Business context and reporting period
Hooker Furniture Corporation’s unaudited Form 10-Q covers fiscal 2019’s third quarter (13 weeks) and first nine months (39 weeks), ended October 28, 2018. Comparisons are with periods ended October 29, 2017. The company designs, markets and imports furniture and manufactures custom upholstery domestically. Results include Shenandoah for the full current periods, versus only one month in the prior-year comparison, limiting comparability, particularly for All Other.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 FY2019 | Q3 FY2018 | First 9 months FY2019 | First 9 months FY2018 |
|---|---|---|---|---|
| Net sales | $171.5 | $157.9 | $483.0 | $445.1 |
| Gross profit / margin | $35.8 / 20.9% | $34.3 / 21.7% | $103.4 / 21.4% | $95.5 / 21.5% |
| Operating income / margin | $12.3 / 7.2% | $11.3 / 7.2% | $33.5 / 6.9% | $30.5 / 6.9% |
| Net income | $9.3 | $7.2 | $25.2 | $19.7 |
| Diluted EPS | $0.79 | $0.61 | $2.13 | $1.69 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $20.9 | $25.1 |
- Q3 sales rose 8.6%; net income increased 29.6%. Nine-month sales rose 8.5%; net income increased 27.7%.
- Lower effective tax rates—22.9% versus 35.7% in Q3 and 23.0% versus 34.9% year to date—reflect the Tax Cuts and Jobs Act, partly offset by higher state taxes. The lower tax burden contributed to earnings growth.
- Q3 gross margin declined 0.8 percentage points, mainly reflecting weaker Home Meridian and All Other margins. Operating margin was unchanged. Year-to-date gross margin was down 0.1 percentage point.
Financial position, liquidity and debt
- At October 28, cash was $29.4 million, versus $30.9 million at fiscal year-end; total assets were $360.3 million and shareholders’ equity was $250.4 million.
- Inventory increased to $100.7 million from $84.5 million at January 28. Trade receivables were $87.0 million, down from $92.5 million.
- Term debt totaled approximately $37.7 million, down from $53.3 million at fiscal year-end, following $15.7 million in debt payments, including an unscheduled $10 million prepayment. No revolver borrowings were outstanding; $28.5 million remained available, with $1.5 million of letters of credit.
- Nine-month investing cash use was $1.8 million, including $2.5 million of capital expenditures; financing cash use was $20.6 million, including debt payments and $4.9 million of dividends. Operating cash flow was lower than the prior-year period, in part alongside higher inventory and a $3 million pension-plan contribution.
- The company reported compliance with loan covenants and believes available resources are sufficient for fiscal 2019 and the foreseeable future. It expected $0.5–$1.0 million of fourth-quarter capital expenditures.
Material changes, outlook and risks
- Growth came from both reportable segments and All Other. Q3 sales rose 9.2% at Hooker Branded, 3.2% at Home Meridian and 28.7% at All Other; the latter increase primarily reflects the full-quarter inclusion of Shenandoah. Nine-month All Other sales grew 39.7% for the same comparability reason.
- Management reported consolidated orders up 19% and backlog up 17% year over year at quarter-end, with the higher backlog driven by Home Meridian. It expected strong fourth-quarter shipments and said sales growth could improve Home Meridian’s fixed-cost leverage and profitability. Management described its fourth-quarter outlook as bullish, while noting mixed macroeconomic conditions; no full-year numerical earnings or sales guidance was provided.
- U.S. tariffs of 10% on many China-origin furniture goods took effect September 24, 2018, with a possible increase to 25% in 2019. China-origin products represented approximately 40% of fiscal 2018 sales. The company raised prices on some products, sought vendor concessions, increased inventory ahead of possible tariff escalation, and pursued sourcing outside China. Management warned that inability to offset costs could materially affect sales, earnings and liquidity.
- Cost and execution pressures include freight, upholstery materials and employee medical costs. Home Meridian’s Q3 gross margin fell to 16.2% from 17.2%; All Other’s fell to 20.4% from 23.1%. Management also cited a slowing housing sector and market volatility.
- Weather damaged two Virginia warehouses; the company recorded a $0.5 million casualty loss in Q2. It incurred an additional $0.409 million of repair and remediation expense in Q3 and reported receiving reimbursement from its insurer in early December.
- A $4 million legal liability and matching insurance receivable were recorded for a lawsuit settlement expected to be paid by insurers, subject to court approval. Management expected approval in Q4 and said the settlement was not expected to adversely affect financial position or liquidity.
- The company contributed $3 million to its frozen legacy Pension Plan in Q3 as part of a de-risking strategy. It expects lease-accounting adoption in February 2019 to create a significant right-of-use asset and lease liability; the impact was still under evaluation.
- The board declared a quarterly dividend of $0.15 per share on December 6, 2018, payable December 31, an increase of 7.1% from the prior rate.
Important facts for investors to verify
- Whether tariff increases are implemented and whether price increases, vendor concessions and alternative sourcing offset their effects without weakening demand or margins.
- Whether elevated orders and backlog convert into shipments, cash flow and improved Home Meridian profitability, and whether segment margin pressure persists.
- How the rise in inventory affects working capital and cash conversion in coming periods.
- Final court approval and insurer payment for the $4 million settlement, and the accounting for the separate warehouse-repair reimbursement.
- The eventual balance-sheet impact of lease adoption and future pension funding requirements.
- Customer concentration, import and freight exposure, and the company’s ability to maintain loan-covenant compliance; a 1 percentage-point LIBOR increase was estimated to add about $343,000 in annual term-loan interest expense.