Stanley Furniture Co.

(STLY) news: Stanley Furniture

Management Discusses Q3 2013 Results - Earnings
Call Transcript - Seeking Alpha
seekingalpha.com/article/1746102-stanley-f urniture-management-discusses-q3-2013-results-
earnings-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
Barry George Haimes - Sage Asset Management, LLC
Steve Hale
Brad Hathaway
Stanley Furniture (STLY) Q3 2013 Earnings Call October 15, 2013 9:00 AM ET
Operator
Greetings, and welcome to the Stanley Furniture Third Quarter Investor Call. [Operator Instructions]
As a reminder, this conf erence is being recorded.
It is now my pleasure to introduce your host, Micah Goldstein, Chief Operating Of f icer and Financial
Of f icer f or Stanley Furniture. Thank you, Mr. Goldstein, you may begin.
Micah S. Goldstein
Thanks, Rob. Good morning. Glenn and I appreciate you all taking the time to join us this morning,
while we review the results of our third quarter.
During the call this morning, we may make some f orward-looking statements that are subject to risks
and uncertainties. A discussion of the f actors that could cause actual results to dif f er materially f rom
our expectations is contained in our SEC f iling 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 those f orward-looking statements to ref lect events or circumstances af ter this morning's call.
Glenn, I'll turn it over to you to kick us of f .
Glenn Charles Prillaman
Good morning, everyone, and thank you f or joining us. Our business showed important signs of
improvement during the quarter. And af ter 3 years of strategic change necessary to position both our
Stanley and Young America brands f or growth, we are starting to see the benef its of our work.
I'd like to take you through a f ew of those. First, sales have stabilized, and we should begin growing
in the near term. Second, service to customers improved through our domestic manuf acturing model
supporting our Young America brand, as our customer noticed better order f ulf illment rates as the
quarter ended. Third, the dif f iculties we experienced in Q2, af ter the launch of our new operating
system in May, continued in Q3, and that did af f ect -- negatively af f ect sales, but it greatly dissipated
as the quarter progressed. We entered Q4 with our customer well inf ormed of order status, invoicing
and acknowledging, stock availability and lead times f or f uture production. Orders f rom earlier in the
summer that were delayed due to the issues we experienced with the operating system were
delivered to customers, allowing us to now f ocus only on f ulf illing new orders. These are the
improvements in the way day-to-day business is conducted that customers have needed to
experience in order f or us to begin growing. Fourth, our new customer care department in our new
corporate of f ice served our customer and our sales representatives in the f ield increasingly well as
the quarter progressed. With ref inements to our operating system not yet made at the beginning of
the quarter, hold times, e-mail responses and our ability to speak with credibility regarding the
inf ormation surrounding the sale of our products were issues, yet as we exited the period, customer
satisf action has greatly improved. Fif th, we -- as we got it, our cash use during the quarter declined
signif icantly compared to prior quarters. Our balance sheet remains strong. And again, I want to
remind you that our plan to become prof itable does not hinge upon capital spending outside of
protecting the value of the investments we've already made. Lastly, business in our segment remains
dif f icult, and our read is that there is a f air amount of uncertainty in the retail sector at the moment.
However, we, again, greet customers and introduce new product this week at High Point Market. The
accomplishments I've mentioned are advancements in our business we and our customers can now
see, f inancial results will f ollow.
I congratulate our team and thank our customers. And now, I'll turn the call back over to Micah to
comment f urther on operations and the f inancials.
Micah S. Goldstein
Thanks, Glenn. The most substantial news f rom the past quarter has to do with the progress we
made on our new enterprise system and how that progress has allowed our customers to begin
experiencing how well our operations are perf orming. Specif ically, during the quarter, we corrected the
issues that were af f ecting the way we allocated inventory to customer orders. This was a big hurdle
that hampered shipments and orders during the previous 2 quarters. We also solidif ied our demand
planning processes and have improved the accuracy of product availability inf ormation to our
customers. Our Robbinsville f actory continues to gain ef f iciencies in spite of the low unit volume.
