Hooker Furniture Corporation — Q2 FY2018 Form 10-Q
Reporting period: The unaudited quarter (13 weeks) and first half (26 weeks) ended July 30, 2017, compared with periods ended July 31, 2016. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Net sales | $156.3 | $136.2 | $287.2 | $258.0 |
| Gross profit | $33.1 | $28.5 | $61.3 | $55.1 |
| Gross margin | 21.2% | 20.9% | 21.3% | 21.3% |
| Operating income | $11.8 | $8.2 | $18.9 | $12.2 |
| Operating margin | 7.5% | 6.0% | 6.6% | 4.7% |
| Net income | $7.8 | $5.3 | $12.5 | $7.8 |
| Diluted EPS | $0.67 | $0.46 | $1.08 | $0.68 |
- Q2 sales rose 14.8%; net income increased 45.4%. First-half sales rose 11.3% and net income increased 59.6%.
- First-half operating cash flow was $13.9 versus $24.1 in the prior-year period. The decrease reflected working-capital movements, including inventory growth and lower payables; receivables provided a cash source.
- Cash increased to $45.8 at July 30 from $39.8 at fiscal year-end. Operating, investing and financing activities resulted in a $6.0 cash increase. Capital expenditures were $1.7 and dividends paid were $2.8 in the first half.
- Term debt totaled approximately $44.7, including $5.8 current and $38.9 long-term, down from approximately $47.6 at January 29. No revolver borrowings were outstanding; $28.5 of revolving capacity remained available after $1.5 of letters of credit.
- Total current assets were $207.5 and current liabilities $50.8 at July 30. The company reported total liabilities of $104.5 and shareholders’ equity of $208.3.
Changes and operating drivers
- Home Meridian accounted for 61.7% of Q2 sales and led growth: sales increased 20.0% for the quarter and 17.0% for the first half, driven mainly by mega, e-commerce and alternate-channel customers. Q2 segment operating margin improved to 5.4% from 2.9%.
- Upholstery sales increased 12.7% in Q2 and 6.7% in the first half. Hooker Upholstery benefited from improved product availability after a prior-year supplier quality issue; Bradington-Young grew sales of higher-priced motion products. Sam Moore continued to face labor-efficiency and delivery-time challenges.
- Hooker Casegoods sales increased 3.9% in Q2 and 1.8% in the first half, but Q2 operating margin declined to 11.5% from 12.9%. Management cited sluggish traditional-channel retail conditions.
- Consolidated Q2 gross margin improved, primarily from Home Meridian and Upholstery. First-half gross margin was unchanged year over year. Lower acquisition-related amortization and the absence of about $1.0 of prior-year Home Meridian acquisition costs also supported operating income.
- Homeware operations were wound down during Q2. Home Meridian’s Q2 average selling price declined 11.0%, primarily from customer mix; consolidated unit volume rose while average selling prices fell.
Outlook, risks and notable items
- Management cited strong orders and backlogs across segments and expressed optimism about the fall selling season and second half. It also flagged slower retail business and lower housing starts. No quantitative full-year earnings or revenue guidance was provided.
- On September 6, 2017, after quarter-end, Hooker agreed to acquire Shenandoah Furniture for $40.0: $32.0 cash and $8.0 in newly issued shares. About $12.0 of the cash consideration was expected to be funded with additional bank debt. The deal remained subject to closing conditions, including third-party consents. Management expected a close in Q3 FY2018, a nominal earnings reduction in the remainder of FY2018, and accretion in FY2019; these are estimates, not assurances.
- The company said existing cash, operating cash flow and credit availability should fund expected needs, including debt service and the proposed acquisition. It was in compliance with loan covenants at quarter-end and expected continued compliance.
- Key exposures include customer concentration, furniture-industry cyclicality and weak discretionary demand, offshore sourcing and freight or tariff disruptions, competition, domestic manufacturing costs, floating-rate debt, raw-material prices, currency movements and pension obligations. A 1% LIBOR increase was estimated to raise annual term-loan interest expense by about $0.416.
- The board declared a $0.12-per-share quarterly dividend on August 29, payable September 29, 2017. Controls and procedures were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Home Meridian’s sales growth can sustain improved margins, given its large share of revenue and lower-margin channel mix.
- Whether first-half operating cash flow weakness and inventory growth reverse as sales convert to cash.
- Shenandoah’s closing, financing, integration costs, customer retention and actual earnings contribution versus management’s estimates.
- Sam Moore’s labor and delivery issues, and the durability of improvements in Upholstery performance.
- Debt covenant headroom and exposure to changing LIBOR rates, especially if acquisition financing increases borrowings.