker Upholstery continues to focus on programs that maximize sales per square foot for the retailer. The success of this strategy is recognized through additional cover offerings, expanded recliner options, and customizable container direct capabilities. Turning to all leather, which includes domestically produced upholstery divisions, Braddington Young, Shenandoah, and Sam Moore, along with H Contract, We reported a net sales decrease of $1.3 million, or approximately 4.3% of sales. Sales of $28.7 million in the current third quarter compared to $30 million in last year's third quarter. Lower sales were driven by sales decline in our domestic upholstery manufacturing divisions due to soft retail conditions partially offset by continued growth at H Contract, which specializes in furnishings for senior living and retirement facilities. Despite a sales decrease, all others' gross profit increased in absolute terms and as a percentage of net sales due to lower material costs and better cost containment. The segment reported operating income margin of 9.6%, and 8.7% for the fiscal third quarter and first nine months, respectively. The U.S. upholstery companies and Hooker Contract continue to focus on sales and profitability growth through new product development initiatives, including the development of proprietary products for key accounts and the pursuit of new product categories. Additionally, there is a focus on better aligning marketing programs and products to capture more market share through advantage channels, area design, senior living segments of contract. At this time, I'd like to call on Doug Townsend to give more detail on the home meridian segment performance this quarter.