Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hooker Furnishings Corporation's Third Quarter 2022 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . I will now like to turn the conference over to your speaker host today, Paul Huckfeldt, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Olivia. Good morning, and welcome to our quarterly conference call to review our results for the fiscal 2022 third quarter, which began on August 2, 2021 and ended on October 31, 2021. Joining me today is Jeremy Hoff, our Chief Executive Officer. We certainly 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 2022 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. This morning, we reported consolidated net sales of $133 million, a decrease of 16.3 million or 11% as compared to last year's third quarter. We reported a quarterly net loss of 1.2 million or $0.10 per diluted share compared to net income of 10.1 million or $0.84 per diluted share in the same quarter a year ago. For the fiscal 2022 nine-month period, consolidated net sales were 459 million, up 74 million or 19% compared to last year during the same period. We reported net income of 15.7 million or $1.30 per diluted share this year compared to a net loss of $19 million or $1.61 per diluted share a year ago, which was primarily due to a 44.3 million or 33.7 million after tax non-cash impairment charge. Now I'll turn the call over to Jeremy to comment on our fiscal 2022 third quarter results.

Thank you, Paul, and good morning to everyone. While we were encouraged by a strong order backlog which stands at three times typical levels and industry-wide strong demand for home furnishings, we were challenged by ongoing supply chain disruptions during the quarter. Specifically, the slower-than-expected reopening of Vietnam and Malaysia furniture factories following COVID-related shutdowns, continued high freight cost and logistics challenges had the most adverse impacts on sales and operating income. Our third quarter consolidated revenue decline follows two consecutive quarters of double digit sales and income gains at Hooker Furnishings during the first half of the year. The declines this quarter were driven by significantly reduced shipments in the Home Meridian segment due to the factory closures in Asia that began around August 1 and did not begin reopening until late in the quarter, and then at only about 25% capacity. HMI sales decrease was partially offset by double digit sales increases in the Hooker Branded and Domestic Upholstery segments versus the prior year period. These two segments have achieved five consecutive quarters of higher year-over-year net sales. The sales volume reduction at HMI was the primary driver of consolidated operating loss and gross profit decreases during the quarter. High freight and product costs also contributed to the decreases. In addition, HMI had a few significant charges during the period, including 2.6 million in one-time order cancellation costs to exit the ready-to-assemble furniture category. This was a move we made to improve long-term profitability by eliminating this low margin category. Also, HMI incurred 1.9 million of higher than expected chargebacks from two club channel customers. These charges drove 75% of our earnings miss. Industry-wide inflationary pressures also were a factor in reduced income, along with decisions we made that will have a short-term adverse impact but will strengthen…

Thanks, Jeremy. I'll begin with the Hooker Branded segment which reported a sales increase again this quarter and continues to be our most profitable segment, but also felt some of the impact of higher logistics costs in the quarter. Net sales increased by 8.7 million or 18.5% in the Hooker Branded segment compared to the prior year quarter, driven by higher demand and inventory availability as well as lower discounts. The consistent and vibrant growth in this segment is driven by our diversification of the Hooker Branded product portfolio to address a wide variety of lifestyles and price points. The introduction of our new Commerce & Market accent furniture collection this summer, along with the ongoing strength of our Mélange accent collection, has significantly expanded our leadership position in the accent furniture category. In addition, our strategy to rationalize our stocking inventory to focus on top sellers is helping us maximize shipping and production capacity, product flow and cash utilization. While sales continue to reflect strong demand and a healthy furniture retail environment, higher ocean freight and product cost inflation impacted gross margin in the segment, diluting the gains from sales increases this quarter. We've implemented price increases to mitigate increased product costs; however, due to current order backlog levels and customer price changes taking effect at different times, we anticipate seeing more of the benefits of price increases in future periods as more products sold reflect the new pricing. Additionally, the segment is starting to see another round of product and logistics costs increases which will likely necessitate additional customer price changes. Despite these adverse factors, the Hooker Branded segment reported $6.7 million in operating income, or an 11.9% operating margin. Incoming orders decreased slightly by 1.9% as compared to the prior year period when business was rebounding dramatically…

