by MARTINSVILLE, Va. — Rising inventory levels have been a key issue for the industry of late, particularly for retailers that have more than they can handle just as product continues to arrive from overseas on orders placed many months ago.
But from Hooker Furnishings’ perspective, the onslaught in inventory appears to be a good thing, especially when you compare it to the reduced inventory levels that impacted sales in its first quarter.
“The Asian factory shutdown and lengthy ramp up reduced the inventory available for direct shipment to customers and reduced our ability to replenish warehouse inventories, which became depleted as the shutdown wore on,” CEO Jeremy Hoff said during a conference call Thursday with analysts discussing the company’s latest earnings results.
Hoff was referring to the Covid-related shutdowns in Vietnam and Malaysia, which impacted many factories’ ability to ship in the third and fourth quarter even as they ramping up production. Now with the Covid shutdowns almost a year in the past, factories have once again gotten back closer to full production with some even expanding their facilities to boost capacity.
As with any type of expansion, there’s a certain amount of risk involved, whether it be a plant expansion or the addition of a warehouse such as the massive 800,000-square-foot distribution facility in Savannah, Georgia, that Hooker opened late last year.
The company’s warehouse facilities will house what the company described as a record amount of inventory in transit now — estimated at $40 million, according to company Chief Financial Officer Paul Huckfeldt. Including the $40 million, inventories were estimated at about $107.7 million at the end of the first quarter in early May.
With a high percentage of the inventory in transit being sold, Huckfeldt noted that “we expect to convert as much of the inventory to shipments fairly quickly.” Which in turn, will help improve cash balances that stood at $10.1 million at the end of the first quarter, down $59.3 million from its cash balance at year end fiscal 2022. The difference resulted from a $30 million investment in inventory and its $26 million acquisition of outdoor furniture resource Sunset West.
While demand has softened to some extent — including order cancellations on the Home Meridian side of the business — Hoff noted that most of that is on orders planned much further out. This is, indeed, a sign that many retailers don’t see the massive demand during the pandemic continuing at that pace moving forward.
Nor does Hooker. As Hoff noted during the call, “We are seeing a leveling off of demand with incoming orders down from the meteoric but unsustainable levels we experienced in the last 18 months. Order rates are stabilizing at or about fiscal 2020 levels for most divisions.”
Still, while he noted the company continues to watch inflationary pressures that are having an impact on consumer spending especially at the lower vs. the upper middle price points, he remained optimistic about the company’s prospects.
“Backlogs at all divisions remain sizeable and sufficient to support of sales targets for coming quarters,” Hoff said. “Once we receive all the inventory in transit, we expect to be in a near-optimum shipping position through the second quarter and will begin to feel the full benefit of Asian production levels being at 100% capacity.”
He added that the company also remains optimistic about the housing market, including having two of the largest generational groups in prime household formation and furniture purchasing years.
Thus, it appears the company’s investment in its new Savannah warehouse and inventory ultimately will pay off as the company will have inventory to support its customers both over the short and long term.
“Our variable cost business model will allow us to adjust to changing economic conditions, and we continue to focus on multiple strategic initiatives to spur organic growth and increase market share,” Hoff said.
