Hooker Furnishings Corporation — Form 10-Q
Reporting period: Fiscal second quarter and first half ended July 30, 2023, compared with periods ended July 31, 2022. Dollar amounts below are in millions unless noted.
Business context and performance
Hooker designs, markets and imports furniture and home décor, and manufactures upholstered and outdoor furniture domestically. Results reflected weak home-furnishings demand, retailers reducing excess inventories, and the exit from Home Meridian’s Accentrics Home (ACH) product line.
| Metric | Q2 FY2024 | Q2 FY2023 | First half FY2024 | First half FY2023 |
|---|---|---|---|---|
| Net sales | $97.8 | $152.9 | $219.6 | $300.2 |
| Gross profit / margin | $23.3 / 23.9% | $31.1 / 20.3% | $51.2 / 23.3% | $60.5 / 20.2% |
| Operating income / margin | $1.3 / 1.3% | $7.3 / 4.8% | $3.2 / 1.5% | $11.2 / 3.7% |
| Net income | $0.8 | $5.5 | $2.2 | $8.7 |
| Diluted EPS | $0.07 | $0.46 | $0.20 | $0.73 |
Financial position, cash flow and capital
- Cash was $50.0 million at July 30, up from $19.0 million at fiscal year-end. First-half operating cash flow was $51.4 million, versus cash used of $48.5 million a year earlier; receivables and inventory reductions were major sources of cash.
- Inventory fell to $63.4 million from $96.7 million at year-end, and was about $70 million below the year-earlier level. Management said liquidation of ACH and other excess inventory was mostly complete.
- Debt totaled $23.6 million: $18.0 million secured term debt and $5.6 million unsecured term debt. No revolver borrowings were outstanding; $27.2 million was available under the $35 million facility, with $7.8 million of letters of credit outstanding. The term loans have variable rates tied to BSBY; management estimated a 1 percentage-point rate rise would add about $0.23 million of annual interest expense.
- Cash from operations funded $8.7 million of share repurchases, $4.9 million of dividends, $4.0 million of capital expenditures, $2.6 million of ERP development and the $2.4 million BOBO acquisition. The company repurchased 473,463 shares in the first half at an average $18.29 per share; about $3.0 million remained authorized at quarter-end.
- Operating lease liabilities were $61.1 million. A warehouse footprint reduction lowered lease assets and liabilities by about $8 million; a further Georgia warehouse reduction was expected to reduce rental payments by about $3 million over the remaining lease term.
Changes versus the prior comparable periods
- Q2 sales declined 36.0% and first-half sales declined 26.8%. Consolidated gross profit fell, but gross margin improved, principally with lower freight costs and improved costs in Hooker Branded and Domestic Upholstery. Operating income and net income nevertheless dropped sharply as reduced volume pressured earnings and fixed-cost absorption.
- Q2 segment sales: Hooker Branded fell 34.3% to $34.7 million; Home Meridian fell 51.0% to $28.9 million; Domestic Upholstery fell 19.4% to $30.9 million; All Other rose 22.1% to $3.3 million. Home Meridian reported a $3.3 million operating loss; Hooker Branded and Domestic Upholstery remained profitable.
- Backlog was $88.2 million at quarter-end, down from $201.4 million a year earlier and $95.4 million at fiscal year-end. Management attributed the annual decline to normalized shipping, lower demand and the absence of ACH orders.
- Interest expense rose to $0.7 million in Q2 and $0.8 million in the first half, mainly reflecting term-loan interest and higher rates. First-half dividends declared were $0.44 per share, versus $0.40 in the prior-year period.
Outlook, commentary and risks
Management said demand remained weak amid high interest rates, subdued consumer confidence and retailer inventory reductions. It expects business to improve in the second half, citing consolidated orders up by a mid-double-digit percentage year over year, Hooker Branded new-product backlog, and planned Home Meridian placements on more than 1,000 retail floors. Management said it believes Home Meridian can achieve sustainable second-half profitability; this is an expectation, not formal numerical guidance. Management also expects approximately $1 million of remaining fiscal 2024 capital expenditures and about $2.5 million of further ERP spending.
Key risks include continued weak discretionary demand, Home Meridian’s ability to reduce costs and restore profitability, ERP implementation costs or disruption, variable-rate debt, imported-product sourcing and freight exposure, raw-material costs, customer concentration, and integration of the Sunset West and BOBO acquisitions. The company reported compliance with its financial covenants at quarter-end and expected continued compliance. Disclosure controls were assessed as effective; acquired BOBO operations were excluded from the fiscal 2024 internal-control assessment scope under SEC guidance.
On September 5, 2023, the board declared a $0.22-per-share quarterly dividend, payable September 29, 2023.
Important facts for investors to verify
- Whether order growth translates into shipments, revenue and sustained margin recovery in the second half.
- Home Meridian’s progress on inventory, cost reductions, warehouse rationalization and the projected return to profitability.
- Whether cash generation remains strong as inventory and receivables normalize, while the company continues dividends, repurchases and ERP investment.
- Exposure to BSBY rate changes, debt covenant headroom and the effect of future borrowing or interest costs.
- ERP rollout execution, including the Home Meridian implementation planned for fiscal 2025, and integration and control progress at acquired businesses.