HOOKER FURNISHINGS Corp quarterly report, Q1 FY2022

Business context and reporting period

Hooker Furniture Corporation’s unaudited fiscal 2022 first quarter covered the 13 weeks ended May 2, 2021; comparisons are with the 13 weeks ended May 3, 2020. The company designs, markets and imports furniture and also manufactures upholstered furniture domestically. Results rebounded from the early-pandemic downturn in the prior-year quarter.

Financial results and position

Sales rose 55.7% year over year. Hooker Branded sales increased 89.0%, Home Meridian 46.4%, and Domestic Upholstery 45.9%; All Other sales declined 12.3%. Consolidated gross margin improved 2.8 percentage points. Prior-year operating results included $44.3 million of noncash goodwill and trade-name impairment charges; the prior-year tax benefit included $10.6 million related to those impairments.

At May 2, cash was $61.6 million, down $4.2 million from January 31. Receivables were $91.3 million and inventory was $81.5 million, up $11.3 million since year-end. Current assets were $240.6 million and current liabilities $63.6 million. The company reported no revolver borrowings; $28.7 million remained available under its $35 million facility after $6.3 million of standby letters of credit. It had paid off its $24.3 million term loans in the prior quarter. Total operating lease liabilities were $34.4 million, separate from funded debt.

Cash used in investing activities was $2.3 million, including $2.2 million of capital expenditures; dividends paid were $2.1 million. The board subsequently declared a $0.18-per-share quarterly dividend, payable June 30, 2021. Diluted shares averaged 12.0 million.

Material changes, outlook and risks

Order backlog reached $280.5 million at quarter-end, up 13% from January 31 and 206% from the prior-year quarter-end. Management said backlog and orders were at historic levels, but warned that supply-chain disruption means orders are converting to shipments more slowly than before the pandemic. Backlog is not a firm sales forecast: orders may be cancelled, and the company considers it a limited-term indicator.

Management was cautiously optimistic about demand, citing housing conditions and home-furnishing interest, while expecting extraordinary demand to ease but remain above pre-pandemic levels. No specific full-year revenue or earnings guidance was provided. Management expected logistics constraints to persist at least into the second half of fiscal 2022, and said ocean freight rates were not expected to return to pre-pandemic levels soon. Freight, raw-material and supplier cost increases may outpace customer surcharges and price increases.

Domestic Upholstery faced foam and other material shortages, inflation and production inefficiencies. Home Meridian was especially exposed to higher freight costs and spot-market container rates; hospitality activity remained weak. H Contract, whose business is concentrated in senior living, had not fully recovered from the pandemic. The company expects to use cash to build inventory to meet demand.

Management expected approximately $5 million of capital expenditures over the remainder of fiscal 2022. This includes about $3 million to outfit a Savannah-area warehouse expected to open in fall 2021, consolidating older facilities. A separate, not-yet-commenced warehouse lease carries approximately $28 million of estimated future minimum rental commitments over an initial 10-year term. The ERP upgrade is expected to cost approximately $5.5 million in total, with implementation phased across segments. The company said it had adequate resources for operations, expected capital needs and dividends, and was compliant with its credit covenants.

Key risks include shipping-container and vessel availability, offshore supplier capacity, freight and raw-material inflation, tariffs and sourcing transitions, customer concentration and collections, execution of the new warehouse and ERP projects, and the continuing effects of COVID-19. The company also cited possible demand normalization and competition for consumer spending. Prior-period impairment charges were unusual and noncash.

Important facts for investors to verify

• Whether large backlogs convert into shipments and revenue on schedule, given logistics bottlenecks, customer scheduling and cancellation risk.
• Whether freight surcharges and price increases offset rising freight, supplier and domestic raw-material costs without materially weakening demand or margins.
• Whether inventory growth supports fulfillment or creates working-capital, obsolescence or cash-flow pressure; operating cash flow was only $0.2 million this quarter.
• Progress, cost and expected savings from the Savannah warehouse and ERP implementation, including the warehouse lease commitment.
• Whether demand in hospitality and senior living recovers, and whether customer concentration, covenant compliance and dividend capacity remain manageable.