Business context and reporting period
Hooker Furniture Corporation (NASDAQ: HOFT) designs, imports and manufactures residential, hospitality and contract furniture. Its reportable segments are Hooker Branded, Home Meridian and Domestic Upholstery; other activities are reported as All Other.
This Form 10-K covers fiscal 2021, the 52 weeks ended January 31, 2021, compared primarily with the 52 weeks ended February 2, 2020. The filing also reports fourth-quarter results; fiscal Q4 2021 was not a separate 10-K reporting period.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $540.1 million | $610.8 million |
| Gross profit / margin | $112.7 million / 20.9% | $114.0 million / 18.7% |
| Operating income (loss) | $(14.4) million | $22.7 million |
| Net income (loss) | $(10.4) million | $17.1 million |
| Diluted EPS | $(0.88) | $1.44 |
| Cash from operating activities | $68.3 million | $41.4 million |
Sales fell 11.6%. Gross margin increased 2.2 percentage points, while the operating loss primarily reflected $44.3 million of non-cash goodwill and trade-name impairment charges. Excluding the impairment charges, segment operating performance still differed materially: Hooker Branded reported $22.8 million operating income; Home Meridian reported a $26.1 million operating loss, including impairment; Domestic Upholstery reported a $12.4 million operating loss, including impairment; and All Other reported $1.3 million operating income.
Fiscal Q4 net sales were $155.3 million and net income was $8.5 million, or $0.71 diluted EPS, versus $164.9 million, $7.0 million and $0.59, respectively, in fiscal Q4 2020.
Liquidity, debt and capital
- Year-end cash was $65.8 million, up from $36.0 million; working capital was $169.6 million.
- The company generated $68.3 million in operating cash flow and used $38.0 million in financing activities, including $30.1 million to repay term loans and $7.8 million for dividends.
- No term-loan or revolver borrowings were outstanding at year-end. The $35 million revolver had $28.7 million available after $6.3 million of letters of credit. Operating lease liabilities totaled $36.1 million.
- FY2021 capital expenditures were $1.2 million. Management expected approximately $7 million of FY2022 capital expenditures, including Georgia warehouse outfitting and ERP implementation.
- Dividends were $0.66 per share for FY2021; the board declared a subsequent $0.18-per-share quarterly dividend.
Material changes versus the prior comparable period
- COVID-19 drove a sharp early-year decline in orders and sales, followed by recovering and then unusually strong demand. Approximately 75% of the year-over-year sales decline occurred in the first half.
- Home Meridian sales fell 17.1% and Domestic Upholstery sales fell 12.5%; Hooker Branded sales were essentially flat. Hospitality weakness, order cancellations, factory interruptions and limited shipping capacity affected results.
- Consolidated gross margin rose despite lower sales, aided in part by lower tariff-related costs and fewer quality and warehousing costs at Home Meridian. Freight costs, volume and domestic production inefficiencies remained pressures.
- Unshipped order backlog rose 118% to $248.1 million, or 23.9 weeks, from $113.8 million, or 9.7 weeks. Management cautioned that supply constraints delayed conversion of orders to shipments and that some orders are cancellable.
- The company paid off its term loans in January 2021. Cash increased, while inventory fell to $70.2 million from $92.8 million, partly reflecting supply disruptions and the demand shock.
Outlook, commentary and key risks
Management described its FY2022 outlook as positive, citing strong demand, higher incoming orders and a robust housing market. Its near-term priority was fulfilling the record backlog and sustaining the improved profitability achieved in the second half of FY2021. The filing gives no quantified revenue or earnings guidance.
Management identified global manufacturing, container and vessel capacity constraints and a domestic upholstery foam shortage as significant, expected-to-be-temporary headwinds; timing of logistics improvement was uncertain. The company anticipated cash could decline as it rebuilt inventory. It was consolidating Home Meridian East Coast warehouses into a leased 800,000-square-foot Georgia facility, then expected to open in fall 2021, and had begun a multi-year common ERP upgrade.
- COVID-19 effects, consumer demand and the risk that high backlog may not convert to shipments on schedule.
- Concentration in offshore sourcing: Vietnam and China accounted for 91% of import purchases; the top five suppliers in those countries accounted for 45% of import purchases. A 25% U.S. tariff on certain China-origin furniture and components remained in effect.
- Freight, raw-material and labor cost inflation, including foam allocations reported at 60–75% of requested amounts for domestic upholstery.
- Customer concentration: one customer represented about 12% of sales; the top five represented about 30% of sales and approximately half of receivables.
- Execution risks and costs for the Georgia warehouse move and ERP implementation; the new Georgia lease carried approximately $28 million of estimated minimum commitments once commenced.
- Goodwill and intangible impairment valuations depend on subjective forecasts and assumptions; further impairment could be possible if conditions deteriorate.
The company reported no material pending legal proceedings. Management and the auditor concluded internal control over financial reporting was effective at year-end; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the record backlog converts to revenue, and how much is delayed or cancelled.
- Whether freight, container, supplier-capacity and foam constraints ease, and the effect on gross margins and fulfillment.
- Home Meridian and Domestic Upholstery operating performance apart from the reported impairment charges.
- Customer receivable collectability and continued exposure to major customers and offshore suppliers.
- Georgia warehouse and ERP implementation timing, costs and realized efficiencies.
- Assumptions underlying impairment tests, liquidity needs as inventory rebuilds, and the sustainability of dividends.