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HH

HG Holdings, Inc. (STLY)·Q2 2017 Earnings Summary

Executive Summary

  • Net sales were $11.615M, up 3.8% sequentially vs Q1 ($11.190M) but down 3.6% YoY vs Q2 2016 ($12.053M); gross margin improved to 23.5% (from 20.0% in Q1 and 17.1% YoY), yielding breakeven operating results and net income of $0.014M .
  • Management highlighted an inflection point: inventories increased sequentially by ~$0.770M on product in transit, discounting eased, and fixed overhead absorption improved; the company remained debt-free with $5.2M in total cash (including $0.631M restricted) .
  • Guidance calls for slow revenue growth and slight profitability over the remainder of 2017 as inventory availability improves; strategic advisor engagement (Stephens Inc.) expired, but the Board continues evaluating strategic alternatives .
  • Potential late-2017 CDSOA distribution of ~$0.369M (based on 33.5% share of prelim $1.1M pool) could support modest cash generation in Q4 2017 .

What Went Well and What Went Wrong

What Went Well

  • Gross margin expanded to 23.5% on lower discounting and better fixed overhead absorption; SG&A fell to historical lows, supporting breakeven operating results .
  • Sequential sales growth for the second consecutive quarter and inventory build on in‑transit production indicate sourcing issues are beginning to ease .
  • Management tone was cautiously positive: “The business is now essentially breakeven… We remain debt free… We have sufficient cash to serve customers… which should result in continued sequential revenue growth” — Glenn Prillaman, CEO .

What Went Wrong

  • Revenue remained below targets and declined 3.6% YoY due to prior sourcing constraints; unit volumes were essentially flat sequentially with price/mix doing the work .
  • Legal and professional fees related to strategic reviews/agreements persisted ($65k in Q2; $93k YTD), though overall SG&A was controlled .
  • Working capital decreased $0.794M since year-end as inventories fell $2.0M YTD; payables rose $1.8M sequentially amid late-quarter overseas shipments (timing/flow constraints remain a near-term headwind) .

Financial Results

MetricQ2 2016Q4 2016Q1 2017Q2 2017
Net Sales ($USD Millions)$12.053 $9.802 $11.190 $11.615
Gross Profit Margin %17.1% 20.1% 20.0% 23.5%
SG&A % of Net Sales29.1% 34.2% 23.7% 23.6%
Operating Income (Loss) ($USD Millions)$(1.446) $(1.380) $(0.421) $(0.006)
Operating Margin %(12.0%) (14.1%) (3.7%) (0.1%)
Net Income ($USD Millions)$(1.392) $(0.301) $(0.416) $0.014
Net Income Margin %(11.6%) (3.1%) (3.7%) 0.1%
Diluted EPS ($)$(0.10) $(0.02) $(0.03) $0.00

KPIs (Balance Sheet and Operating Indicators):

KPI ($USD Millions)Q1 2017Q2 2017
Cash and Equivalents$3.599 $4.532
Restricted Cash$0.663 $0.631
Accounts Receivable$4.585 $4.561
Finished Goods Inventory$20.160 $20.930
Accounts Payable$3.936 $5.687
Working Capital ex Cash & Restricted Cash$18.8 (Dec‑16) → $17.7 (Q2‑17) $17.7

Notes:

  • Inventories increased ~$0.770M sequentially (Q1→Q2) due to production in transit not yet received in the domestic warehouse .
  • The company remained debt-free with no borrowings under its $6.0M revolving credit facility (max borrowings $4.0M subject to availability covenant) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue trajectoryFY 2017Expect uptick in sales as shipments from multiple vendors service backlog; increase turns and generate cash for the year .Expect to “slowly grow revenues” as inventory availability improves .Maintained (qualitatively consistent)
ProfitabilityQ2 2017 / FY 2017“Modest profits beginning with second quarter results and for the total year” ; “confident… second quarter will begin to demonstrate slight profitability” .“Expect to… demonstrate slight profitability over the remainder of 2017” .Maintained (timing reaffirmed)
CDSOA proceedsQ4 2017N/A in prior guidance.Potential ~$0.369M distribution based on prelim $1.1M pool and ~33.5% share .New information
Credit facility usage / leverageFY 2017Use facility only if needed; cash near current levels in 1H .“We remain debt free… sufficient cash to serve customers” ; no borrowings outstanding .Maintained
Strategic alternativesFY 2017Stephens, Inc. engaged (June 2016) .Engagement expired June 2017; Board continues evaluating alternatives .Process ended, evaluation continues

