Hooker Furniture Corporation — Q2 FY2019 Form 10-Q
Reporting period: The 13-week quarter and 26-week first half ended July 29, 2018. Comparisons are with periods ended July 30, 2017. Financial statements are unaudited. Shenandoah, acquired in September 2017, is included in current-period results but not in the comparable prior-year periods.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $168.7 million | $156.3 million | $311.6 million | $287.2 million |
| Gross profit / margin | $35.6 million / 21.1% | $33.1 million / 21.2% | $67.6 million / 21.7% | $61.3 million / 21.3% |
| Operating income / margin | $11.9 million / 7.0% | $11.9 million / 7.6% | $21.2 million / 6.8% | $19.2 million / 6.7% |
| Net income / net margin | $8.7 million / 5.2% | $7.8 million / 5.0% | $15.9 million / 5.1% | $12.5 million / 4.4% |
| Diluted EPS | $0.74 | $0.67 | $1.34 | $1.08 |
- Q2 sales increased 7.9%; first-half sales increased 8.5%. First-half operating income rose 10.9% and net income rose 26.6% year over year.
- Q2 operating income was essentially flat despite higher sales; operating margin fell 0.6 percentage point. The lower effective tax rate helped lift Q2 net income 11.8% and first-half net income 26.6%.
- Effective tax rates were 24.9% in Q2 and 23.0% for the first half, versus 35.2% and 34.4%, respectively, a decline management attributed to the Tax Cuts and Jobs Act.
- Cash from operations was $15.5 million for the first half, versus $13.9 million. Capital expenditures were $0.8 million. Cash declined $1.7 million during the half to $29.2 million.
- At July 29, cash was $29.2 million and term-loan debt was approximately $39.6 million, down from $53.3 million at January 28. The company made $13.8 million of debt payments, including a $10 million unscheduled payment. It reported $28.5 million of revolver availability and no revolver borrowings; $1.5 million of letters of credit were outstanding.
- Current assets were $217.4 million and current liabilities were $59.8 million. Inventories increased to $98.5 million from $84.5 million at fiscal year-end.
Material changes and segment trends
- Hooker Branded: Q2 sales were $40.6 million, down 0.8%; first-half sales were $83.3 million, up 6.3%. First-half operating income rose to $11.7 million from $10.1 million. Management cited a slower summer selling season in Q2.
- Home Meridian: Q2 sales grew 4.8% to $101.0 million as supplier disruptions eased; first-half sales were nearly flat at $171.6 million. First-half operating income declined to $5.3 million from $6.1 million.
- All Other: Q2 sales rose 42.4% to $27.1 million and first-half sales rose 46.2% to $56.6 million, largely reflecting Shenandoah. First-half operating income increased to $4.2 million from $3.0 million. Sam Moore faced weaker sales and lost a major retail customer.
- Consolidated Q2 gross margin was nearly unchanged. Higher selling and administrative costs and Shenandoah-related amortization weighed on operating margin. Upholstery businesses also faced increased material and component costs, with a lag before company price increases took effect.
Outlook, risks and notable items
- Management described its outlook for the fall selling season and remainder of the year as “guardedly optimistic,” citing improving retail conditions, incoming orders and increased backlogs at seven of ten divisions. No specific full-year revenue or earnings guidance was provided.
- The company warned that proposed U.S. tariffs on Chinese imports could materially adversely affect sales, earnings and liquidity. Approximately 43% of FY2018 consolidated sales were imported from China. Management was pursuing mitigation strategies, but the potential tariff impact was uncertain.
- Heavy rains damaged two Virginia warehouses. A $500,000 casualty loss was recorded, equal to the insurance deductible; management expected covered costs above the deductible to be reimbursed. Order fulfillment was only nominally disrupted.
- The company expected $6–$7 million of capital spending during the remainder of FY2019, including approximately $5.4 million for a Bradington-Young production-facility expansion.
- After quarter-end, the company contributed $3 million to its frozen Pension Plan as part of a de-risking strategy and declared a $0.14-per-share quarterly dividend.
- Other cited risks include customer concentration, import and shipping disruptions, interest-rate exposure, raw-material cost pressures, consumer and furniture-industry cyclicality, and acquisition integration. A 1-percentage-point increase in LIBOR was estimated to add about $359,000 to annual term-loan interest expense.
- Management expected adoption of the new lease standard in FY2020 to result in a significant right-of-use asset and lease liability; the amount was not specified.
Investor verification priorities
- Assess whether the growth contribution from Shenandoah is sustainable and distinguish acquisition-driven growth from underlying performance.
- Monitor tariff developments, sourcing alternatives and any resulting changes in prices, demand or margins.
- Track inventory growth, cash conversion and operating cash flow against sales growth.
- Review segment margins and whether cost increases, especially in upholstery, are being passed through to customers.
- Confirm insurance recovery for warehouse damage, progress and cost of the Bradington-Young expansion, and the pension plan’s funding and de-risking effects.
- Monitor variable-rate debt, covenant compliance and the expected balance-sheet impact of lease-standard adoption.