The plant's maintaining its production schedule and has completely embraced the culture of
continuous improvement. This transf ormation is showing in our metrics on quality, schedule
attainment and labor ef f iciencies. The team is increasingly f ocused on attacking material waste in
light of recent inf lation on lumber.
With 4 markets per year now, our team supporting the Stanley brand remains busy developing and
bringing new product to market, as well as keeping us in service on all existing groups. We have
maintained the necessary inventory levels to provide good service and still believe our f inishes and
quality specif ications represent a great value in the marketplace. So that's the operations summary.
Now as I recap the f inancials, I'll highlight the comparisons to prior year, which are what we discussed
in the press release and 10-Q, but I also want to make some comments on sequential perf ormance
to highlight the improvements af ter the completion of our of f ice/showroom consolidation and the
new systems implementation.
Net sales f or the quarter were $24 million and basically f lat with both the prior year and the
sequential quarter. Orders during the early part of the quarter, as Glenn ref erenced, were depressed
as we work through the challenges associated with our system. They have since improved, and we
did exit Q3 with healthy backlogs on both brands. As expected and as guided on the last call, gross
margins improved by about 260 basis points over the sequential quarter to 11.6% of net sales. Lower
discounting and improved operating perf ormance drove most of that improvement. The unf avorable
margin comparison to the prior year is the result of inf lation on both sides of the business and, to a
lesser extent, the f inal shipments of the f loor sample promotion we of f ered in Q2.
Not much to discuss on SG&A. It remains consistent. We still believe a number just shy of $5 million
is the best to use as you try and model or f orecast what our business is going to look like.
And our operating loss f or the quarter was $1.9 million. On a sequential basis, the improvement is
attributed to what I just spoke about with regards to gross margin. And compared to the prior year,
the increased loss was also driven by inf lation in the f loor sample promotion and slightly higher
SG&A spending.
As Glenn mentioned in his opening remarks, our balance sheet remains healthy. Our team worked
very hard to minimize the use of cash, and you should expect this discipline and trend to continue
into the f uture.
With that, let's open the line f or questions, Rob.
Question-and-Answer Session
Operator
[Operator Instructions] Our f irst question is f rom the line of Budd Bugatch of Raymond James.
Unknown Analyst
This is Bobby f illing in f or Budd. I just had a couple quick questions. One, being on the backlog, what
-- kind of how are the margins in the backlog? Is that -- is there -- there's no discounting less -- and
is the price increase accounted f or in the backlog and the margin's healthy?
Micah S. Goldstein
Yes, I think that's a f air depiction, Bobby. Our price increase is now f ully implemented. The price
increase that we did was only on the Stanley side of our business, so the Young America backlog has
not been impacted by that at all. And as I mentioned earlier, we have seen inf lation on both sides of
the business. So that obviously, on Young America, any time we see inf lation, and we haven't raised
price, that has potential to impact margins. And we're working hard to of f set that through ef f iciency
gains in the f actory.
Unknown Analyst
All right. And then to touch on inf lation, that was going to be my next question. Is that -- do you see
that as kind of a temporary issue or something that could be -- could come into something more
longer term?
Micah S. Goldstein
So let's split it out and talk about it by business. So on the Stanley side, we saw inf lation related to a
government-mandated wage increase f or workers in Indonesia, and we took pricing action to of f set
that inf lation. The timing of that price increase was pushed back, as you recall, because we delayed
the launch of our operating system. And that's why we really took a little bit more of a margin hit on
the Stanley side than we had originally anticipated taking. On the Young America side, the inf lation
that we're seeing right now is mostly related to lumber. And it's pretty typical, lumber prices f luctuate
throughout the year. This year has been a lot wetter than normal, we had a really wet summer, and so
we've had to go f urther f rom our f actory to procure lumber. And so that increases transportation
costs. And when the loggers have a hard time getting into the woods, they -- the supply and demand
gets out of balance, and the loggers make a little bit more money. So we expect that to come back
down, it usually does. No way f or us to predict when that's going to happen, although dry weather
helps.
Operator
Our next question is f rom the line of John Baugh with Stif el.
