Hooker Furnishings Corporation — FY2022 Third-Quarter Form 10-Q
Reporting period: The quarter ended October 31, 2021 (13 weeks), with year-to-date results for the 39 weeks ended October 31, 2021. Comparisons are to the quarter and year-to-date periods ended November 1, 2020. Amounts below are in millions unless noted.
Business context and financial performance
Hooker designs, markets and imports casegoods and upholstered furniture, and manufactures custom upholstered furniture domestically. Its segments are Hooker Branded, Home Meridian, Domestic Upholstery and All Other.
| Metric | Q3 FY2022 | Q3 FY2021 | 39 weeks FY2022 | 39 weeks FY2021 |
|---|---|---|---|---|
| Net sales | $133.4 | $149.7 | $458.8 | $384.8 |
| Gross profit / margin | $20.0 / 15.0% | $33.5 / 22.4% | $85.3 / 18.6% | $79.1 / 20.6% |
| Operating income (loss) | $(1.7) | $13.0 | $20.2 | $(24.9) |
| Net income (loss) | $(1.2) | $10.1 | $15.7 | $(19.0) |
| Diluted EPS | $(0.10) | $0.84 | $1.30 | $(1.61) |
| Operating cash flow | Not separately presented | Not separately presented | $5.0 | $67.6 |
Quarterly sales fell 10.9%, primarily because Home Meridian shipments dropped amid temporary COVID-related factory closures in Vietnam and Malaysia. Year-to-date sales rose 19.2%, with increases in Hooker Branded, Home Meridian and Domestic Upholstery. The prior-year year-to-date operating and net losses included $44.3 million of goodwill and trade-name impairment charges.
Segments and material changes
- Hooker Branded: Q3 sales increased 18.5% to $56.0 million; operating income was $6.7 million. Higher freight, product inflation and logistics charges pressured gross margin. Year-to-date sales rose 38.9% to $157.3 million.
- Home Meridian: Q3 sales fell 37.3% to $46.2 million and the segment recorded a $10.2 million operating loss. COVID-related sourcing disruptions, freight expense, customer chargebacks and $2.6 million of raw-material cancellation costs weighed on results. Management estimated exiting ready-to-assemble furniture avoided roughly $10 million of additional product and freight costs. Year-to-date operating loss was $9.3 million.
- Domestic Upholstery: Q3 sales increased 10.3% to $28.0 million, but operating income declined to $1.4 million as raw-material inflation, freight, labor and delivery constraints offset growth. Year-to-date operating income improved to $3.6 million from a prior-year $14.4 million loss.
- All Other: Q3 sales decreased 4.0% to $3.2 million; operating income was $0.3 million. H Contract remained affected by lower senior-living-industry spending.
Consolidated selling and administrative expense was $21.1 million in Q3, up 6.5%; as a share of sales it increased to 15.8% from 13.3%. Quarterly operating margin was negative 1.3%, versus 8.7% a year earlier.
Cash, liquidity and capital resources
- Cash was $57.2 million at October 31, 2021, down $8.6 million from fiscal year-end. Nine-month operating cash flow was $5.0 million; investing cash use was $7.2 million and financing cash use was $6.4 million, primarily dividends.
- Inventory increased $7.7 million from fiscal year-end. Capital expenditures were $6.6 million year to date, including spending on the Georgia distribution center and business systems.
- No revolver borrowings were outstanding. The $35 million facility had $27.9 million available; $7.1 million of standby letters of credit were outstanding. The company reported compliance with its financial covenants.
- There was no conventional long-term debt reported at quarter-end. Lease liabilities totaled $54.8 million, up from $36.1 million at fiscal year-end, primarily reflecting a new Georgia warehouse lease.
- Current assets were $218.3 million and current liabilities $41.8 million. The company stated that available resources were sufficient for operations, dividends and expected needs.
Outlook, risks and unusual items
Management said demand remained historically strong, with $330.9 million of unshipped orders at quarter-end—up 33.3% from fiscal year-end and 36.8% year over year. It cautioned that backlog is not a reliable long-term sales forecast and that supply constraints were delaying conversion of orders into shipments.
The company expected supply-chain turbulence and product and raw-material inflation to affect sales and earnings at least through the second quarter of fiscal 2023. Management described Hooker Branded and Domestic Upholstery as less exposed than Home Meridian, citing Home Meridian’s greater reliance on direct-container shipments. Freight surcharges and price increases were in place, but could lag supplier and logistics cost increases by up to 90 days, and by up to 180 days for some backlog orders. Domestic Upholstery price increases were expected to benefit results beginning in FY2023’s second quarter because existing backlog had not been repriced.
Key risks include COVID-19 and factory disruptions, ocean freight and container availability and cost, supplier and domestic labor capacity, inflation, tariffs, customer concentration and chargebacks, demand uncertainty, and execution of the Georgia warehouse move and ERP implementation. The company expected approximately $500,000 of remaining FY2022 capital expenditures. ERP implementation was expected to cost approximately $5.5 million overall, including about $1.0 million in the final quarter of FY2022. A High Point showroom lease expected to commence in fall 2022 carries estimated minimum commitments of approximately $23.7 million over an initial 10-year term; it was not included in recorded lease liabilities.
On December 7, 2021, the board declared a quarterly dividend of $0.20 per share, an 11% increase from the previous rate. Management cautioned that interim results may not indicate full-year results. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether Home Meridian’s factory, freight and fulfillment constraints ease as expected, and whether its substantial backlog converts into shipments and profitable sales.
- Whether price increases and surcharges offset freight, material and labor inflation without materially weakening demand.
- The sustainability of cash generation and the dividend amid inventory needs, capital spending, ERP costs and new lease commitments.
- Progress and costs for the Georgia distribution center and ERP implementation, including operational disruption risks.
- Customer concentration, chargebacks, order cancellations and the quality and cancellation exposure of reported backlog.