Business Context and Reporting Period
Hooker Furniture Corporation’s unaudited fiscal 2019 first quarter covered the 13 weeks ended April 29, 2018; comparisons are with the 13 weeks ended April 30, 2017. The company designs, markets and imports home furnishings and manufactures custom upholstered furniture. Shenandoah was acquired in September 2017, so its results are included in the current period but not the prior-year comparison.
Financial Performance and Liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $142.9 million | $130.9 million | +9.2% |
| Gross profit / margin | $32.0 million / 22.4% | $28.1 million / 21.5% | Margin +0.9 percentage points |
| Operating income / margin | $9.4 million / 6.6% | $7.2 million / 5.5% | +29.6% |
| Net income | $7.2 million | $4.7 million | +50.7% |
| Diluted EPS | $0.61 | $0.41 | +$0.20 |
| Operating cash flow | $28.6 million | $17.8 million | +$10.7 million |
Cash and equivalents were $46.6 million at quarter-end, up from $30.9 million at January 28, 2018. Operating cash flow benefited in part from a $20.6 million cash contribution from accounts receivable. Capital expenditures were $0.4 million. The company paid $1.6 million in dividends and $11.9 million toward debt, including an unscheduled $10 million payment.
Term loans totaled approximately $41.4 million at April 29, 2018, down from $53.3 million at fiscal year-end; there were no revolving-credit borrowings and $28.5 million of revolving capacity was available. The company reported compliance with loan covenants. Current assets were $211.1 million and current liabilities $59.9 million.
Material Changes and Segment Results
- Hooker Branded sales rose 14.1% to $42.8 million; operating income increased to $6.7 million from $5.0 million. Management cited stronger orders and shipments, good inventory availability and improved upholstery performance.
- Home Meridian sales declined 4.2% to $70.6 million and the segment recorded an operating loss of $0.3 million, versus $0.8 million of operating income a year earlier. Slower post-Chinese New Year supplier restarts and shipping delays affected sales; year-to-date orders and backlog were up more than 19% and 16%, respectively.
- All Other sales increased 49.9% to $29.5 million, largely reflecting Shenandoah, and operating income rose to $2.9 million from $1.4 million. Shenandoah’s contribution makes this comparison less like-for-like.
- Upholstery sales increased to 37% of consolidated sales from 32%; casegoods sales were nearly flat. Consolidated unit volume fell 4.1%, while average selling price increased 5.8%.
Interest expense rose 52.2% to $0.4 million, reflecting higher rates on variable-rate loans and Shenandoah acquisition debt. The effective tax rate declined to 20.5% from 33.0%, primarily due to the Tax Cuts and Jobs Act.
Outlook, Risks and Unusual Items
Management described first-quarter retail activity as uneven, but said incoming orders generally exceeded shipments, economic trends were favorable and the company entered the second quarter with momentum. It expects improved Home Meridian sales in the second and third quarters and believes its diverse businesses position it to outperform the industry. The filing provides no specific full-year revenue or earnings guidance. Management said available resources should meet fiscal 2019 needs and expected capital expenditures of $7–9 million for the remainder of the year, including about $5 million for Bradington-Young facility expansion.
Two Virginia warehouses were damaged by torrential rains on May 18, 2018. The company expected a $0.5 million casualty loss in fiscal Q2, representing its insurance deductible; it expected covered costs above the deductible to be reimbursed and reported only nominal shipping disruption.
Key risks include customer and receivable concentration, reliance on Asian sourcing and shipping, tariffs and currency movements, raw-material inflation, furniture-industry cyclicality, acquisition integration and debt service, variable interest rates, and domestic labor and operating costs. A 1 percentage-point increase in LIBOR was estimated to raise annual term-loan interest expense by approximately $376,000. The company reported effective disclosure controls; integration of Shenandoah’s internal controls was still in progress.
Other notable items: about $1 million of life-insurance proceeds benefited current-quarter results, and lower bad-debt expense reflected the absence of a prior-year customer balance write-off. The company adopted Topic 606 using the modified retrospective method, recording a $0.21 million after-tax retained-earnings adjustment; management said the effect on revenue timing was otherwise immaterial. It also adopted guidance resulting in a $0.11 million reclassification from accumulated other comprehensive income to retained earnings.
Important Facts for Investors to Verify
- How much of sales and earnings growth reflects Shenandoah acquisition contributions versus organic performance.
- Whether Home Meridian’s higher orders and backlog convert into shipments and a return to operating profitability.
- Whether higher upholstery raw-material costs can continue to be offset by pricing and productivity.
- Debt balances, variable-rate exposure, covenant headroom and the expected benefit of the $10 million prepayment.
- Final warehouse repair costs, insurance recovery and any operational impact from the May casualty loss.