John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division
A couple things. So help with the order number. You mentioned it was depressed at the beginning of
the quarter, and I guess you emerged f rom the quarter stronger. Were the orders year-over-year f or
the entire quarter f lat, up, down?
Glenn Charles Prillaman
John, I think what we saw more so progressing as the quarter went on is our service to customers.
What I spoke of is our customer care department was armed with better inf ormation, and theref ore,
they could serve the customer and the sales rep in the f ield as the quarter went on because of the
f ixes in our operating system. And then, certainly, the customer could use our online web portal, and
so on and so f orth, as the quarter. So as f ar as how that af f ects orders, I think that's exactly what
we're betting on moving f orward. There has been a little sof tness as we exited the third quarter and
into the f ourth. Things are really dif f icult right now at retail, and there's a lot of uncertainty out there,
in our opinion and f rom what we hear.
John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division
Okay. So your guess would be that during the third quarter, your order activity improved and likely
improved as your service or your ability to process the order improved. And then subsequent to the
quarter end, now that you're in a great position to take orders, maybe retail traf f ic is a little slower,
and the orders are showing a little weakness again. Would that be a f air summary?
Glenn Charles Prillaman
Yes, that's right. That's right, John. Obviously, I don't like to guess on orders in the third quarter.
What I would -- what we did in the third quarter is stabilized. And now what should happen, barring
any macro f actor outside of our control, is we should see growth now that we've got the business
where we wanted it. And it's not like it's been a 1- or 2-quarter journey here. This is -- the system's
implementation and getting our people armed with the right inf ormation and then the f actory
allocating orders correctly all through that new system, that was, as we've said, that last hurdle that
we needed to jump in our 3-year plan here to transf orm this company to where it can grow again and
compete and dif f erentiate in the marketplace. So it is disheartening a bit to see the government
shutdown and uncertainty out there in the consumer marketplace and have the -- not have a ton of
momentum going on at retail or upper-end cased goods, but I think that's temporary. And I think
there's market share f or us to gain, so that's what we look f orward to.
John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division
Yes, and I wanted to -- on that latter point, any -- can you give us any color around your shelf space
battle or market share battle perspectively? Now that you're in a position to service orders, what's
the strategy? What will you be doing here at High Point? Give us some kind of rearview as well in the
last 12 months of your shelf space changes, if they've been losses, where likelihood of getting back
any of those losses and gaining shelf space going f orward?
Glenn Charles Prillaman
John, I think that the Stanley -- let's take it in 2 parts, and let's look at the Stanley side of our
business f irst. I think over the past number of years, there have been so many dif f erent
manuf acturers that, because of importing, they're coming into to the business. It's a constant battle
f or f loor space, no doubt about it. We -- when we got the Stanley line in service like we wanted to as
we entered this year, we went to April market and took some aggressive, aggressive action to get
f loor samples placed, and we're starting to see some benef its f rom that. But it's just -- this is an
introduce and closeout business, the Stanley business. And new product is very, very important, and
we're now bringing it at every market we attend, which means both Vegas and High Point twice a year,
so 4 times a year. That business is about bringing new product and just gaining as much f loor space
as possible. The discounts that we gave at April market, that was a onetime deal, and I don't expect
us to do that, that heavily in the f uture, unless there is an opportunity to gain market share through a
new customer or what have you. So the idea there is create great designs at great values and have
the product in service, and that's where we are. Then you switch to Young America, and certainly, new
product is important there as well. But because our Young America service was more so impacted
through the launch of our -- or due to the launch of our new operating system, it's not that we have
an issue necessarily with shelf space, it's more of the conf idence of the retail sales associates. And
now that our retail sales associate can call to our of f ice or call their sales representative or check
their iPhone f or stock availability or f uture production dates, that we believe we can get that
mindshare back and now turn shelf space that we have. Are there new customers out there? I think
so. And the company's multiple channel distribution strategy should def initely serve us well. As things
may be shaking up. They may or may not be shaking up a bit, we're certain -- in certain areas with
f loor space, but it's really just about us executing our model now that we've stabilized the business.
