Hooker Furniture Corporation — Q2 FY2022 Form 10-Q
Reporting period: Thirteen weeks ended August 1, 2021; first half was the twenty-six weeks ended the same date. Comparatives are the corresponding periods ended August 2, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Hooker designs, markets and imports casegoods and upholstered furniture, and manufactures custom upholstery domestically. Its reportable segments are Hooker Branded, Home Meridian and Domestic Upholstery, alongside All Other.
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $162.5 | $130.5 | $325.4 | $235.1 |
| Gross profit / margin | $31.7 / 19.5% | $27.0 / 20.7% | $65.3 / 20.1% | $45.7 / 19.4% |
| Operating income (loss) / margin | $9.7 / 5.9% | $7.5 / 5.8% | $21.9 / 6.7% | $(37.9) / (16.1)% |
| Net income (loss) | $7.5 | $5.8 | $16.9 | $(29.0) |
| Diluted EPS | $0.62 | $0.48 | $1.40 | $(2.46) |
Q2 sales rose 24.5%; first-half sales rose 38.4%. Q2 gross margin declined 1.2 percentage points, principally reflecting freight and other cost pressure, while first-half margin increased 0.7 points. First-half prior-year losses included $44.3 million of non-cash goodwill and trade-name impairment charges.
Cash flow, debt and liquidity
- First-half operating cash flow was $(20.2) million, versus $53.2 million provided in the prior-year period. Inventory growth used $33.4 million of cash and receivables growth used $14.7 million.
- Cash declined $28.4 million from fiscal year-end to $37.4 million. Capital expenditures were $3.5 million and cash dividends paid were $4.3 million during the first half.
- No revolving-credit borrowings were outstanding at August 1, 2021. The $35 million facility had $28.7 million available; $6.3 million of letters of credit were outstanding. The company reported compliance with its financial covenants.
- Total liabilities were $97.6 million, including $27.7 million of operating lease liabilities. The company had about $51 million of estimated future minimum commitments for two leases not yet commenced.
- Current assets were $247.1 million and current liabilities were $64.9 million. Management said available resources were sufficient for operations, expected capital spending and dividends through FY2022 and the foreseeable future.
Material changes and segment trends
- Hooker Branded: Q2 sales increased 28.6%; operating income was $8.9 million. Higher demand, lower discounting and price increases supported results, though freight and product inflation remained pressures.
- Home Meridian: Q2 sales increased 22.7%, but gross margin fell to 11.0% from 14.8%, with freight costs reducing margin by about 550 basis points. Operating income was only $43,000; some e-commerce, club and hospitality businesses were weaker.
- Domestic Upholstery: Q2 sales increased 28.7% and operating income was $457,000. Production recovered from prior-year COVID shutdowns, but labor, materials and transport constraints continued.
- All Other: Q2 sales declined 10.1%, mainly as senior-living customers reduced spending; the segment remained profitable.
- Unshipped order backlog reached $320.4 million, up 29% from January 31, 2021 and 97% from August 2, 2020. Management cautioned that supply constraints and longer delivery schedules were delaying conversion of orders into shipments.
Outlook, risks and unusual items
Management expects second-half net sales and income to be adversely affected by supply-side constraints, particularly at Home Meridian. It cited shipping-container and vessel shortages, high freight and transit costs, raw-material inflation, labor constraints, and temporary factory closures in Vietnam and Malaysia associated with the Delta variant. Management said freight rates are not expected to return to pre-pandemic levels soon and that price increases may lag supplier and logistics cost increases by up to 90 days.
Longer term, management sees support from housing activity and favorable household-formation demographics, while expecting demand to moderate from extraordinary pandemic-era levels but remain above pre-pandemic levels. This is qualitative outlook, not numerical earnings or sales guidance. Planned investments include about $4 million of remaining FY2022 capital spending, including the Georgia distribution facility and ERP work; the overall ERP project is expected to cost about $5.5 million.
Other material risks include COVID-19 and future variants, reliance on offshore sourcing, tariffs (including the stated 25% U.S. tariff on certain China imports), customer concentration and collections, product quality, domestic manufacturing capacity, information-system and cybersecurity risks, and consumer demand and competition. The board declared a $0.18-per-share dividend payable September 30, 2021.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue on expected schedules, especially for Home Meridian.
- Whether freight, raw-material and labor cost increases continue to outpace pricing actions and pressure margins.
- Inventory levels, operating cash flow and working-capital needs as the company fulfills its elevated backlog.
- Progress, cost and timing of the Georgia warehouse and ERP implementation, including the uncommenced lease commitments.
- Exposure to major customers, offshore suppliers, tariffs and COVID-related disruptions, and continued compliance with credit-facility covenants.