Hooker Furnishings Corp

NASDAQ:HOFT

Earnings Call Analysis

Hooker Furnishings Faces Challenges but Sees Improvements Ahead

In Q3 2025, Hooker Furnishings faced significant challenges, reporting a net loss of $4.1 million on sales of $104 million, down 10.7% year-over-year. Key factors included low demand in the home furnishings sector and restructuring costs totaling $7.5 million. However, the management remains optimistic, citing improved core profitability and ongoing cost management strategies. They project positive impacts from their recent licensing agreement with Margaritaville and a planned inventory increase of $11 million to meet anticipated demand. Guidance includes an expectation for revenue growth in 2026 alongside a goal of achieving $10 million in total annual cost savings, evenly spread throughout next year.

Navigating Through Challenging Waters

Hooker Furnishings Corporation recently reported its financial results for the third quarter of fiscal 2025, which ended on October 27, 2024. The company experienced a challenging quarter amid ongoing macroeconomic difficulties affecting the home furnishings industry, most notably a decrease in consumer demand. Consolidated net sales totaled approximately $104 million, a notable decrease of $12.5 million, or 10.7%, from the same quarter last year. Likewise, sales for the nine-month period dropped by $43 million, or 12.9%. This decline was exacerbated by the absence of liquidation sales from the company’s unprofitable ACH product line, which was phased out last year.

Losses and Strategic Adjustments

The financial impact was reflected in an operating loss of $7.3 million for the quarter and a consolidated net loss of $4.1 million, or $0.39 per diluted share. The losses were amplified by approximately $7.5 million in charges, including $3.1 million from restructuring efforts and $2.4 million attributable to bad debt linked to the bankruptcy of a significant customer. This situation highlighted the operational challenges faced by the company during a period of heightened competition and diminishing demand.

Operational Improvements Amidst Adversity

Despite these setbacks, CEO Jeremy Hoff outlined a positive trajectory for the company moving forward. The third quarter revealed signs of sequential improvement in core business profitability, a response to meticulous cost reductions and strategic planning. The company announced a global licensing agreement with Margaritaville, aimed at expanding its market presence. Additionally, based on the feedback from the recent High Point Market, strong placements and positive reception of new collections have positioned the company favorably as it anticipates a stronger fall selling season.

Segment Performance Highlights

Examining segment performances, Hooker Branded saw a decline of $4 million in net sales, reflecting a decrease of 10.7% compared to the prior year's third quarter. However, unit volumes outperformed the previous quarters, dropping only 2.1%. The Home Meridian segment experienced a more substantial decline, with a net sales decrease of $5.1 million or 11.8%. This was driven significantly by diminished unit volumes, though the segment boasted its highest gross margin since 2016 at 20.5%, showcasing effective restructuring efforts. Meanwhile, Domestic Upholstery reported a decrease in sales, but the overall operating loss improved sequentially from earlier in the fiscal year.

Building Inventory for Future Growth

In anticipation of increased demand, Hooker Furnishings ramped up inventory levels significantly, with an injection of $11 million or 40% compared to the previous quarter. This proactive measure positions the company to meet projected demand spikes in the upcoming fiscal year and capitalize on the success of its best-selling SKUs. The leadership emphasized the importance of quality and strategic inventory management, moving away from low-margin businesses like ACH, thereby enhancing the overall operational efficiency of the company.

Looking Ahead: Optimism in Macroeconomic Indicators

As the company looks ahead, positive economic indicators, including an anticipated 10% increase in home sales for 2025 and easing inflation alongside interest rate cuts, present opportunities for recovery. The management expressed confidence that, despite prior challenges, they are strategically positioned to maximize efficiencies and pursue growth opportunities once consumer demand rebounds. They expect to realize the benefits of cost-saving initiatives in the forthcoming quarters, with most savings projected to be realized evenly throughout the next fiscal year.

Conclusion: A Journey of Resilience

In conclusion, while Hooker Furnishings Corporation faces immediate challenges reflected in their recent earnings report, proactive steps taken to streamline operations and adapt to the shifting economic landscape underscore their resilience. The integration of new licensing agreements, improved inventory strategies, and a focus on high-quality products should help the company reclaim growth momentum as market conditions improve. Investors should keep an eye on the company’s strategic execution and macroeconomic developments to assess the potential for future profitability.