John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division
Glenn, is the clearance of all the f ormer or old Young America product, is that essentially done by the
end of Q3 or is there more of that bleeding into Q4?
Glenn Charles Prillaman
That's essentially done, John. There's always going to be -- there are always going to be some
products that are discontinued because as we introduce one, we'll tend to drop another, but nothing
out of the ordinary going f orward.
John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division
And I assume that there's still a prof itable adult business and a negative EBIT youth businesses. Is
that correct, f irst of all? And then, what is -- is it strictly a matter of volume at this point f or the
youth business to get to at least breakeven or prof it?
Glenn Charles Prillaman
Yes and yes. And the second one is absolutely yes.
Operator
Our next question is f rom the line of Barry Haimes of Sage Asset Management.
Barry George Haimes - Sage Asset Management, LLC
I have a couple questions. One is just f ollowing up on the order commentary and the pattern of
orders through the quarter that you've already talked about, would you say those trends were similar
between Stanley and Young America or were there any dif f erences as you trended through the
quarter? Second question is you've been thinking through -- you've talked about some ways to
possibly better load Robbinsville, maybe doing some manuf acturing f or others or what have you. Any
update on what your thoughts are around that?
Glenn Charles Prillaman
Thanks, Barry. No, Barry, no update on -- if you're speaking about private label or OEM projects in
Robbinsville. What I've said in the past, and I'll say it again, is that when you have a domestic
manuf acturing f acility and you have short lead times, there are a lot of people experiencing issues
with delays f rom overseas. And so we do talk to people about that, but the private label business and
the OEM business, that's tough business to make money on. We're going to def initely pursue any
opportunities, but no update to give you there. As f ar as orders are concerned, the best I can tell you
is I don't think there's anything too much to read into this because what matters is what happens
f rom here, and it's tough to predict, but we think we're going to grow because of where we've
positioned the company. But if you look back at Q3, Young America has been f airly stable. And
Stanley, which is a little more cyclical, we actually saw orders start to build in the beginning and
through the mid part of the quarter. And then as we got into September, we saw some sof tness.
Operator
Our next question is coming f rom the line of Steve Hale of Hale Partnership.
Steve Hale
A question f or you. I saw on the court dockets, the f avorable ruling f rom the Court of Appeals on the
CDOSA (sic) [CDSOA]. I haven't seen an 8-K, and I didn't see any details in your Q. I was just
wondering what the plan was f or kind of more broadly sharing that with your stakeholders.
Micah S. Goldstein
Yes, so, Steve, I mean, it's still very much a legislative matter, and so we're letting the lawyers talk
about it. Our Q that we f iled this morning has the CDSOA disclosure and that it is the most current
inf ormation that we can give you at this time. It is updated f rom the last quarter, if you haven't read it
in detail yet. I mean...
Steve Hale
No, no, well, yes, I read it, but it didn't say anything about the rulings and the easing out in the Ashley
Furniture that came down f rom that court, right? So I understand that you guys got to kind of ...
Micah S. Goldstein
Yes, it does ref erence that ruling and the subsequent...
Steve Hale
The one f rom August.
Micah S. Goldstein
and those people to have it reheard.
Steve Hale
So it ref erences the August 2013 rule?
Micah S. Goldstein
Yes, it is August.
Glenn Charles Prillaman
Yes, the August 19 ruling.
Micah S. Goldstein
And then it ref erences there their petition to have it reheard en banc on October 3. So yes, it's
current.
Steve Hale
And so is there any -- are you guys still viewing that as continued? I was wondering, given kind of
that second af f irmation f rom a higher-level court, if that was impacting your guys' view on uses of
the excess cash, and if you might explain to everyone what you're thinking about with that.
Micah S. Goldstein
We booked it in income and f elt like the chances of having it clawed back were remote to start with,
obviously, this latest ruling conf irms that thinking. But as I said, it's still very much a legislative matter.
