Stanley Furniture Co.

(STLY) news: Stanley Furniture Management Discusses Q4 2013 Results - Earnings Call Transcript - Seeking Alpha
seekingalpha.com /article/1992241-stanley-f urniture-management-discusses-q4-2013-resultsearnings-call-transcript Executives Micah S. Goldstein - Chief Financial Of f icer, Chief Operating Of f icer, Principal Accounting Of f icer, Secretary and Director Glenn Charles Prillaman - Chief Executive Of f icer, President and Director Analysts John A. Baugh - Stif el, Nicolaus & Co., Inc., Research Division Stanley Furniture (ST LY) Q4 2013 Earnings Call February 4, 2014 9:00 AM ET Operator Greetings, and welcome to the Stanley Furniture Fourth Quarter and Total Year Operating Results Call f or 2013. [Operator Instructions] As a reminder, this conf erence is being recorded. I would now like to turn the conf erence over to your host, Micah Goldstein, Chief Operating and Financial Of f icer f or Stanley Furniture. T hank you, Mr. Goldstein, you may begin. Micah S. Goldstein T hank you, Kevin. Good morning, everyone. Glenn and I appreciate you taking the time to join us. During the call this morning, we may make f orward-looking statements that are subject to risks and uncertainties. A discussion of the f actors that could cause our actual results to dif f er materially f rom expectations is contained in our SEC f ilings and the press release announcing these results. Any f orward-looking statement speaks only as of today, and we undertake no obligation to update or revise any f orward-looking statements to ref lect events or circumstances af ter the call. We're going to change our order up a little bit this morning, and I'm going to go ahead and cover the f ourth quarter results and then the f ull year results, and then I'll turn the call over to Glenn. Net sales f or the quarter decreased to $22.7 million. Gross margin decreased compared to the prioryear period, as well as the sequential quarter, and I want to walk you through both of those comparisons now. And then I'm happy to answer any f ollow-up questions when we start the Q&A session. When you look at the decrease compared to the prior year, it's mainly attributed to the increase in promotional spending, lower sales and, because the new introduction didn't ship, we had a mix shif t away f rom the Stanley brand. We're also being impacted by inf lation on both brands, labor increases f rom Asia that were not in last year's number, as well as increased lumber cost domestically.

When you turn to look at the gross margin change on a sequential-quarter basis, if you remember f rom our last call, we guided an expected growth and we didn't see that. As a result, we had to make some adjustments to our inventory reserves to make sure they're f airly stated. We also had lower sales, higher promotions and the same unf avorable mix that got us on a year-over-year basis. SG&A f or the quarter included $238,000 of restructuring related to the f inal relocation expenses f rom our corporate of f ice and showroom consolidation. Amortization and support of our new enterprise solution along with f avorable bad debt adjustments in the f ourth quarter of last year contributed to the year-over-year interest -- or year-over-year increase in this expense. As a result of these items, our operating loss f or the quarter, net of restructuring, was $3.7 million, also equals our cash loss f or the quarter. Switching to results f or the f ull year. Net sales f ell 1.6% to $97 million and the mix of sales were 6040 in f avor of our Stanley product line. Gross prof its slipped f rom 12.4% in 2012 to 10.1% in 2013. Contributing to this decline was higher promotional spending during the year, inf lation on sourced products early in the year and our decision to delay pricing action until af ter go live of our new enterprise system midyear and higher prices f or raw materials used in our domestic operation. While we didn't f eel able to take wide-scale pricing action in Young America, we did take action on a number of SKUs late in the year and we continue to work hard to lower costs while maintaining product quality. SG&A expenses f or the f ull year of '13 were $20 million, which included $770,000 of restructuring related to the corporate of f ice move. T his f ull year number also includes $350,000 f or amortization related to our new enterprise solution. Other increases f or the f ull year include the marketing expenses related to a f ull year of attending 4 markets compared to 2 markets in previous years. We're expecting SG&A to stay around $5 million on a quarterly basis and will obviously drop as a percentage of revenue as we leverage the f ixed component of these expenses. Our balance sheet remains healthy and we remain debt f ree and our f inal year of transf ormation we invested in our of f ice and showroom consolidation, a new enterprise solution and some minor spending in Robbinsville. Inventories increased in Q4 but came down slightly f or the year. Our inventory remains adequate, we believe, to support growth and we don't anticipate this being a drain on cash in 2014. Other sources of working capital should remain stable. We've been successf ully using extended payment terms to place new products and that will likely continue in 2014. A f ew other brief points of interest bef ore I turn the call over to Glenn. First, we expect to f ile our 10K later this week, which will have the latest inf ormation on the CDSOA litigation. Second, we have approximately $1.5 million of capital expenses planned f or 2014. T hese expenses will occur mostly in the back half of the year. T hird, we're expecting depreciation and amortization to be about $2.5 million f or the f ull year of 2014, $1.9 million f or depreciation and about $600,000 f or amortization. And last, we expect the interest expense related to our legacy def erred comp plan to be about $3 million this year. You've got to remember that this is noncash and that the increase in policy loans is netted against the increase in cash surrender value of the underlying policies. Glenn? Glenn Charles Prillaman