Earnings Call Transcript 2025-Q3

[Operator]

Good day. Thank you for standing by. Welcome to the Hooker Furnishings Corporation Third Quarter 2024 (sic) [ 2025 ] Earnings Webcast. [Operator Instructions]

Please be advised that today's conference is being recorded. I will now hand the conference over to your speaker host today, Paul Huckfeldt, Chief Financial Officer. Please go ahead, sir.

[Paul Huckfeldt, executive]

Thank you, Olivia. Good morning, and welcome to our quarterly conference call to review our financial results for the fiscal 2025 third quarter, which began July 29 and ended October 27, 2024. Joining me this morning is Jeremy Hoff, our Chief Executive Officer. We appreciate your participation today.

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 2025 third quarter results. Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today's call.

Our fiscal 2025 third quarter and 9-month results were adversely affected by the ongoing low demand in the home furnishings industry as well as charges totaling about $7.5 million, including approximately $3.1 million of restructuring costs related to the company's previously announced cost savings plan. $2.4 million of bad debt expense related to the bankruptcy of a single large customer and $2 million of noncash impairment charges to certain trade names under the Home Meridian segment. These factors resulted in an operating loss of $7.3 million and a consolidated net loss of $4.1 million or $0.39 per diluted share in the third quarter.

Consolidated net sales were $104 million, a decrease of $12.5 million or 10.7% compared to the same quarter of the previous year. For the 9-month period, consolidated net sales was $293 million, a decrease of $43 million or 12.9% compared to the same period of the previous year. This decrease was also due to low demand affecting the home furnishing industry and the absence of $11 million of liquidation sales from the unprofitable ACH product line, which the company exited last year.

The company reported a consolidated operating loss of $15 million and a net loss of $10.2 million or $0.97 per diluted share attributed to lower overall sales, higher ocean freight costs at Hooker Branded, under absorbed indirect costs at Domestic Upholstery as well as the $7.5 million in charges mentioned earlier.

Now, I'll turn the results -- the call over to Jeremy to comment on our fiscal 2025 third quarter results.

[Jeremy Hoff, executive]

Thank you, Paul, and good morning, everyone. Despite sustained macroeconomic challenges and the charges recorded in Q3, we are encouraged by the sequential quarterly improvement in our core business profitability and by the results of our cost reduction efforts which will be more fully realized beginning fourth quarter. These improvements reflect our team's focus on managing controllables and reducing nonstrategic costs in a difficult environment while investing in impactful initiatives to expand our addressable market and growth opportunities, including our recently announced global licensing agreement with Margaritaville. We're also encouraged by positive developments in the macroeconomic environments such as cooling inflation and recent interest rate cuts in September and November, which should begin to increase demand for furnishings.

Our October High Point Market introductions were positively received with significant placements across the board. In addition, we had the best retail placement market to date at outdoor furniture specialist Sunset West. The early feedback of 3 major case gigs collections for Hooker Branded gave us the confidence to place initial cuttings early before these groups were officially introduced in October.

As a result, the collections will ship this month with a second cutting in January, increasing our speed to market by 6 months. This puts us in a strong position for the coming fiscal year with our available product assortment. In anticipation of increased demand and the typically stronger fall selling season, we built up Hooker Branded inventory by $11 million or 40% compared to previous quarter end. In addition, we are aggressively producing our top collections to ensure we will be in stock during the first quarter of fiscal '26. These inventories are high-quality assortments centered on our best-selling and most profitable SKUs.

Now, I want to turn the discussion over to Paul, who will discuss highlights in each of our segments.

[Paul Huckfeldt, executive]

Thanks, Jeremy. Beginning with Hooker Branded. Net sales decreased by $4 million or 10.7% in the fiscal third quarter, compared to the prior year period, due primarily to lower average selling prices. While gross revenue in this segment decreased by 6.7% compared to the previous year's third quarter, discount increased by 390 basis points, due mainly to higher discounting on excess inventory.