Thank you, Paul. Consumer and retail demand remain historically strong with consolidated backlogs nearly triple compared to pre-pandemic levels. However, we expect continuing supply chain turbulence to impact our net sales and income in the short term, at least through the second quarter of next fiscal year. We expect our Hooker Branded and Domestic Upholstery segments will continue to be less challenged than Home Meridian, because more than 70% of Home Meridian's business is shipped via direct container versus the domestic warehouse distribution model in the Hooker Branded and Domestic Upholstery segments. In addition, higher freight costs have a greater impact as a percentage on HMI's lower price product line. In that short to mid term, we look forward to the expected efficiencies and cost savings from HMI's new Savannah facility. The facility puts us in an excellent position to grow HMI's warehouse business. We will continue to focus on factors we can control such as developing relevant new products to meet consumer needs, operational improvements, managing overhead and cost and executing our strategic growth initiatives. We remain very optimistic about our long-term success as we manage through a challenging environment. 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.

Thank you. . Our first question is coming from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

Yes. Good morning. And thank you for taking the questions. So first, I have a couple of questions here on HMI. So obviously a tough quarter here for the third quarter, down 37% in terms of sales. So given the backlog and the partial reopening of Vietnam, what would be a reasonable sales estimate for Q4 for HMI? If you could take a stab at it, that would be very helpful.

Say about 60 million.

Okay.

It's tough to predict because of just the erratic nature of this whole COVID situation in opening and closing, but that's the ballpark that I'm thinking there.

He's given you a number based off of what we're getting -- we're being told from a capacity standpoint what's available. So in these times, in the short term, this is a little more of a capacity budget versus a sales budget obviously.

Right. Understood. Okay. And then I heard you guys call out two out of the three unusual charges for HMI, the RTA and the club channel. Unless I missed the third one, did you guys give that number? What that was?

There were two in the club channel. And there was one for the RTA.

Okay, got it. Okay. Perfect. And then in terms of the new warehouse, so were there any one-time cost that you guys want to call out as far as getting that new facility up and running? And can you expand on the increased operating efficiencies you plan to get from that for next year? If there's any way you can quantify that that would be very helpful?

Well, of course, we have to fill it up and we did -- it did occur to us to move products from our other warehouses. We're exiting our California, North Carolina Home Meridian warehouses. Probably spent $0.5 million in the quarter, most of it on relocating inventory. Next year, I think our forecast shows us saving about $2 million. That will increase in subsequent years. But like we said, we still got to fill the warehouse up before we can maximize the savings.

Okay, got it. And then, Jeremy, I know you guys did move as far as RTA exit. Are there any other segments or sub-segments of the business where we should expect anything kind of similar to what you just did here? I understand the rationale certainly makes sense from a longer term cost saving perspective, but anything that we should be aware of as far as anything strategically that you guys are looking to perhaps exit out of or you're happy with the current business lines?

No, there's not anything imminent in what you just asked. I do want to add to Paul's question or his answer on the last one that the savings at HMI for next year won't be fully realized, but around 6.5 million if you consider West Coast warehouse, some salaries that had to do with the RTA division mostly and then the savings that we're anticipating with Savannah by not having the drage from the port all the way to and then Madison, those are very significant. Of which probably 5 million to 5.5 million would be realized next year.

Okay. All right, that's definitely meaningful for sure. Okay. And then just in terms of the total backlog, can you perhaps quantify what that was at the end of the quarter?

Total backlog was 331 million company-wide.

Okay, great. Thank you. And then as far as the price increases, can you perhaps talk about what you guys did in the third quarter and plans going forward? And I guess just to stick to that same topic, so if we assume that cost kind of stabilize, and I know that's a big if, but assuming that they do, would you expect to have the planned price increases offset the higher cost by Q1 of next year? Would that be a reasonable assumption?

Yes. And regarding price increases, most are rolling in now and going -- and will be executed within about a month or so. And depending on which side of our business we're talking about, it will affect backlog on certain businesses where we just couldn't absorb and that will not affect backlog on other businesses.

Right. So it will --

In other words, there's a little bit of a trailing feature to that.

And the whole industry is facing this right now. There could be more price increases. And the same thing will happen is that they'll roll in depending on whether you find backlog or whether you allow backlog to stand at the lower margins. And that's a business decision by each business.

Got it. Okay. All right. I think that's all I had here. So thanks a lot and best of luck.

Thank you. We appreciate it.

Thanks, Anthony.

Our next question is coming from the line of Sandy Mehta with Evaluate Research. Your line is open.

