Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Fiscal 2021 third quarter and first nine months ended November 1, 2020, compared with periods ended November 3, 2019. The quarter ran August 3–November 1, 2020. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.
Financial performance
| Metric | Third quarter 2021 | Third quarter 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $149.7M | $158.2M | $384.8M | $445.9M |
| Gross profit / margin | $33.5M / 22.4% | $28.4M / 18.0% | $79.1M / 20.6% | $82.7M / 18.6% |
| Operating income (loss) | $13.0M | $5.0M | ($24.9M) | $13.7M |
| Net income (loss) | $10.1M | $3.9M | ($19.0M) | $10.1M |
| Diluted earnings (loss) per share | $0.84 | $0.33 | ($1.61) | $0.85 |
- Third-quarter sales declined 5.4% year over year; operating income rose 161% and net income rose 158%. The gross margin improved by 4.4 percentage points, reflecting stronger Home Meridian margins and lower selling and administrative expenses.
- Nine-month sales fell 13.7%. The reported operating and net losses include $44.3M of noncash impairment charges: $39.6M for goodwill and $4.8M for Home Meridian trade names. Management attributed the valuation reassessment to pandemic-related economic effects, lower sales and earnings, and depressed market value.
- Nine-month operating cash flow was $67.6M, versus $26.6M in the prior-year period. Investing activities provided $0.3M; financing activities used $10.1M, including $5.7M of dividends and $4.4M of term-loan principal payments. Cash increased $57.8M to $93.9M.
- At November 1, cash was $93.9M, current assets $237.8M and current liabilities $74.8M. Term loans totaled $25.7M, due on or before February 1, 2021; there was no revolver borrowing, and $25.7M was available under the revolver. Standby letters of credit totaled $4.3M. Lease liabilities were $37.7M.
- Dividends declared were $0.16 per share in the quarter, versus $0.15 a year earlier. After quarter-end, the board declared $0.18 per share, a 12.5% increase.
Material changes and business developments
- Third-quarter sales by segment: Hooker Branded increased 8.2% to $47.3M; Home Meridian declined 14.0% to $73.7M; Domestic Upholstery increased 1.3% to $25.4M; All Other declined 9.4% to $3.3M. Home Meridian’s lower shipments reflected inventory and supply constraints and weakness in hospitality; Hooker Branded benefited from higher sales.
- Quarterly orders increased 34% year over year, and nine-month orders increased 8.3%. Management reported substantial backlog growth, but cautioned that supply constraints make backlog less reliable as a near-term sales indicator.
- Cash and inventories shifted materially from fiscal year-end: cash rose from $36.0M to $93.9M, while inventory declined from $92.8M to $64.1M. The company said it was rebuilding inventory to meet demand.
- In the first quarter, domestic manufacturing was temporarily disrupted and cost-reduction measures included furloughs, temporary compensation reductions, plant closures and deferred nonessential capital spending. Plants reopened and were at current full capacity by quarter-end; most furloughs had ended and temporary pay and director-fee reductions were rescinded.
- Fiscal 2021 segment reporting was recast after domestic upholstery businesses were grouped into a new Domestic Upholstery segment.
Outlook, risks and unusual items
- Management was encouraged by residential demand and backlog, but expected supply-chain bottlenecks to weigh on fourth-quarter fiscal 2021 sales and earnings, particularly at Home Meridian. Constraints included raw materials and components, shipping containers and vessel space, and supplier production delays. Management anticipated steady improvement beginning around mid-February 2021; it did not provide specific financial guidance.
- Management expected cash to decline as inventory and receivables increase and term loans are repaid, but believed liquidity would be sufficient. Credit-facility refinancing discussions were nearing completion; management expected to refinance but said available cash could support loan repayment and near-term operations if refinancing did not occur. A new warehouse lease, not yet commenced, carries estimated future minimum rent commitments of about $28M and was expected to begin in December 2021.
- COVID-19 remained a principal uncertainty, including renewed infection increases and possible effects on demand, operations, employees and liquidity. Other disclosed risks include reliance on overseas sourcing, tariffs, freight and supply disruptions, raw-material costs, customer concentration and collections, product quality, foreign-exchange movements, and the cyclical furniture market.
- The company early-adopted income-tax guidance that generated an additional $4.0M tax benefit upon adoption; the nine-month tax benefit also included $10.7M related to impairment charges. The nine-month loss therefore should be assessed alongside the large noncash impairment and tax effects.
- On November 4, 2020, the revolving-facility letter-of-credit sublimit was increased from $4M to $10M. Management reported compliance with its financial covenants at quarter-end. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Confirm the timing and terms of the refinancing or payoff of the $25.7M term loans due by February 1, 2021, and the resulting borrowing costs and covenant terms.
- Track whether elevated orders and backlog convert into shipments, especially given import, freight, labor and component constraints.
- Assess the sustainability of improved margins and earnings after cost reductions and the nonrecurrence of prior-year Home Meridian charges.
- Review ongoing COVID-19 effects on demand, hospitality, suppliers, operations and liquidity, and whether inventory rebuilding absorbs cash as expected.
- Monitor further impairment risk and the assumptions underlying goodwill and trade-name valuations, along with the tax treatment of impairment charges.
- Evaluate the affordability and continuation of increased dividends alongside debt repayment, working-capital requirements and the future warehouse lease commitment.