T hanks, Micah. As Micah outlined -- good morning, everyone. As he outlined, the f ourth quarter was disappointing f inancially. We were not able to show the growth we expected. Retail activity in the last 3 months of the year proved to be weaker than anticipated and, unf ortunately f or everyone, we think this is primarily the case across most of the wood segment of the industry. With that being said, we are making progress and we do have some very good things going on in our business. Operations in Robbinsville supporting our Young America brand continued to improve even as that f actory operates on low unit volumes. We operated on schedule throughout the quarter and we have now pleased customers with timely, dependable deliveries f or several months. Last year, specif ically, in spite of widespread pessimism towards our plan to manuf acture domestically, we demonstrated the potential of our Young America brand through revenue growth. Now that revenue growth was slight but it was growth. And when you consider our revenue losses in previous years, all that we went through last year, which was the f inal year of our multiyear ef f ort to reposition the company, and what we believe other companies in this segment would report if they did report, this slight growth in the Young America brand, we don't believe, is insignif icant. It's not what we need but given what's happened in the recent past, it's a start. Looking f orward into this year, we continue to believe we can compete globally, and Young America brand can continue to occupy meaningf ul space and grow in the children's f urniture marketplace. We can point to specif ic examples in our traditional distribution channels, where our customer is executing our f ormula by showing our product, supporting it with point of sale and consumer advertising ef f orts and telling our dif f erentiated story. Where we are doing this, orders are growing steadily. As the quarter ended, we made progress selling a leading national lif estyle retailer. We've made progress with a large regional chain. Sales projects that have begun since the quarter ended include us becoming a more important vendor, and again, with -- this is with the Young America line, to the smaller specialty retailer through private label products. And we're exploring an opportunity with a large national chain. T hese opportunities turning into sales over the coming quarters should begin to validate our investments in the f lexible domestic manuf acturing platf orm, which supports Young America and gives us a long-term operational competitive advantage in the marketplace. When the salient f eatures of Young America brand are paired with an ef f ective retailer in any market, we are showing the ability to outpace competitors even when they're selling f rom lower-priced segments. T here are good things happening in the Stanley brand as well. Our newest collection and our largest introduction f rom last year shipped this past month and early f eedback f rom customers is very good. T he problems we had with the supplier in launching the collection have been resolved. We also have some channel development going on with the Stanley product line, and we see opportunities to grow with both the traditional and emerging retailer, as well as the interior design community. We have an aggressive product introduction plan scheduled this year f or both brands and we have already shown new products in both brands last month at the Las Vegas Market. Lastly, let me say our team has overcome a lot. We are positioned to achieve prof itability through growth and the changes that have inhibited growth are now in the past. Looking f orward, I expect the f irst half of this year to validate the work our team has put into repositioning the company. Specif ically, the f irst quarter of last year was a relatively strong sales quarter. We had not launched our new operating system and we were gaining momentum. Based on what we see in retail right now, even though we can show signif icant progress sequentially, I'm not

