STLY

Stanley Furniture Company, Inc. (STLY)

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Stanley Furniture (STLY)

Q4 2013 Earnings Call

February 04, 2014 9:00 am ET

Executives

Micah S. Goldstein - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Secretary and Director

Glenn Charles Prillaman - Chief Executive Officer, President and Director

Analysts

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Greetings, and welcome to the Stanley Furniture Fourth Quarter and Total Year Operating Results Call for 2013. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Micah Goldstein, Chief Operating and Financial Officer for Stanley Furniture. Thank you, Mr. Goldstein, you may begin.

Micah S. Goldstein

Thank you, Kevin. Good morning, everyone. Glenn and I appreciate you taking the time to join us.

During the call this morning, we may make forward-looking statements that are subject to risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from expectations is contained in our SEC filings and the press release announcing these 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 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 fourth quarter results and then the full year results, and then I'll turn the call over to Glenn.

Net sales for the quarter decreased to $22.7 million. Gross margin decreased compared to the prior-year 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 follow-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 shift away from the Stanley brand. We're also being impacted by inflation on both brands, labor increases from 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 from 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 fairly stated. We also had lower sales, higher promotions and the same unfavorable mix that got us on a year-over-year basis.

SG&A for the quarter included $238,000 of restructuring related to the final relocation expenses from our corporate office and showroom consolidation. Amortization and support of our new enterprise solution along with favorable bad debt adjustments in the fourth 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 for the quarter, net of restructuring, was $3.7 million, also equals our cash loss for the quarter.

Switching to results for the full year. Net sales fell 1.6% to $97 million and the mix of sales were 60-40 in favor of our Stanley product line. Gross profits slipped from 12.4% in 2012 to 10.1% in 2013. Contributing to this decline was higher promotional spending during the year, inflation on sourced products early in the year and our decision to delay pricing action until after go live of our new enterprise system midyear and higher prices for raw materials used in our domestic operation. While we didn't feel 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 for the full year of '13 were $20 million, which included $770,000 of restructuring related to the corporate office move. This full year number also includes $350,000 for amortization related to our new enterprise solution. Other increases for the full year include the marketing expenses related to a full 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 fixed component of these expenses.

Our balance sheet remains healthy and we remain debt free and our final year of transformation we invested in our office and showroom consolidation, a new enterprise solution and some minor spending in Robbinsville.

Inventories increased in Q4 but came down slightly for 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 successfully using extended payment terms to place new products and that will likely continue in 2014.

A few other brief points of interest before I turn the call over to Glenn. First, we expect to file our 10-K later this week, which will have the latest information on the CDSOA litigation. Second, we have approximately $1.5 million of capital expenses planned for 2014. These expenses will occur mostly in the back half of the year. Third, we're expecting depreciation and amortization to be about $2.5 million for the full year of 2014, $1.9 million for depreciation and about $600,000 for amortization. And last, we expect the interest expense related to our legacy deferred 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.

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