Hooker Furnishings Corporation — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 1, 2022 (the company’s fiscal 2023 first quarter), compared with the thirteen weeks ended May 2, 2021. Amounts below are in millions unless stated otherwise.
Business context and results
Hooker designs, markets and imports furniture and manufactures upholstered and outdoor furniture. The quarter included Sunset West, acquired on January 31, 2022; its results are included in Domestic Upholstery. Management said results were below the prior-year quarter but better than expected given operating conditions.
| Metric | Q1 fiscal 2023 | Q1 fiscal 2022 |
|---|---|---|
| Net sales | $147.3 | $162.9 |
| Gross profit / margin | $29.5 / 20.0% | $33.6 / 20.6% |
| Operating income / margin | $3.9 / 2.7% | $12.2 / 7.5% |
| Net income | $3.2 | $9.4 |
| Diluted EPS | $0.26 | $0.78 |
| Operating cash flow | $(30.0) | $0.2 |
Financial position, liquidity and cash flow
- Cash fell to $10.1 million from $69.4 million at fiscal year-end. Operating cash use was driven principally by a $30.1 million inventory build; the company also spent $25.9 million on the acquisition and paid $2.4 million in dividends.
- Inventory rose to $107.7 million from $75.0 million, including a record approximately $40 million in transit. Receivables were $83.0 million.
- No revolver borrowings were outstanding at May 1; $27.9 million was available under the $35 million facility, with $7.1 million of letters of credit outstanding. The company subsequently drew $8 million early in Q2, repaid $4 million in mid-May and expected to repay the balance during Q2.
- Operating lease liabilities totaled $54.7 million. The filing reports no material funded debt outstanding at quarter-end apart from lease obligations and revolver letters of credit.
- Management was pursuing a $25 million term loan to replenish acquisition cash; closing was expected within 30–60 days of the report, but was not assured and was not considered necessary for current working capital needs.
Material changes and segment performance
- Consolidated sales declined 9.5%, operating income fell 68.0%, and net income declined 66.3% year over year. Cost of sales rose to 80.0% of sales from 79.4%, while selling and administrative expenses increased to 16.7% of sales from 12.7%.
- Hooker Branded: Sales fell 17.7% to $42.2 million, mainly from inventory unavailability. Operating income was $4.1 million versus $9.4 million.
- Home Meridian: Sales fell 26.4% to $62.1 million; the segment recorded a $3.1 million operating loss versus $0.9 million operating income. Contributing factors included supply constraints, reduced e-commerce demand, exit from the unprofitable Clubs channel, and Georgia warehouse transition costs.
- Domestic Upholstery: Sales increased 62.2% to $41.2 million, including Sunset West. Operating income was $2.8 million versus $1.7 million. The filing attributes growth to acquired sales and organic gains at existing divisions.
- Consolidated backlog was $282.6 million, down 8.9% from fiscal year-end and up 0.8% from the prior-year quarter-end. Management cautioned that supply-chain disruption and cancellation practices limit backlog’s usefulness as a longer-term sales indicator.
Outlook, risks and unusual items
- Management said demand was leveling off from unusually high post-pandemic levels. It expected improved shipment availability in Q2 as Asian production recovered and inventory in transit reached warehouses; it expected cash balances to begin improving by the end of Q2 as inventory shipped and customers paid.
- Key headwinds include elevated ocean freight and logistics costs, port and vessel constraints, raw-material inflation and shortages, domestic labor and transportation constraints, and inflation and higher interest rates. The company cited Russian Birch plywood supply disruption related to the war in Ukraine and was seeking higher-cost alternatives.
- The Sunset West acquisition consideration was preliminarily valued at $26.7 million, including $23.9 million cash, $2.0 million escrow and a $0.8 million earn-out fair value. Purchase-price allocations remain subject to revision and working-capital and other post-closing adjustments. Sunset West contributed $7.9 million of sales and $0.9 million of operating income, including $0.3 million of acquired-intangible amortization.
- The company expected about $5 million of remaining fiscal 2023 capital expenditures and approximately $3 million of additional ERP implementation spending. Legacy Hooker and Sunset West ERP go-live was expected in the second half of fiscal 2023; Home Meridian follows later.
- The board declared a $0.20-per-share dividend payable June 30, 2022, and authorized up to $20 million of share repurchases on June 6, 2022. Repurchases are discretionary and subject to liquidity and loan-covenant considerations.
- Other identified risks include customer concentration, acquisition integration, ERP implementation, cyber and information-system disruption, tariffs, currency exposure, product quality and the cyclical nature of furniture demand. Management reported compliance with revolving-credit covenants and effective disclosure controls; Sunset West was excluded from the fiscal 2023 internal-control assessment under SEC guidance.
Important facts for investors to verify
- Whether record in-transit inventory converted to shipments and collections as expected, and whether operating cash flow and cash balances recovered.
- Whether the $25 million term loan closed, and the resulting borrowing costs, covenants and liquidity position.
- Whether Home Meridian returned to profitability as warehouse transition, labor and freight costs changed, and whether its backlog converted to sales.
- Final Sunset West purchase accounting, post-closing adjustments, integration progress and realization of expected benefits.
- Actual freight, raw-material and labor cost trends, and the effect of price increases and surcharges on demand and margins.