Yes. Good morning. Thank you for taking my question. Given that these temporary issues are there for everybody in the industry, stock prices have come down because of this. The medium term outlook's very positive. The CapEx that you had for Savannah is now behind you. Any thoughts of possibly -- and then a high net cash position. Any thoughts of a possible buyback? I noticed the dividend increase yesterday, which was excellent news. But any thoughts in terms of possibly buying back stock? Thank you.

We discussed buybacks a lot, obviously, capital allocation. We have the luxury of being able to have capital allocation discussions pretty regularly. And we've considered a buyback and not ready to act on that. Our Board talks about -- we talk about buybacks at every quarterly meeting. We also talk about the possibility of acquisitions to grow the company and also to invest in additional inventory. I think we're still well below our inventory levels. We're below historical inventory levels. And with demand the way it is, we really need to grow inventory above even historic levels. So I think that we're not ready to commit to a buyback at this point, but it's a discussion item pretty regularly.

Thank you. And one other question. Can you comment or give some color on incoming order trends in terms of how consumers are reacting to higher prices? So we see anecdotally very strong housing industry data. People are moving to suburbs, people are moving from one state to the other. So the housing demand remains strong, but housing prices are up, furniture prices are up. Can you just give some color on what you're seeing out there in terms of how consumers are reacting to that? Thank you so much.

Yes. Right now, the higher end companies within all the brands have the most I would call it closer to the pulse, because those are more sold orders. So I believe that's a better indicator for what you're asking. And then those companies' orders just keep -- they keep going. It hasn't slowed down really at all. The businesses that are more stocking for warehouse orders, those orders they are so far out on the backlog that that has inherently slowed down orders within those businesses, but the backlog is over three times historic level. So I hope that answers your question.

Just for perspective. In February of 2020, our backlog was 122 million. At the end of 2021, it was 240 million. And it's 331 million now. What we're also seeing is we're not seeing cancellations. Despite price increases and all the other demands on -- the inflationary demands on consumers, we're not seeing cancellations. And as you pointed out, housing is still robust even at these higher prices. And we think that trend is going to continue for a number of years. With all the favorable demographics of millennials settling down, buying homes, moving to the suburbs, the new work trend, we think that all supports solid long-term growth.

Great. Thank you so much.

You’re welcome.

Thank you.

Our next question is coming from the line of John Deysher with Pinnacle Value Fund. Your line is open.

Good morning. Thanks for taking my questions. I was just curious; you called out higher freight costs, but what other costs are increasing? I know we've talked about this in the past, but where are you seeing the highest cost pressures going forward?

It's both on inbound from overseas and once it's here, all of the domestic trucking is significantly higher as well. To give you an idea, it consistently goes up. And now we're in a season where you're starting to figure out, okay, what's the contract going to be? And all the contracts are higher. So it really is more -- it's what's not up would be an easier question. It's across the board. Logistics is up.

But in terms of raw materials, what are you seeing in terms of the foam issue and lumber prices and all of that, how is that moving?

Foam has been mostly mitigated. It still can be a challenge at times, but not to the point where it's really hurting our production significantly, like it was before. Lumber seems to have stabilized somewhat, although we could get an increase tomorrow. So a lot of the raw materials did take significant price hikes recently. But some of it has seemed to slow down and the foam issue has definitely started to get much, much better where it's not affecting our production.

Okay. That's good to hear. You mentioned adding inventory. Where would you expect year-end inventory to be at this point approximately?

Actually, we don't expect year-end inventory to be a lot higher than it is now.

I think he's saying what would we want it to be? Is that right?

Right.

We'd like to add another 15 million to 20 million over the course of next year. But right now, we're shipping almost everything that's in transit is sold. So we're shipping everything we get. So we're not going to see a lot of growth in the short term, but we'd like to add 15 million, 20 million over the course of next year as the factories get back on line.

And which segments do you think that would mostly fall into?

Mostly in Hooker Branded.

Branded. Okay, good. And then finally, now that spend is behind you, do you have a ballpark CapEx number for next fiscal year?

It's going to be high again next because we're renovating a showroom and we're going to complete our ERP project. We've typically been a pretty low CapEx company, very often under 5 million. I'm going to say next year, it could be around 8 million or 9 million.

8 million or 9 million, okay.

Yes, we're moving to a great new showroom. It's going to require some CapEx and then finishing this ERP project will be the other big piece.

