HOOKER FURNISHINGS Corp quarterly report, Q1 FY2020

Business context and reporting period

Hooker Furniture Corporation designs, markets and imports furniture and also manufactures custom upholstered furniture. This unaudited Form 10-Q covers the 13 weeks ended May 5, 2019 (fiscal 2020 first quarter), compared with the 13 weeks ended April 29, 2018. Dollar amounts below are in millions unless stated otherwise.

Key financial results

Selling and administrative expense was essentially flat at $22.0 million, but rose to 16.2% of sales from 15.4%. Interest expense was $0.3 million; the effective tax rate was 20.6%, versus 20.5%.

Cash was $28.3 million at quarter-end, up $16.8 million from fiscal year-end. Term debt was approximately $34.0 million; no revolving-credit borrowings were outstanding, and $27.7 million of revolver capacity was available. The company paid $1.5 million of term debt and $1.8 million of dividends, and spent $1.5 million on capital expenditures. It declared a $0.15-per-share quarterly dividend payable June 30, 2019.

Material changes and drivers

• Sales declined across all segments: Hooker Branded was down 7.4% to $39.6 million; Home Meridian down 4.2% to $67.6 million; and All Other down 4.2% to $28.3 million. Consolidated unit volume fell 8.7%, partly offset by a 4.9% increase in average selling price.
• Home Meridian was the largest profit pressure: gross margin fell to 8.7% from 14.8%, and the segment recorded a $5.0 million operating loss versus a $0.3 million loss a year earlier. Drivers included tariffs and freight, quality-related allowances, lower-margin sales mix, and higher warehousing costs. Quality allowances reduced its sales by $2.1 million.
• Hooker Branded remained profitable, with $5.2 million operating income and a 13.1% margin, though both sales and operating profit declined. All Other generated $2.7 million operating income, with a 9.6% margin.
• Management attributed weaker results to softer demand, higher product, freight and warehousing costs, and tariffs. A prior-year $1.0 million life-insurance gain did not recur.
• Cash-flow generation benefited from a $33.5 million reduction in receivables; inventory increased $5.6 million. Investing cash flow was a $0.2 million use, including $1.5 million of capital spending partly offset by $1.4 million from a note receivable.

Outlook, risks and unusual items

Management said order activity had shown some improvement but was inconsistent, and expected industry challenges to persist through the summer. It was more optimistic about the second half, anticipating normal or above-average demand around Labor Day and into the fall; this is management’s expectation, not formal earnings guidance. Expected remaining fiscal 2020 capital expenditures were $4.0–$4.5 million. Management said liquidity was sufficient for fiscal 2020 and the foreseeable future.

China-import tariffs increased from 10% to 25% for furniture and components shipped after May 10, 2019; the company said more than 40% of products were imported from China as of February 2019. Mitigation plans include price increases, vendor concessions and shifting sourcing to non-tariff countries. Home Meridian planned to move about 90% of its PRI production outside China by fall. Management cautioned that tariffs could disrupt the industry and affect sales and margins.

Home Meridian was improving manufacturing specifications, inspections and sourcing after quality issues; management said it believed the issue was resolved and did not believe customer relationships were irreparably harmed. The board had voted to terminate the frozen Pulaski pension plan; the approval and termination process was expected to take 18–24 months. Settlement could create earnings charges, though management did not expect them or related costs to be material.

Adoption of lease accounting on February 4, 2019 added $43.9 million of operating lease right-of-use assets and $44.0 million of lease liabilities; management reported no material effect on quarterly income or cash flow. Key risks also include weak consumer demand, customer concentration, supply-chain and shipping disruptions, foreign-exchange and interest-rate exposure, and the company’s ability to pass through costs. A 1% increase in LIBOR was estimated to increase annual term-loan interest expense by approximately $0.3 million. The company was in compliance with its loan covenants at quarter-end.

Important facts for investors to verify

• Whether Home Meridian’s quality-related allowances, margin deterioration and operating loss improve in subsequent quarters.
• Whether price increases, vendor concessions and sourcing changes offset the 25% China tariff without further volume or margin damage.
• Whether order trends and the anticipated second-half demand recovery materialize, particularly after the summer selling season.
• Whether receivables, inventory and operating cash flow remain supportive of liquidity, debt service, dividends and planned capital expenditures.
• Progress, timing and any settlement expense from the pension-plan termination, and continued compliance with debt covenants.