Hooker Furniture Corporation — Q1 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended April 30, 2017 (fiscal quarter began January 30, 2017). Comparisons are with the thirteen weeks ended May 1, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Revenue: Net sales were $130.9 million, up 7.4% from $121.8 million. Home Meridian sales rose 13.4% to $73.7 million; Hooker Casegoods declined 0.3% to $32.8 million, Upholstery increased 1.3% to $22.2 million, and All Other rose 6.9% to $2.2 million.
- Profit and margins: Gross profit increased 5.8% to $28.1 million, while gross margin eased to 21.5% from 21.8%. Operating income rose 77.7% to $7.1 million; operating margin improved to 5.4% from 3.3%. Net income increased 89.8% to $4.7 million, or $0.41 per diluted share, versus $2.5 million, or $0.22.
- Cash flow: Cash provided by operations was $17.8 million, versus $14.5 million. Capital expenditures were $0.9 million; dividends paid were $1.4 million and debt payments were $1.5 million. Cash increased $14.0 million to $53.8 million.
- Liquidity and debt: Current assets were $206.2 million and current liabilities $53.4 million at April 30. Term-loan carrying amounts totaled approximately $46.1 million, including current and long-term portions; management separately reported $45.8 million outstanding under term loans for interest-rate-risk purposes. No revolver borrowings were outstanding; $28.5 million was available, with $1.5 million of standby letters of credit. The company reported compliance with loan covenants.
- Dividends: Quarterly dividend declared was $0.12 per share, versus $0.10 in the comparable quarter. A further $0.12 dividend was declared June 6, payable June 30, 2017.
Material changes and management commentary
- Home Meridian drove sales growth, particularly through mega, e-commerce, and alternate-channel accounts. Its orders rose 43% and backlog 29% year over year at quarter-end. Traditional-channel sales at Hooker Casegoods and Upholstery were comparatively flat, though their order/backlog trends improved.
- Casegoods and Upholstery gross margins improved, supported by lower ocean freight costs; Upholstery also benefited from a one-time vendor price concession. Home Meridian gross margin fell to 14.9% from 16.5%, reflecting customer mix and higher sales-allowance expense. Management said excess operating costs also weighed on Home Meridian and that countermeasures had begun.
- Consolidated S&A expense declined 1.2% to $20.7 million, partly because the prior-year quarter included approximately $1.0 million of acquisition-related costs. Intangible amortization fell to $0.3 million from $1.7 million as certain acquisition-related assets had shorter amortization periods.
- The effective tax rate was 33.0%, down from 35.8%, due to a state tax credit received in the quarter. A customer balance write-off and increased compliance-related professional fees raised Home Meridian S&A expense.
Outlook, risks, and other notable matters
- Management reported positive orders and backlogs across all segments as of early June and said this supported its outlook for improved fiscal Q2 sales. It expressed optimism about longer-term growth but provided no quantified full-year earnings or revenue guidance.
- Management expects $2.0–$3.5 million in capital expenditures during the remainder of fiscal 2018 and believes available cash, operating cash flow, and credit facilities will meet anticipated needs, including debt service, dividends, and benefit-plan funding.
- Key risks include dependence on a limited number of customers, furniture-market cyclicality and price competition, imported-product sourcing and freight disruption, tariffs and currency movements, floating-rate debt, and pension funding and asset-return assumptions. A 1 percentage-point LIBOR increase was estimated to add approximately $0.43 million in annual term-loan interest expense.
- Fiscal 2018 first-quarter contributions to the legacy Pension Plan were $0.1 million; the company expected a further $0.7 million of required contributions during the fiscal year. SRIP and SERP benefit payments of approximately $0.5 million were expected from general assets during the remainder of the year.
- Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Home Meridian’s strong order and backlog growth converts to sales and improved margins, given customer-mix pressure and excess costs.
- Whether improved traditional-segment orders and backlogs translate into sustained sales growth.
- How much earnings growth reflects recurring operating improvement versus lower acquisition-related costs and amortization, a state tax credit, and the one-time vendor concession.
- Term-loan balances, floating-rate exposure, covenant headroom, and the company’s ability to fund dividends, capital spending, and pension obligations.
- Exposure to customer concentration, imported sourcing, freight and tariff changes, and any potential impact on sales volume or margins.