Hooker Furniture Corporation — Form 10-Q Summary
Business context and reporting period
Hooker designs, markets and imports casegoods and upholstered furniture, and manufactures custom upholstery in the U.S. Its businesses serve residential, hospitality and contract markets. This filing covers the 13 weeks and 26 weeks ended August 4, 2019, the company’s fiscal 2020 second quarter and first half. Comparatives are the periods ended July 29, 2018.
Financial results
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net sales | $152.2 million | $168.7 million | $287.8 million | $311.6 million |
| Gross profit / margin | $28.8 million / 18.9% | $35.6 million / 21.1% | $54.3 million / 18.9% | $67.6 million / 21.7% |
| Operating income / margin | $5.8 million / 3.8% | $11.9 million / 7.0% | $8.7 million / 3.0% | $21.2 million / 6.8% |
| Net income | $4.2 million | $8.7 million | $6.1 million | $15.9 million |
| Diluted EPS | $0.35 | $0.74 | $0.52 | $1.34 |
For the first half, operating cash flow was $11.0 million, investing cash outflow $2.7 million and financing cash outflow $6.5 million. Cash increased $1.9 million to $13.3 million. Capital expenditures were $3.7 million; the company paid $3.5 million in dividends and $2.9 million toward long-term debt.
At August 4, 2019, total assets were $400.6 million and shareholders’ equity was $267.1 million. Term loans totaled approximately $32.6 million; there were no revolver borrowings, and $27.8 million was available under the revolving facility, with $2.2 million of standby letters of credit outstanding. The company reported compliance with its debt covenants. Operating lease liabilities were $43.0 million, recognized following adoption of the new lease standard.
Material changes and management commentary
- Q2 sales declined 9.7% and first-half sales declined 7.6% year over year. The Home Meridian segment drove the largest decrease: Q2 sales fell 13.7%, and first-half sales fell 9.8%.
- Home Meridian recorded an operating loss of $0.1 million in Q2 and $5.1 million for the first half, versus operating income of $5.6 million and $5.3 million, respectively, in the prior-year periods. Management cited weak demand, quality-related allowances and shipping effects, tariffs, sourcing-transition costs, and higher freight and warehousing expenses.
- Hooker Branded Q2 sales decreased 2.8%; its operating margin was 10.4%. All Other sales decreased 5.3%, but its gross profit and operating income improved year over year.
- Lower unit volumes were partly offset by higher average selling prices. Consolidated S&A expense declined in dollars but rose as a share of sales, to 14.8% in Q2 and 15.5% for the first half.
- Operating cash flow was below the prior-year first half’s $15.5 million. The company attributed cash generation in part to receivables collections, while inventory increased $8.4 million from fiscal year-end.
Outlook, risks and unusual items
Management gave no specific numerical earnings or revenue guidance. It was cautiously optimistic about the second half, expecting retail demand to improve beginning in the fall. The company expected tariff mitigation and sourcing changes to begin benefiting results in Q3 and increasingly thereafter, and planned to reduce Home Meridian’s warehouse footprint beginning late in Q3 and into fiscal 2021. It expected $1.0–$1.5 million of additional capital expenditures in the remainder of fiscal 2020.
Key risks include soft furniture demand, customer and receivables concentration, tariffs on China imports (including the stated 25% tariff on certain goods), challenges and lead times in shifting sourcing, product quality and returns, freight and input costs, and reliance on offshore suppliers and transportation. Management said it was working to reduce Home Meridian excess inventory over the next 90–120 days. Pension-plan termination is in process and requires regulatory approvals; the company did not expect termination costs to be material. The September 2019 quarterly dividend was declared at $0.15 per share.
Notable accounting change: adoption of ASC 842 on February 4, 2019 added $42.5 million of right-of-use assets and $43.0 million of lease liabilities; management said adoption did not materially affect reported income or cash flows. No casualty loss was recorded in Q2 FY2020, compared with $0.5 million in Q2 FY2019.
Important facts for investors to verify
- Whether Home Meridian’s sales, margins and operating performance recover as quality issues, excess inventory and sourcing transitions are addressed.
- Whether tariff mitigation, price changes and sourcing outside China offset tariff, freight and transition costs without further weakening demand.
- Whether the expected fall-season demand improvement and order/backlog trends translate into shipments and cash generation.
- Whether inventory reductions and warehouse-cost actions proceed as planned, and whether liquidity and covenant compliance remain adequate.
- The effects and costs of the pending pension-plan termination and the company’s substantial lease commitments.