Unit volume decreased by a modest 2.1% compared to the previous year's third quarter, but exceeded the first and second quarters of this fiscal year. For the quarter, the segment reported an operating loss of $1.7 million on historically low third quarter net sales. The result -- this result included approximately $1 million of severance charges related to our cost reduction plan. Incoming orders decreased by 13% year-over-year. The quarter end backlog was 30% lower than at the end of the prior year's third quarter, but remained 18% higher than pre-pandemic levels, which were at the end of fiscal 2020 third quarter.

For the 9-month period, net sales decreased by $14 million or 11.7%, also due primarily to lower average selling prices, resulting from the price reductions implemented in the previous year in response to reduced ocean freight costs. Unit volume was essentially flat, decreasing by about 1% compared to the prior year 9-month period.

Turning to the Home Meridian segment. Net sales decreased by $5.1 million or 11.8% in the third quarter compared to the prior year third quarter due to reduced unit volume. Over 40% of the sales decrease was attributable to the loss of a major customer following its bankruptcy. Sales through major furniture chains and independent furniture stores decreased though these decreases were partially offset by an 8% increase in sales in our hospitality business, marking 2 consecutive quarters of higher revenues.

Incoming orders increased by 8% compared to the previous year's third quarter, while decreasing modestly by 2.9% for the 9-month period despite the absence of orders from the discontinued ACH product line and the large customer bankruptcy. quarter end backlog was 32% higher than the prior year third quarter backlog. Despite increased net sales -- decreased net sales, Home Meridian achieved a gross margin of 20.5%, its highest level since the acquisition in 2016. The restructuring efforts at Home Meridian over the recent years have shown meaningful results towards creating sustainable profitability, including significantly reduced allowance, improved product margins and lower fixed costs across nearly all of this segment. For the quarter, the segment reported an operating loss of $3.7 million, driven by $2.4 million in bad debt charges due to the previously mentioned customer bankruptcy.

$2 million in noncash intangible asset impairment charges and $233,000 of severance costs related to the cost reduction plan. For the 9-month period, net sales decreased by $19 million or 16% in large part due to the absence of $11 million in ACH liquidation sales, which accounted for approximately 60% of the sales decrease and 75% of the unit volume decrease.

Sales decreased in nearly all channels during the period, except for the hospitality business, which experienced a 23% increase. Lastly, the Domestic Upholstery segment net sales decreased by $3.2 million or 10% compared to the prior year third quarter due to decreased sales at Shenandoah, Bradington-Young and HF Custom attributable to the persistent low demand. This decrease was partially offset by a 9% increase in sales at Sunset West, which has delivered year-over-year quarterly sales growth for 3 consecutive quarters this fiscal year. Gross profit decreased due to lower net sales, but the gross margin remained stable.

For the quarter, the segment reported an operating loss of $281,000, a sequential improvement compared to the $1.3 million in operating losses recorded in each of the fiscal 2025 first and second quarters. These results also included approximately $560,000 of severance costs related to the cost reduction plan.

Incoming orders decreased by 4.8% during the quarter and the quarter end backlog was 30% lower than the prior year third quarter backlog. Excluding Sunset West, the order backlog remained consistent with prepandemic levels at the end of the fiscal 2020 third quarter. For the 9-month period, net sales decreased by $10.6 million or 10.8%, also due to decreased sales at Bradington-Young, Shenandoah and HF Custom, partially offset by a 10% increase in Sunset West net sales.

Turning now to cash inventories and capital. Cash and cash equivalents were $20.4 million at the end of the third quarter, a decrease of $22.7 million from the previous year-end in January. Inventory levels increased by $4.7 million from year-end, driven primarily by a $6 million increase in Hooker Branded inventories. During the 9-month period, we used cash and cash equivalents on hand on $7.4 million of dividends, $2.8 million to further develop our cloud-based ERP system and $2.7 million in capital expenditures.

In addition to our cash balance, we had an aggregate of $28.3 million available under our existing revolver at quarter end as well as $29 million in cash surrender value of company-owned life insurance. We expect to finalize the refinancing of our credit facility and pay off our term debt in the coming days.