And that showroom revolves around the Hooker legacy brands.

Right.

Is that in the high point?

Yes.

Yes.

It is. Okay. All right. Great. Thanks very much and good luck going forward.

Thank you.

Thank you.

. Our next question is coming from the line of Jeff Geygan with Global Value Investment. Your line is open.

Thank you. Good morning, gentlemen. I appreciate your time here.

Good morning.

Hi, Jeff.

With respect to backlog, and I know you've made a few comments around this, at these elevated levels, assuming that the supply chain resolves itself at some point, what would you expect the stickiness of this backlog to be?

I think that if you're talking the Hooker -- if you're talking the legacy brand business, so on that side of business, I believe that is in line with what we may see in the future as well, because that's more sold orders. It's more based on the consumer. I think once we get past, to your point, the supply issues, I think the HMI backlog would come significantly down, because we would actually be able to perform on it and get it to a level that would still be advantaged, but not at the level it's at currently.

So your expectation in terms of withdrawal or cancellation of the current backlog?

We really have not had cancellations of any -- it hasn't been big at this point. And we don't expect to have major cancellations in our backlog in the near future.

All right. And then coupled that with imposing price increases, what is your expectation in terms of the elasticity of demand and potential volume impact as you raise prices?

We believe that our price increases are very much in line with the overall industry. So that's number one. Number two, I don't pretend to know where that elasticity takes us. But there has to be a point somewhere, but I believe we've had a deflationary industry for my entire career, which is 25 years. So I think we're making up some levels there. I think the industry as a whole is in the 20% to 30% range of how much is up over this period of time. And I bet the industry deflated at least that much over 25 years. So I'm not sure how to answer your question on where that inflection point actually is. But those are some just points.

And we cover a number of price points. So obviously, as we see an evolution, we'll support the businesses that are most favored by their price point.

All right. Thank you. Our analysts talked to a number of companies in different industries and it's fairly universal to hear issues about labor, yet you did not mention any labor issues. Can you address that please?

Yes, it was probably a myth on our part, candidly, because labor is an issue, particularly in the domestic factories. We've put a lot of initiatives in place, including in-house recruiter. We're doing things -- you have to do things differently or you're not going to succeed in the labor market. So we're doing I think a relatively good job, but it still is very much a challenge.

What type of wage increases have you experienced?

Probably in the range of around -- probably around 5% would be the overall.

All right. Circling back on your freight/logistics, you indicate that like most people, you have had seen accelerated costs. But we follow the shipping industry fairly closely and it seems that's mitigated itself somewhat in the last, say, four to six weeks. Can you speak to real-time versus the Q that you just reported out just directionally what you're seeing?

We're still seeing an increase, especially in the costs coming from overseas. We believe some of that has to do with factories shut down and equipment in the wrong places. So more of a supply and demand issue with the equipment that's maybe creating a bit of a short-term bubble. But we're not seeing decreases at this point.

And contract rates are going up.

Yes, right.

Even if spot rates come down, contract rates are going up. So we're not budgeting a lot of short term -- a lot of reductions in short term.

Got it. Thank you. And last and somewhat unrelated question, you did talk about capital allocation and share buybacks and the Board contemplates the buyback from time to time. Under what circumstance might the Board consider buying back stock if not today?

I think that we contemplate it, but there are -- between the fact that we're very comfortable -- we're pretty comfortable having probably an excessive safety cushion of cash. It served us well through the recession, through a number of downturns over the years. So we probably keep too much cash on the balance sheet, if you were just looking at it formulaically. So we try to keep -- we keep more cash. I think we stated pretty regularly that we would like to grow by acquisition. So we try to preserve cash for that too. We feel like in the long term to grow a bigger, healthier company is a better investment than buyback around shares. Although there's got to be -- there is a price. I can't quote that price, but there is a price where we would buy back shares.

That's fair. Thank you, guys. I know it's been a challenging environment. I appreciate your taking time to speak with your shareholders today.

We appreciate it. Thank you.

We appreciate the interest.

I'm not showing any further questions at this time. I will now like to turn the call back over to Mr. Jeremy Hoff for any closing remarks.

Thank you, Olivia. I would like to thank everyone on the call for their interest in Hooker Furnishings. We look forward to sharing our fourth quarter and year-end result in April. I everyone has a wonderful holiday season. Take care. Thank you.

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