And until it's all worked through the system, we think we've done everything that we need to do. Our
thoughts on the way we managed excess cash have not changed. We discuss it with the board on a
monthly basis. Our f ocus right now is on not burning cash through operations. We don't need any
more capital spending to reach prof itability f rom here other than minor maintenance capital spending
to take care of the assets that we got and keep our f actory and our systems running. And I think if
we return to growth as we hope will happen in the near term, we'll be in a position where we're cash
neutral or generating cash, and then can have a more intelligent conversation about capital
allocation.
Steve Hale
And to that end, on the adult business, which you guys have said is prof itable, have you guys
considered any type of inventory f inancing f or that side of the house?
Micah S. Goldstein
We always think about the best way to use cash and leverage, Steve. And I think the challenge f or us,
and we've looked at it several times in the last f ew quarters, people don't like to lend money to
people that are losing money. And so the rates that we're of f ered to think about that are not
attractive. And our investment options f or the cash we have are not good enough to of f set that
increased expense f rom borrowings. So I think that being our own bank in the short run until we
return to prof itability, makes the most sense.
Operator
[Operator Instructions] Our next question is f rom the line of Brad Hathaway of Far View Capital.
Brad Hathaway
So actually, just quickly f ollowing up on something Steve brought up. Is -- so when you approach the
banks, you have them look at Young America and Stanley as separate companies or you approach
them as one consolidated company?
Micah S. Goldstein
Yes, Brad, we do everything as one consolidated company. That's how we view our business, and
that's how we look at things, and that's how we report, and that's how people evaluate us. And as I
said, our conversations with banks that want to lend us money tend to be very short conversations.
All of our f ilings are public inf ormation, and the rates are not attractive to consider doing that, and
we don't think we need to do that. We talk about it with our board on a regular basis, and it would be
nice to need capital f or growth in the f uture, and we'd look f orward to that opportunity. Right now,
we're f ocused on returning the business to growth so that we can do that. And quite f rankly, our
inventories are both in great shape and could support growth without f inancing, at least as of now.
Brad Hathaway
Okay. I mean, I'd actually like to say that I kind of -- I disagree that the market views you as one
company, at least f rom my perspective, and this is just purely speaking f or me, but also some people
I've spoken with. There's a view of the company as a prof itable, sustainable adult business, and then
an option on the recovery of the youth business. And so I guess what I wonder about is how you
can't use that, the f act that you have a prof itable, sustainable, standalone Stanley brand as,
perhaps, more of an advantage in these kind of negotiations.
Micah S. Goldstein
Yes, again, I mean, I think if we were in a position where we needed to use cash, I can appreciate your
comments and understand why you would say what you say. We've got a healthy balance sheet. We
just spend all the money we need to spend to return the business -- to position the business to be
able to grow f rom here, and we really don't need to put debt on the balance sheet right now. At least
that's our perspective, and obviously, that's one that you may dif f er in your belief on.
Brad Hathaway
Okay, because I just wonder what the cost of capital would be f or inventory f inancing f or a prof itable
brand like Stanley compared to the cost of capital being implied by the current discounted share price
and whether -- I guess what we're all wondering here is, yes, you have a great balance sheet with a
lot of cash. You're also potentially at a turning point in your business. I mean, I think it sounds like
you're more optimistic now than you have been in prior quarters. So the ability to add extra value to
shareholders by taking advantage of the f act that the market is not as optimistic as you are, and
move and use kind of creative f inancing to increase your ability to take advantage there is something
that I think shareholders might be very interested in.
Micah S. Goldstein
That's good f eedback, and I appreciate it.
Glenn Charles Prillaman
Brad, this is Glenn, I wanted to thank you f or reading my optimism correctly. Thank you.
Brad Hathaway
Now switching gears kind of to the business again. I mean, obviously, it's good to hear that you're
conf ident about kind of this is where you're going to start growing f rom here. I guess what I'd love to
understand a little more is the potential to materially grow the business. I mean, what needs to
happen f or this not to grow 5%, but f or this to grow much more signif icant number? I mean, what --
is it something at Stanley, Young America, retail? What do you need to do f rom here?