As Jeremy mentioned, we're aggressively building inventory to support 3 new major casegoods collections as well as our best-selling and most profitable SKUs to accelerate speed the market and product availability for both current and next fiscal year. The inventory build is also driven by what is expected to be a longer-than-typical Lunar New Year holiday in Vietnam and expected longer post holiday ramp-up period resulting from the extended holiday and lower production demand in Vietnam as well as potential U.S. East Coast port strike in January of 2025.

Earlier this week, we announced the payment of our regular quarterly dividend in December, which we believe demonstrates our confidence in the company's future success.

Now, I'll turn the conversation back to Jeremy for his outlook.

[Jeremy Hoff, executive]

Over the last few months, the key economic indicators that impact furniture sales have been trending positively, such as interest rate cuts which drive home mortgage rates and cooling inflation. Additionally, in November, a leading real estate industry group stated its belief that the worst of the housing inventory shortage is ending and the forecast and forecast an approximately 10% increase in home sales for 2025 with mortgage rates stabilizing around 6%. And October year-over-year furniture store sales rose for the second month in a row. Lastly, consumer sentiment rose in November to its highest level since April and the stock market continues near all-time highs.

While the macroeconomic outlook is improving, our team has continued to focus on the controllables and improvements already underway at Hooker Furnishings. Our balance sheet, financial condition and management team should well equip us to navigate any remaining challenges as we focus on maximizing efficiencies and with the cost reductions while simultaneously investing in expansion strategies that will position us for revenue and profitability growth when demand fully returns. This ends the formal part of our discussion. And at this time, I will turn the call back over to our operator, Olivia, for questions.

[Operator]

[Operator Instructions] And our first question coming from the line of Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski, analyst]

Can you hear me now?

[Jeremy Hoff, executive]

Yes.

[Anthony Lebiedzinski, analyst]

Yes. Sorry about that, I was on mute. So first, just curious, so since the election, have you guys seen any notable changes in demand from your customers? It seems like just talking to others in the industry. They talked about the election being a sort of distraction for the end consumer. So curious to get your thoughts on what you've seen so far?

[Jeremy Hoff, executive]

Yes. So we've noticed that we've had a noticeable positive bump in order rates since the election for sure.

[Anthony Lebiedzinski, analyst]

That's good to hear, certainly encouraging. And then in terms of the new casegoods collections. You talked about the speed to market, certainly driving that. How impact -- I'm sorry, how impactful could that be for the fourth quarter as you look to get those products to retailers?

[Jeremy Hoff, executive]

Well, it definitely gives us a better shot at some better shipments at Hooker Branded because we're going to ship first cutting in November, second cutting in January, specifically to direct container customers that, that will affect first. But I think the more significant part of it is the fact that we're putting those collections in position for the next fiscal year to gain the full benefit of those hitting floors for the entire year and not half of the year.

[Anthony Lebiedzinski, analyst]

All right. That makes a lot of sense. And you've done a nice job improving the gross margin at HMI. Do you think you can further improve from here? What are your thoughts there, Jeremy?

[Jeremy Hoff, executive]

I would say a little bit. And just to stress, most of that improvement was simply getting out of businesses we should not have been in which obviously takes the average very positive compared to where we were when we had businesses losing money, a low-margin business like the ACH business, the fact that we're out of that, it's no longer a drag on the overall average. So that's been the biggest benefit for us. We do still think there's a little bit of room for improvement.

[Anthony Lebiedzinski, analyst]

Got you. And so as far as the inventory situation here, so you talked about having excess inventories overall, your inventory was higher at the end of the third quarter than we expected. So how would you describe your current inventory position and the quality of that inventory and any sort of goal for your inventory at the end of your fiscal year?

[Jeremy Hoff, executive]

I would call our inventory position, the best it's been probably, Paul, in probably 2 years.

[Paul Huckfeldt, executive]

I think so, yes.

[Jeremy Hoff, executive]

And I say that not only because of the positive inventory we have on the Hooker Branded side that are some of our best SKUs, but not having the drag of something like ACH on the other side, which negatively impacts the entire inventory as well. So we really don't have the problem inventory within our system anymore like we did with the ACH. We only -- or increase is in really good SKUs.

