Hooker Furniture Corporation — Q3 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended October 29, 2017; year-to-date covers 39 weeks beginning January 30, 2017. Comparisons are to the periods ended October 30, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | 39 weeks FY2018 | 39 weeks FY2017 |
|---|---|---|---|---|
| Net sales | $157.9 (+8.7%) | $145.3 | $445.1 (+10.4%) | $403.3 |
| Gross profit / margin | $34.3 / 21.7% | $30.9 / 21.3% | $95.5 / 21.5% | $86.0 / 21.3% |
| Operating income / margin | $11.2 / 7.1% | $9.9 / 6.8% | $30.1 / 6.8% | $22.2 / 5.5% |
| Net income | $7.2 | $6.5 | $19.7 | $14.3 |
| Diluted EPS | $0.61 | $0.56 | $1.69 | $1.23 |
| Net interest expense | $0.3 | $0.2 | $0.9 | $0.8 |
Q3 net income rose 11.5%; nine-month net income rose 37.9%. Consolidated gross margin improved modestly. Year-to-date operating income benefited in part from lower amortization of Home Meridian acquisition intangibles and the absence of prior-year Home Meridian acquisition costs.
Business drivers and material changes
- Upholstery revenue grew 35.8% in Q3, including one month of Shenandoah sales; Home Meridian grew 7.0%. Hooker Casegoods declined 1.3%. Year to date, Home Meridian sales increased 13.3% and Upholstery increased 16.0%.
- Home Meridian growth was driven by mega, e-commerce and alternative-channel accounts. Its year-to-date orders were up 17.3%, but its quarter-end backlog was down 14.7% year over year.
- Hooker Casegoods Q3 operating income fell to $4.0 million from $5.1 million, reflecting lower gross profit and higher selling and administrative costs. Its quarter-end backlog was up 25.1% year over year.
- Sam Moore continued to face labor-efficiency and delivery-time challenges, weighing on orders, sales and manufacturing costs. Upholstery year-to-date orders were up 7.7%, while backlog was down 4.5%.
- Homeware operations were wound down during Q2 FY2018.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first 39 weeks was $25.1 million, versus $31.3 million a year earlier. Investing used $35.9 million, principally including the Shenandoah acquisition; financing provided $3.4 million. Cash declined $7.4 million to $32.4 million.
- Cash and cash equivalents were $32.4 million at October 29, down from $39.8 million at fiscal year-end. Inventories were $83.6 million, up from $75.3 million; accounts receivable was $79.9 million, down from $92.6 million.
- Total term debt was approximately $55.2 million, including a new $12 million unsecured loan drawn to help fund the acquisition. No revolver borrowings were outstanding; $28.5 million was available, with $1.5 million of standby letters of credit outstanding.
- The new loan bears monthly adjusted LIBOR plus 1.50%, with approximately $143,000 monthly principal installments. The company reported compliance with its debt covenants and expected to remain compliant.
- Capital expenditures were $2.7 million year to date. Management expected a further $0.5–$1.0 million for the remainder of FY2018.
Acquisition, outlook and risks
- On September 29, 2017, the company acquired substantially all of Shenandoah Furniture’s assets and assumed certain liabilities for $32.7 million cash and 176,018 shares valued at $8.4 million. The preliminary purchase price was $41.0 million; fair values, including goodwill and certain acquired assets and liabilities, remained subject to finalization.
- Shenandoah contributed $3.1 million of October sales and $0.2 million of operating income, after $0.3 million of intangible amortization. The company had incurred about $0.7 million of acquisition-related costs. Management expected a nominal earnings reduction for the remainder of FY2018 and anticipated accretion beginning in FY2019; these expectations were preliminary and not assured.
- Management reported weaker retail conditions in September, partly attributed to hurricanes, followed by a rebound in October. It expected Q4 sales trends in Hooker Casegoods and Upholstery to be favorable, but lower Home Meridian orders and backlog to weigh on that segment. A later-than-usual Chinese New Year was expected to shift some shipping activity into Q1 FY2019. No specific full-year financial guidance was provided.
- Key risks include acquisition integration and failure to realize expected benefits; concentration of Shenandoah sales and receivables among a small number of customers; customer concentration more broadly; furniture-industry cyclicality and price competition; reliance on Asian sourcing, shipping and currency exposure; and floating-rate debt. A 1% LIBOR increase was estimated to raise annual term-loan interest expense by about $0.5 million.
- Shenandoah’s four properties are leased from entities in which a company employee has an ownership interest. Leases began at acquisition, generally have 48-month initial terms and renewal options; Q3 lease payments were $68,000. Shenandoah operations were excluded from the company’s FY2018 internal-control assessment scope while controls were being implemented.
- After quarter-end, the board declared a $0.14-per-share quarterly dividend, payable December 29, 2017. The Q3 dividend declared per share was $0.12, versus $0.10 a year earlier.
Important facts for investors to verify
- Final Shenandoah purchase-price allocation and working-capital adjustments, and whether integration costs, amortization and synergies match management’s expectations.
- Whether the expected FY2019 acquisition accretion is achieved, given customer concentration and the preliminary nature of the estimate.
- Home Meridian order backlog and sales trends, alongside the continued performance of Upholstery and Hooker Casegoods.
- Cash conversion and working-capital trends, covenant headroom, and sensitivity to LIBOR increases.
- Progress in integrating Shenandoah’s internal controls and the effect of its property leases and related-party relationship.