Earnings Call Themes & Trends

Note: No Q2 2017 earnings call transcript was located; themes reflect management commentary from the press release and 10‑Q.

TopicPrevious Mentions (Q4 2016 & Q1 2017)Current Period (Q2 2017)Trend
Supply chain / sourcingStrategic alliance capacity shortfalls at Starwood; ramp with other vendors; expect shipments to service backlog from Q2 onward . Q1: sequential sales +14% despite late backlog fulfillment; discounting elevated; inventories down $2.8M .Sourcing issues beginning to be alleviated; inventories up ~$0.770M on in‑transit production; discounting lower; absorption improved .Improving execution
Product introductionsMajority of new styles delayed at retail; aligning supply with demand . Q1: newer, more marketable product set to hit retail floors late Q2 .Newer product “began to sell late in the quarter”; initial results positive .Gaining traction
Pricing/discountingPrior heavy discounting to move older product and protect backlog .Lower discounting supported higher ASPs and margins .Normalizing
Liquidity / leverageCash $4.2M & $0.663M restricted; revolver available, intend minimal use .Debt-free; cash $5.2M incl. $0.631M restricted; positive operating cash flow YTD $0.322M .Stable
CDSOA$1.1M received in Nov 2016 .Potential ~$0.369M in Q4 2017 (prelim) .One-time tailwind
Strategic reviewStephens engaged (2016) .Engagement expired; Board continues strategic alternatives evaluation .Transitioned

Management Commentary

  • “We continue to see the signs of an inflection point in the recovery of our business with another quarter of sequential improvements in sales, gross profits and income.” — Glenn Prillaman, President & CEO .
  • “The business is now essentially breakeven despite missing desired sales growth. We remain debt free. We have sufficient cash to serve customers through inventory investments, which should result in continued sequential revenue growth.” — Glenn Prillaman .
  • “Newer, more marketable product introductions… began to sell late in the quarter… we expect to slowly grow revenues and demonstrate slight profitability over the remainder of 2017 as inventory availability improves.” — Glenn Prillaman .

Q&A Highlights

  • No Q2 2017 earnings call transcript was available; therefore Q&A highlights and any guidance clarifications from live discussion are not provided.

Estimates Context

  • Wall Street consensus estimates via S&P Global for Q2 2017 (EPS and Revenue) were unavailable at the time of retrieval, so comparisons vs estimates are not included.

Key Takeaways for Investors

  • Sequential improvement for the second quarter in a row, with gross margin up to 23.5% and net income essentially breakeven, suggests operating leverage is returning as discounting normalizes and fixed costs are absorbed at higher sales levels .
  • The supply chain recovery is tangible (inventory up on in‑transit production; newer product selling late in the quarter), positioning the company for gradual revenue growth through 2H17 .
  • SG&A discipline (historical lows) alongside margin recovery underpins the path to “slight profitability” for the remainder of 2017, per management .
  • Liquidity is adequate: debt-free with $5.2M cash and potential ~$0.369M CDSOA in Q4 2017; revolver remains undrawn, providing flexibility if needed .
  • Strategic alternatives remain on the table after the Stephens engagement expired; any corporate actions could be a catalyst alongside improved fundamentals .
  • Near-term watch items: pace of inventory receipts, discounting levels, unit volume recovery (flat sequential volumes in Q2), and timing/magnitude of CDSOA distribution .