sure we can show a positive comp in Q1 over prior year but I believe we should begin comping well beginning in Q2. With that, I'll open the call f or questions. Question-and-Answer Session Operator [Operator Instructions] Our f irst question today is coming f rom John Baugh f rom Stif el. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division Glenn, I was wondering if you could just take a stab, you mentioned several channel developments in both lines. And I recognize that they're all in various discussion stages, maybe in action stages with a f ew, but if we just looked at the channel opportunities you're working on, would there be any range of revenue you'd be willing to hazard a guess on in calendar '14 that you might see come to f ruition f rom all of these various initiatives? Glenn Charles Prillaman John, I wish I could. I just -- it's very dif f icult to predict sales right now, because while you -- we should very well gain through channel development, there may be some bleed in certain channels as well. But obviously, we wouldn't be going af ter it if we didn't think it's going to produce net growth. It's just very dif f icult to say what that number's going to be in '14. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division Do you think it's a net positive? In other words, let's just exclude what the macro does and overall, but in terms of your bleed versus your gains, do you think it's a net positive? Glenn Charles Prillaman Yes. Absolutely. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division Okay. And then on Robbinsville, any f lavor -- you gave us the f eel f or the year of the sales mix. Any f eel f or the year of -- on an EBIT basis or a gross margin basis, how much the Robbinsville f actory is dragging results and then sort of how that youth line may look? And I understand you have a dif f icult f irst quarter comparison. How the f irst quarter might line up, not just in that segment but I guess as overall in terms of both the revenue and EBIT basis? Micah S. Goldstein John, I think we stand f irm with the comments that we've made earlier. We need about $30 million on a quarterly basis to achieve breakeven at our current mix of sales. So Robbinsville is def initely, as we've said openly, less prof itable than the Stanley brand. It's not covering its overhead and, as sales grow, the investments that we made there are very leverageable and a higher percentage of each dollar will drop to the bottom line. Without growth, that f actory and that brand will continue to be a drain on the overall corporation. In terms of total year results, our total results f or the f irst quarter is really going to depend on what sales do. As Glenn said, we're expecting sales to be better than they were in the f ourth quarter and probably not as good as they were in the f irst quarter of last year. And as our sales grow f rom where we are now, our losses will narrow.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division And Micah, any guess on cash use, it's f or '14? It sounds like f rom a working capital standpoint, it's relatively neutral. You pick up $1 million positive CapEx versus D&A and then the rest is what you assumed f or operating income, correct? Micah S. Goldstein T hat is correct. Obviously, there could be some f luctuations and that with timing of when inventory shows up but, yes, we're introducing a lot of new product this year and so there is -- depending on the timing of shipments out of Asia, there could be a little blip in inventory as that stuf f hits the water bef ore we actually ship it. But we are not expecting any changes in working capital, and our cash use should be equal to our loss. And the investments that we plan to make f rom a capital standpoint, those decisions that we make will be largely dependent on how things go in the f irst and second quarter. We're not locked in to any spending at this point. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division And then, lastly, how do I think about -- you've got the net cash, I think it was $19 million, if I'm not mistaken. What amount of cash beyond that or do you have to operate with? I mean, how much can you burn through bef ore it gets to be an issue, basically? Micah S. Goldstein Yes. $19 million is the number that's on our balance sheet at year end and we've -- I think, we've been pretty clear that when we believe our plan or our strategy is not working, we've got a tough decision to make and I think that we will have ample cash to get us to that decision point. Operator [Operator Instructions] T here are no f urther questions at this time. I'd like to turn the f loor back over to management f or any f urther or closing comments. Glenn Charles Prillaman T hank you, Kevin. Af ter 4 straight years of unprecedented change to reposition the company, as we've said, growth is how we prove the strategy works. And thank you f or joining the call with us. We're very glad to have the massive changes behind us and have these initiatives f or growth underway and look f orward to reporting growth in the f uture. So thanks f or joining us and good morning. Operator T hank you. T hat does conclude today's teleconf erence. You may disconnect your lines at this time and have a wonderf ul day. We thank you f or your participation today. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource f or bloggers and journalists, and are excited to contribute to the democratization of f inancial inf ormation on the Internet. (Until now investors have had to pay thousands of dollars in subscription f ees f or transcripts.) So our reproduction policy is as f ollows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

T HE INFORMAT ION CONTAINED HERE IS A T EXT UAL REPRESENTAT ION OF T HE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTAT ION OR OT HER AUDIO PRESENTAT ION, AND WHILE EFFORT S ARE MADE T O PROVIDE AN ACCURAT E T RANSCRIPT ION, T HERE MAY BE MAT ERIAL ERRORS, OMISSIONS, OR INACCURACIES IN T HE REPORT ING OF T HE SUBSTANCE OF T HE AUDIO PRESENTAT IONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILIT Y FOR ANY INVEST MENT OR OT HER DECISIONS MADE BASED UPON T HE INFORMAT ION PROVIDED ON T HIS WEB SIT E OR IN ANY T RANSCRIPT. USERS ARE ADVISED T O REVIEW T HE APPLICABLE COMPANY'S AUDIO PRESENTAT ION IT SELF AND T HE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVEST MENT OR OT HER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. T hank you!