Glenn Charles Prillaman
Okay, Brad, this is Glenn, and I don't know if you heard me, but yes, I am. I'm very optimistic about it
because we spent the last 3 years positioning each part of the business to get to this point. I think
what needs to happen is not magic. I mean, we have not serviced our customers well, take that, over
the last couple years because of all the change in the business. So what needs to happen is that the
change needs to end. It has. The business needs to stabilize itself . We need to become a more
predictable company f or our customer to do business with and much easier f or them to do business
with. And we are. So that should bring growth. New product, we have spent a tremendous amount of
ef f ort over the past several years bringing new product that really speaks to the part of the market
that we're targeting, that premium part of the market. It's not the ultra high end, it's certainly not the
middle part of the market, but it's the premium upper-end segment. And that new product, obviously,
needs to take hold in the marketplace. We're starting to see that. And as more new product is
brought to market and f loored and accepted by the interior design trade as well, that should bring
growth. Systems, we have to have systems that put accurate, transparent, timely inf ormation in the
hands of our salespeople, our customer care representatives and our customer. And we've invested
in that pretty much down to the level where we're just ref ining those things. And those stakeholders
have that inf ormation in their hands. That should bring a level of comf ort with the brands and growth.
So it's just stability means a lot to our customer base, and we are a stable company. And while it's
dif f icult that you have to go through this and kind of disclose everything as you go through this
transf ormation, our customer now sees f irsthand the benef its of some of the investments we've
made. And that should bring growth. So what we can't control is something at the macro level, and
that's what would prohibit growth. And that's not an excuse, it's just a statement that we can't control
things at that level. Everything we can control, we think we've got it in a much improved position, and
that should render growth.
Brad Hathaway
Okay. I mean, I guess, maybe you said this another way. I mean, most of your shareholders, I think,
are not looking f or -- to move f rom $100 million of revenue to $110 million of revenue. They're
looking f or kind of the longer term, obviously, but move back to $150 million of revenue plus. So are
there -- what -- are there any kind of bottlenecks or things that would prevent you f rom being able to
make that move or -- and what needs to happen at retail f or you to be able to make kind of that
more sizable jump back to being a kind of much more -- a much larger and more sustainable
company?
Glenn Charles Prillaman
The obvious answer, Brad, is time. Time is def initely not something that we think of being on our
side. We're as anxious as you are. I think the thing that -- one thing to remember is that we were over
a $300 million company. We're now 1/3 of that size. Most companies are probably somewhere -- at
least in our view, somewhere about 1/2 their size. And so we think that, sure, we've lost some market
share because we decided to go through this transition and kind of really reinvent our company over
the past several years, and that's cost us some market share, so we think we have some market
share to gain back. And if you want to pick $150 million as your number, I can't tell you when we're
going to get there. Do I think we're going to get there? Yes, I think the opportunity is there. But as f ar
as what has to happen, it's not any -- I don't think there's any event that I can bring to the table that
has to happen, that I can create a rally cry around. It's really been about doing what we've done and
to stabilize the business, and now telling our customer here's what we're going to do and then doing
it. It's just execution.
Brad Hathaway
Okay. If the demand and the quality of product and whatnot was there, could the company add $30
million of revenue in a year? Is that possible or is that just too rapid in terms of growth?
Glenn Charles Prillaman
That's possible. We don't have capacity constraints to grow at that pace. And as Micah said, and I
don't know of f the top of my head, do we have enough inventory to grow at that pace, obviously, we
wouldn't service customers if we grew that f ast, so that would be a nice problem to have. And again,
volume being the only issue with prof itability, if we needed a credit f acility of any type when we're
making money, that's not going to be a problem.
Operator
There are no f urther questions at this time. I would like to turn the f loor back to management f or
closing comments.
Glenn Charles Prillaman
Thank you, Rob. Thanks again f or everybody on the call. I do want to thank again our sales
representatives, our customers, our customer care department. This is the point f rom which we grow,
and we're excited about it, and we'll see you all at this week's High Point Market.
Operator
This concludes today's teleconf erence. You may disconnect your lines at this time. Thank you f or
your participation.
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