Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2020, ended November 3, 2019; comparisons are to periods ended October 28, 2018. Dollar figures below are in millions unless stated otherwise. The company designs, imports and manufactures furniture across Hooker Branded, Home Meridian and All Other businesses.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $158.2 | $171.5 | $445.9 | $483.0 |
| Gross profit / margin | $28.4 / 18.0% | $35.8 / 20.9% | $82.7 / 18.6% | $103.4 / 21.4% |
| Operating income / margin | $5.0 / 3.2% | $12.3 / 7.2% | $13.7 / 3.1% | $33.5 / 6.9% |
| Net income / net margin | $3.9 / 2.5% | $9.3 / 5.4% | $10.1 / 2.3% | $25.2 / 5.2% |
| Diluted EPS | $0.33 | $0.79 | $0.85 | $2.13 |
- Q3 sales fell 7.8%; nine-month sales fell 7.7%. All three reporting groups had lower nine-month sales: Home Meridian -9.8%, Hooker Branded -5.5%, and All Other -4.6%.
- Q3 Home Meridian sales fell 9.7% to $85.8 million and the segment recorded a $4.0 million operating loss, versus $4.8 million operating income a year earlier. Hooker Branded operating income rose to $6.2 million, and All Other rose to $2.8 million.
- Q3 net income declined 58%; nine-month net income declined 60%. Lower Home Meridian gross profit and operating results were the principal drivers of the deterioration.
Cash flow, balance sheet and capital
- Operating cash flow was $26.6 million for the first 39 weeks, compared with $20.9 million a year earlier. Investing cash outflow was $3.8 million; financing cash outflow was $9.7 million.
- Cash increased $13.1 million from fiscal year-end to $24.5 million. Management attributed the increase principally to customer deposits in Home Meridian hospitality and accounts-receivable collections. Cash uses included $5.3 million of dividends, $4.7 million of capital expenditures and $4.4 million of term-loan repayments.
- At November 3, 2019, current assets were $227.2 million and current liabilities were $62.0 million. Total assets were $402.4 million and shareholders’ equity was $269.2 million.
- Term loans totaled approximately $31.1 million; no revolving-credit borrowings were outstanding. The company reported $25.7 million available under its revolver, with $4.3 million of standby letters of credit outstanding. It was in compliance with its debt covenants and expected to refinance term-loan balances due February 1, 2021.
- Adoption of lease accounting added $40.9 million of operating lease right-of-use assets and $41.7 million of lease liabilities. This accounting adoption did not materially affect reported income or cash flow.
- Quarterly dividends declared were $0.15 per share; after quarter-end, the board declared $0.16 per share, payable December 30, 2019.
Management commentary, outlook and risks
- Management described Q3 sales and earnings as disappointing. A single large Home Meridian retail customer drove a substantial portion of the segment’s volume reduction and approximately $3 million of chargebacks. Other Home Meridian pressures included excess-inventory demurrage and storage, a $0.65 million inventory write-down, and HMIdea start-up costs.
- Management cited subdued retail demand and the effects of 25% tariffs on certain China imports. It reported that tariff-related pricing and higher freight costs affected demand and margins. The company expected to reduce China sourcing from about 40% of its product line at the prior fiscal year-end to approximately 22% by fiscal year-end, with further progress in fiscal 2021.
- Positive business trends included growth in Samuel Lawrence Hospitality and e-commerce. Hospitality sales increased more than 30% for the first nine months; its backlog was 27% above the prior-year quarter-end. H Contract reported Q3 incoming orders up more than 15% and backlog more than 20% higher year over year.
- Management expected consolidated earnings to improve sequentially in Q4, with significant improvement at Home Meridian from Q3 levels and continued momentum in Hooker Branded and All Other. It cautioned that Q4 would have one fewer shipping week than the prior year and five to ten fewer shipping days for container-direct customers due to earlier Chinese and Vietnamese New Year holidays. No full-year earnings or sales guidance was provided.
- Other disclosed risks include customer concentration, tariffs and sourcing transitions, supplier and shipping disruptions, product quality and returns, demand weakness, price competition, variable interest rates, foreign exchange exposure and raw-material costs. Management said it expected available resources to meet business needs through fiscal 2020 and the foreseeable future.
Important facts for investors to verify
- Whether the large Home Meridian customer’s reduced volume and chargebacks persist, and whether Home Meridian returns to profitability.
- Progress on inventory reduction, quality-related returns and the planned shift of sourcing away from China; assess resulting costs, lead times and tariff exposure.
- Whether sequential Q4 earnings improvement is achieved, accounting for the shipping-week and holiday-calendar headwinds.
- Cash generation and working-capital quality, especially the contribution of customer deposits and receivables collections.
- Debt refinancing plans, covenant compliance and exposure to LIBOR changes; management estimated a 1% LIBOR increase would add about $0.284 million in annual term-loan interest expense.