Hooker Furniture Corporation (NASDAQ: HOFT) — Form 10-Q
Reporting period: Second quarter and first half of fiscal 2021, ended August 2, 2020; comparisons are to the periods ended August 4, 2019. The company designs, markets and imports furniture and manufactures upholstered furniture domestically. (The filing identifies the registrant as Hooker Furniture Corporation.)
Key financial results
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $130.5 million | $152.2 million | $235.1 million | $287.8 million |
| Gross profit / margin | $27.0 million / 20.7% | $28.8 million / 18.9% | $45.7 million / 19.4% | $54.3 million / 18.9% |
| Operating income (loss) | $7.5 million | $5.8 million | ($37.9 million) | $8.7 million |
| Net income (loss) | $5.8 million | $4.2 million | ($29.0 million) | $6.1 million |
| Diluted EPS | $0.48 | $0.35 | ($2.46) | $0.52 |
- Q2 sales fell 14.3%; net income increased 38.8%. Gross margin rose 1.8 percentage points and operating margin improved to 5.8% from 3.8%.
- First-half sales declined 18.3%. The reported first-half operating and net losses included $44.3 million of noncash goodwill and trade-name impairments ($33.7 million net of tax), recorded in Q1.
- First-half operating cash flow was $53.2 million, versus $11.0 million in the prior-year period. Cash rose to $82.2 million from $36.0 million at fiscal year-end; inventory and receivables reductions contributed to operating cash generation. Investing used $0.3 million and financing used $6.7 million.
- At August 2, total debt was $27.2 million, all term loans; no revolver borrowings were outstanding. The company reported $25.7 million available under its revolver, with $4.3 million of standby letters of credit outstanding. Term-loan principal is due February 1, 2021. Lease liabilities totaled $39.3 million.
- Current assets were $223.4 million and current liabilities $71.0 million. Shareholders’ equity was $242.5 million, down from $274.1 million at fiscal year-end.
Material changes and operating performance
- Q2 demand rebounded from the first-quarter downturn: orders were up nearly 24% year over year, and management said August orders rose more than 50%; year-to-date orders were then up 3% year over year. These are management-reported order trends, not reported sales.
- Hooker Branded Q2 sales decreased 1.5%, while operating income rose to $6.1 million from $4.1 million. Home Meridian sales fell 18.4%, but it returned to operating income of $1.1 million. Domestic Upholstery sales fell 22.8% and was approximately break-even. All Other sales rose 1.7%.
- First-half sales declined across the three reportable segments, most sharply in Domestic Upholstery (down 28.5%). Home Meridian and Domestic Upholstery segment operating losses included impairment charges. The company recast prior-year segment disclosures after changing its segment structure.
- Adoption of ASU 2019-12 contributed an additional $5.4 million tax benefit in the first half. The company also adopted the expected-credit-loss standard; it said adoption did not materially affect the financial statements.
Outlook, commentary and risks
- Management cited strong demand since mid-May and quarter-end backlogs 35% higher than a year earlier, and expected business to improve in the second half absent another broad lockdown. It emphasized limited visibility and uncertainty; no quantified earnings or sales guidance was provided.
- Domestic plants had reopened and were operating near capacity by quarter-end. Most furloughs ended and temporary salary and board-fee reductions were rescinded. The company was rebuilding inventory and cautioned that imported-product lead times could cause out-of-stocks.
- Management expected cash to decline as inventory and receivables increased with sales, but considered liquidity sufficient. Lender discussions to refinance the credit facility were underway; management expected refinancing but warned it could be more costly or difficult if pandemic effects persisted. It also said it believed it could repay the loans and meet working-capital needs without refinancing.
- Fiscal 2021 remaining capital spending was expected at $0.5–$1.0 million after about $3 million of noncritical spending was delayed indefinitely. The company was in compliance with loan covenants at quarter-end.
- Key risks include further COVID-19 disruption, economic weakness and unemployment, customer concentration and credit losses, offshore sourcing and shipping disruptions, tariffs and currency changes, raw-material and labor costs, and the February 2021 debt maturity. A 1% increase in LIBOR was estimated to increase annual term-loan interest expense by approximately $128,000.
- The board declared a $0.16-per-share dividend payable September 30, 2020, while stating that future dividend levels would be evaluated against performance and economic conditions.
Important facts for investors to verify
- Whether the order rebound and elevated backlog converted into shipped sales, and whether demand persisted after the reported August improvement.
- Progress, terms and availability of refinancing before the February 1, 2021 term-loan maturity.
- Inventory rebuilding, receivables collection, cash conversion and the resulting liquidity needs.
- Whether segment margins recover, particularly in Domestic Upholstery, and whether further asset impairment is required.
- How pandemic developments, sourcing and shipping constraints, tariffs, and customer credit conditions affect operations and guidance.
- The ongoing sustainability of the dividend given management’s stated limited visibility.