Hooker Furnishings Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended July 31, 2022 (13 and 26 weeks, respectively). The comparable periods ended August 1, 2021. Dollar amounts below are in millions unless stated otherwise. The company designs, markets and imports furniture and also manufactures upholstered and outdoor furniture domestically.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $152.9 | $162.5 | $300.2 | $325.4 |
| Gross profit / margin | $31.1 / 20.3% | $31.7 / 19.5% | $60.5 / 20.2% | $65.3 / 20.1% |
| Operating income / margin | $7.3 / 4.8% | $9.7 / 5.9% | $11.2 / 3.7% | $21.9 / 6.7% |
| Net income | $5.5 | $7.5 | $8.7 | $16.9 |
| Diluted EPS | $0.46 | $0.62 | $0.73 | $1.40 |
Quarterly revenue declined 5.9%; first-half revenue fell 7.7%. Despite lower gross profit, Q2 gross margin rose 0.8 percentage points, while first-half gross margin was nearly unchanged. Selling and administrative expense increased to 15.0% of quarterly sales from 13.2% and to 15.8% from 13.0% for the first half. Interest expense was $0.1 million in the first half, versus $0.05 million a year earlier.
Segment developments: Home Meridian sales fell 32.4% in Q2 and it recorded a $1.0 million operating loss, reflecting retailer inventory reductions, the exit from its unprofitable Clubs channel, lower e-commerce sales, quality-related costs and Georgia warehouse transition costs. Domestic Upholstery sales rose 62.0%, including Sunset West, and operating income was $1.7 million; higher raw-material costs weighed on its quarterly margin. Hooker Branded sales rose 5.8% in Q2, but operating income fell to $6.1 million amid freight, product, warehousing and labor costs. All Other sales increased as H Contract recovered.
Cash flow, balance sheet and capital
- Operating cash flow was negative $48.5 million in the first half, compared with negative $20.2 million a year earlier. Investing cash flow was negative $28.3 million, including $25.9 million for acquisitions; financing provided $19.0 million.
- Cash fell to $11.7 million at July 31 from $69.4 million at fiscal year-end. Management attributed the decrease principally to a $56.1 million increase in inventory. Inventory was $131.1 million, up $56.1 million from year-end; receivables were $81.7 million.
- Total assets were $412.6 million and shareholders’ equity was $264.8 million. Debt was approximately $25.0 million, comprising $18 million secured and $7 million unsecured term loans; no revolver borrowings were outstanding at quarter-end. The company reported $27.9 million available on its $35 million revolver, alongside $7.1 million of standby letters of credit.
- Term loans mature in July 2027 and bear floating BSBY-based interest. The secured loan is interest-only until maturity; the unsecured loan requires monthly principal payments. A 1 percentage-point increase in BSBY would add approximately $244,000 in annual term-loan interest expense.
- First-half dividends paid were $4.8 million. The board declared another $0.20-per-share dividend for payment September 30, 2022. The company repurchased 68,409 shares in Q2 for approximately $1.1 million at an average $16.59 per share; through September 7 it had repurchased 362,000 shares for $5.9 million under a $20 million authorization.
Acquisition, outlook and risks
Hooker acquired substantially all Sunset West assets on January 31, 2022. Preliminary purchase consideration was $26.7 million, including cash, escrow and an earn-out fair value; the allocation included $15.1 million goodwill and $11.5 million of identifiable intangible assets. Sunset West contributed $6.9 million of Q2 sales and $0.15 million operating income, net of related amortization. Purchase accounting remains preliminary, subject to final working-capital adjustments and other contingencies.
Management said supplier production improved substantially in Q2 after COVID-related Asian factory disruptions, helping the company exceed its internal expectations. It expects fall and holiday activity to be closer to pre-pandemic ordering patterns and, based on backlog and inventory, expects sales in all three segments to increase in the second half versus the prior fiscal year. This is qualitative outlook, not numerical guidance. Management cited strategic initiatives including outdoor furniture, interior-design channel expansion, hospitality and contract recovery, and Home Meridian’s planned Portfolio program. It believes available resources can support operations and dividends through fiscal 2023 and the foreseeable future.
Key uncertainties include inflation, rising interest rates and a slowing housing market; offshore sourcing, freight and supply-chain disruption; tariffs and geopolitical developments; volatile raw-material costs, including Russian Birch plywood supply; retailer inventory corrections and demand; customer concentration and collections; and acquisition integration and realization of expected benefits. The company also faces ERP implementation demands: it expects about $3 million of spending over the remainder of the year, with Sunset West rollout planned for the second half of fiscal 2023 and legacy Hooker rollout in fiscal 2024. Approximately $4 million of remaining fiscal 2023 capital expenditures was expected. Covenant limits include funded debt to EBITDA thresholds stepping down from 2.50:1 to 2.00:1, a minimum fixed-charge coverage ratio of 1.25:1, and a $15 million annual capital-expenditure limit; the company reported compliance at quarter-end.
Most important facts for investors to verify
- Whether sales, margins and earnings recover as management expects, particularly at Home Meridian, and whether retailer inventory reductions prove temporary.
- Whether inventory converts to sales and operating cash flow; first-half operating cash use was $48.5 million and cash declined substantially.
- Whether higher freight, labor and material costs, quality-related charges and warehouse transition costs continue to pressure profitability.
- Final Sunset West purchase accounting, earn-out and working-capital adjustments, integration progress, and realization of expected synergies.
- Floating-rate debt exposure, continued covenant compliance, revolver capacity, and the funding burden of ERP and showroom investments.
- Whether backlog translates into shipments: consolidated backlog was $201.4 million at July 31, down from $310.1 million at January 30 and $320.4 million a year earlier. Management cautions that backlog is not a reliable long-term sales indicator.