[Paul Huckfeldt, executive]

Yes. We talked -- I know it might sound a little inconsistent. We talked about discounting, excess inventories and building inventory and what we're doing is cleaning up the inventory, getting rid of slow-moving stuff to free up the working capital to invest in better SKUs into new products and in our best-selling SKUs.

[Anthony Lebiedzinski, analyst]

All right. Yes. That makes a lot of sense. Okay. And then lastly for me before I pass it on to others. So Jeremy, I know you were very upbeat about the Margaritaville launch when you announced this I believe, in October. Can you provide any more details as to how impactful that deal could be for you guys?

[Jeremy Hoff, executive]

Well, we believe it's going to be very impactful. What's interesting about the Margaritaville license from our standpoint is it really affects a lot of our divisions. It's not really just going to be a Hooker Branded thing, for example. It's going to be Hooker Legacy, that's going to really affect positively, we believe our contract divisions.

There's a lot of opportunity with hospitality and through each contract that will give us an advantage with a lot of those jobs because Margaritaville is building a significant number of homes in areas that we'll be attached to in pricing those models and whatnot. So there's just -- it opens a lot of doors that would not be open otherwise.

[Operator]

And our next question coming from the line of Dave Storms with Stonegate.

[David Joseph Storms, analyst]

Just wanted to ask my first question around the macro demand environment going into this holiday season. Is there any potential to see continued discounting through the back part of this year?

[Paul Huckfeldt, executive]

Can you repeat that, Dave, there's a little bit of static or something on the line.

[David Joseph Storms, analyst]

Apologies. Just around the macro environment and the holiday season coming up, is there any potential for continued discounting as you go into the back quarter of the year?

[Jeremy Hoff, executive]

We don't believe any more than normal.

[Paul Huckfeldt, executive]

Normal -- yes, normal promotions. E-comm, in particular, we tend to run the specials, but it's targeted promotions.

[David Joseph Storms, analyst]

Understood. And then just wanted to touch on the bankruptcy. Are there any other customers that you're seeing as highly at risk? And is there any recourse to recover some of that write-off?

[Paul Huckfeldt, executive]

Well, you probably know who that big customer is. And there's probably not a lot of recourse. We've done what we can to mitigate that business -- that loss. And that's really the only big customer that we -- there's always a small customer here or there that's bankrupt. We haven't really noticed a particularly significant change in the pace of bankruptcies or distressed receivables. But that was one that was just -- it was a big customer, and we got caught.

[David Joseph Storms, analyst]

Understood. And then I did have another question around the licensing deal. I was hoping you could speak a little more around the logistics and next steps. And maybe what early wins would look like? It looks like this is a decent amount of white space for you all.

[Jeremy Hoff, executive]

Yes. And that's what you're mentioning is the reason we're going to launch in October. The temptation of course is to move faster than that and try to launch in April, but ride is going to be much more important and fast for us and we want to get this ride. So the logistics right now of everything are pulling that together from a Sunset West, our outdoor company is obviously heavily involved. All of our Domestic Upholstery is involved, Hooker Branded involved, contract is involved, hospitality. So right now, the biggest thing we're working on is pulling everything together the way it needs to be pulled together in order to make -- to put our best foot forward on a launch. So -- and that will continue until we get there.

[David Joseph Storms, analyst]

That's very helpful. And then just one last question for me, 2 quarter around cost savings. Should we expect any further severance costs in 4Q? And then looking into the next year, should we expect the $10 million to be evenly spread out? Or would we expect that to be more back-end weighted as those cost savings ramp?

[Paul Huckfeldt, executive]

We don't expect significant additional -- at this point anyway, we don't expect significant additional restructuring costs. We've got one more element, one more reasonably large elements of our cost savings program that we still need to execute. But I would say that most of it is going to be in place for the better part of the year. We haven't started really -- we haven't fully realized a lot of those savings yet, but we expect to start seeing those in the fourth quarter. And I would say that most of the $10 million will be evenly spread through next year.

[Operator]

And I am showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Jeremy Hoff for any closing remarks.

[Jeremy Hoff, executive]

I would like to thank everyone on the call for their interest in Hooker Furnishings and wish you all a happy holiday season. We look forward to sharing our fiscal '25 full year results in April next year. Take care.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.