Hooker Furnishings Corporation Common Stock 2027 Q2 Earnings Call

Please go ahead. Thank you, Tanya, and good morning, everyone.

Welcome to our quarterly conference call to review financial results for the fiscal 2027 second quarter, which began on May 4, 2026 and ended on August 2, 2026. Joining me today is Jeremy Hoff, our Chief Executive Officer. We appreciate your participation. 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 2027 second 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. Before we jump into results, we want to discuss tariffs.

We've included a table in our earnings release showing the impacts of this quarter's tariff recoveries by operating segment and for the total company. Obviously, tariff recovery significantly and favorably impacted our Q2 results. However, it's important to note that tariff costs significantly and adversely affected our prior year results too. Prior to the U.S. Supreme Court's February 2026 decision invalidating IEEPA tariffs, we incurred an estimated $10.3 million of cumulative pre-tax costs related to tariffs in our fiscal year 2026 results, which significantly exceeded the tariff recoveries we are reporting today. In fiscal 2026, we reported a net loss of nearly $27 million. Following the imposition of IEEPA tariffs beginning in April 2025, we elected to honor pricing on existing customer backlog and for competitive and administrative reasons, did not immediately adjust pricing on certain other products.

Our pricing reflects our total cost structure and the competitive and macroeconomic environment in which we operate, with tariffs being only one of many factors considered. On to results. Despite continued weaknesses in the housing market, soft retail demand for furniture and home furnishings, and persistent macroeconomic challenges, we delivered consolidated net income of $1.7 million, marking our third consecutive profitable quarter. Results benefited from tariff recoveries received during the quarter, the sustained impact of our prior cost reduction initiatives, and improved profitability in our reportable segments. Consolidated net sales decreased $6 million, or about 9% compared to the prior year period, reflecting lower sales across each of our operating segments.

Despite the sales decline, gross profit increased $2.9 million and gross margin improved 690 basis points to 31.8%, while operating income improved to $1.3 million compared to an operating loss of $0.5 million in the prior year period. I will turn the call over to Jeremy for his comments on our fiscal 2027 second quarter results.

Thank you, Earl. Good morning, everyone. The significant costs we incurred due to the IEEPA tariff significantly and adversely affected our prior year results, and we are grateful to have recovered some of those costs in our fiscal 2027 second quarter. The substantial administrative burden these tariffs placed on our team over many months cannot be recovered. In addition to the tariffs paid, we incurred incremental costs associated with the IEEPA tariffs, including increased customs bond cost, legal and professional fees, financing and working capital cost, and other administrative and supply chain related expenses. Although we do not believe that the tariff recoveries make us whole for the significant cost incurred by us in fiscal 2026, I am grateful to the Hooker team for their persistence and extraordinary effort in navigating an unprecedented and highly complex environment and ultimately securing these recoveries for our shareholders.

We are also deeply appreciative of the commitment and partnership of our suppliers and customers as we navigated this period of extraordinary uncertainty for our industry. We are encouraged to report $1.7 million in consolidated net income for the quarter, marking our third consecutive quarter of profitability and a $4.9 million improvement over the prior year second quarter. These results were achieved despite continued weakness in the housing activity, low consumer confidence, and the seasonally softer demand environment we typically experience in the first half of our fiscal year. The improvement reflects the benefit of tariff recoveries received during the quarter, as well as the sustained impact of the $17.5 million in annualized fixed cost reductions implemented across continuing operations in the prior year. These actions have helped position us to remain profitable despite continued pressure on sales.

From a segment perspective, Hooker Branded and Domestic Upholstery both delivered improved profitability compared to the prior year quarter. Hooker Branded benefited from tariff recoveries and higher selling prices while Domestic Upholstery benefited from tariff recoveries, lower imported material cost, and improved overhead absorption. In addition to tariff recoveries, Hooker Branded profitability was impacted by shifts in channel and sales mix dynamics during the quarter. Seasonally softer summer shipments to brick and mortar retailers resulted in a greater mix of e-commerce sales, along with targeted promotional activity designed to support consumer engagement. The combination of channel mix and elevated promotional activity pressured margins during the quarter. We expect promotional activity to normalize during the second half of the fiscal year, much like we saw in July, the last month of our fiscal second quarter.

It's important to note that our core fiscal July results, absent any tariff recoveries, showed significant improvement over prior year as we had mitigated many of the supply challenges referenced earlier. We believe that positive momentum will continue into the second half of the fiscal year. Now I want to turn the discussion back over to Earl, who will discuss highlights in each of our segments, along with our cash, debt, inventory, and capital allocation strategies.

Thank you, Jeremy. Starting with Hooker Branded, net sales decreased $1.6 million, or 4.5% in the second quarter, primarily due to lower unit volume, higher promotional discounts, and key SKU out of stocks due to significantly longer lead times out of Asia. These headwinds were partially offset by higher average selling prices. Inventory constraints in imported upholstery that began in the first quarter had largely eased by quarter end. Despite the decrease in sales, Hooker Branded gross profit increased $3.2 million, and gross margin improved by 1,050 basis points to nearly 40%. The improvement primarily reflected tariff recoveries and higher selling prices, partially offset by promotional discounting and higher warehousing and distribution costs. The segment generated $870,000 of operating income for the quarter, compared with approximately break even results in the prior year period. Backlog increased nearly 35% compared to the prior year second quarter. Turning now to Domestic Upholstery.

Net sales decreased $1.5 million, or 5.3% in the second quarter, as lower sales of upscale leather and custom fabric upholstery were partially offset by double-digit growth in private label and outdoor furnishings. Gross profit increased $928,000, and gross margin improved 450 basis points to 23%, supported by tariff recoveries on imported materials, lower imported material costs, and improved overhead absorption. The segment generated operating income of $833,000, compared with an operating loss of $408,000 in the prior year quarter, reflecting the improved gross margin as well as the benefit of previously implemented cost reduction actions. The Domestic Upholstery's backlog increased nearly 5% compared to the prior year quarter, primarily reflecting higher private label orders.

In all other, net sales decreased $2.8 million, or about 66% in the second quarter, primarily due to project timing in its hospitality business, with approximately 80% of first half shipments occurring during the first quarter. Lower second quarter shipments resulted in an operating loss for the quarter. However, the business remained profitable for the first six months of fiscal 2027. Turning to Discontinued Operations. Although the divestiture was completed in the prior fiscal year, Discontinued Operations generated second quarter pre-tax income of $587,000, reflecting tariff recoveries, customer-related adjustments, and other post-divestiture activity. Results included approximately $1.6 million of tariff recoveries recognized as a reduction of cost of sales, partially offset by approximately $0.6 million of customer credits recorded as a reduction of revenue. Current period activity also included approximately $0.5 million of additional charges arising from a net settlement of various divestiture-related balances with the buyer.

Turning now to cash, debt, and inventory. Cash and cash equivalents stood at $18.7 million at quarter end, an increase of $8.1 million from the end of the first quarter and $17.5 million from the fiscal 2026 year end. Cash generated from operations during the first six months was $24 million. Cash was used to repay $3.6 million on our credit facility, distribute $2.5 million in cash dividends, repurchase $1.3 million of our common shares, and fund $1.1 million in CapEx. Inventory levels decreased by $5.3 million from $48.7 million at fiscal 2026 year-end to $43.4 million at the end of the second quarter. We maintained our financial flexibility with $51.8 million in available borrowing capacity under our amended and restated loan agreement as of quarter end, net of standby letters of credit and no outstanding balances on the facility.