Hooker Furnishings Corporation — Q3 FY2023 Form 10-Q
Reporting period: Unaudited third quarter and first 39 weeks of fiscal 2023, ended October 30, 2022; comparisons are to periods ended October 31, 2021. Fiscal 2023 ends January 29, 2023. Dollar amounts below are in millions unless stated otherwise.
Business context and results
The company designs, markets and imports furniture and manufactures upholstered and outdoor furniture. Results include Sunset West, acquired January 31, 2022, in Domestic Upholstery; prior-year results do not include the acquisition.
| Metric | Q3 FY2023 | Q3 FY2022 | 39 weeks FY2023 | 39 weeks FY2022 |
|---|---|---|---|---|
| Net sales | $151.6 | $133.4 | $451.8 | $458.8 |
| Gross profit / margin | $32.0 / 21.1% | $20.0 / 15.0% | $92.5 / 20.5% | $85.3 / 18.6% |
| Operating income (loss) / margin | $6.4 / 4.2% | $(1.7) / (1.3)% | $17.6 / 3.9% | $20.2 / 4.4% |
| Net income (loss) | $4.8 | $(1.2) | $13.6 | $15.7 |
| Diluted EPS | $0.42 | $(0.10) | $1.14 | $1.30 |
Q3 sales rose 13.6% and the company returned to quarterly profitability. Gross margin improved across all three principal segments, supported by pricing, improved freight conditions relative to the prior year, and the absence of certain Home Meridian chargebacks and exit-related costs. Nine-month sales declined 1.5%; operating income fell 12.6% and net income fell 13.5% year over year.
- Hooker Branded: Q3 sales declined 2.4%; operating income was $5.2 million. Incomplete inventory collections delayed some shipments, while pricing helped gross margin.
- Home Meridian: Q3 sales increased 9.4%, but the segment recorded a $3.2 million operating loss. Retailer inventory levels delayed shipments; the exited Clubs channel and lower e-commerce sales weighed on year-to-date revenue.
- Domestic Upholstery: Q3 sales increased 48.2%, reflecting Sunset West and organic growth; operating income was $3.8 million. Acquisition-related Sunset West sales and operating income were $8.8 million and $1.4 million for Q3, respectively.
Cash flow, balance sheet and capital
- Cash was $6.5 million at quarter-end, down $62.9 million from fiscal year-end. Operating cash flow was negative $41.1 million, versus positive $5.0 million in the prior-year period, primarily reflecting a $56.3 million cash use from inventory growth. Balance-sheet inventory increased to $133.9 million from $75.0 million at January 30, 2022.
- Investing cash outflow was $29.8 million, including $25.9 million for acquisitions; financing provided $8.1 million. The company also spent $9.4 million repurchasing shares, paid $7.1 million in dividends and invested in capital expenditures and its ERP system.
- Term-loan debt was $24.6 million: $18.0 million secured and $6.6 million unsecured. No revolver borrowings were outstanding; $26.4 million was available under the $35 million facility, with $8.6 million of standby letters of credit outstanding. The term loans bear floating BSBY-based rates. A 1 percentage-point rate increase would add about $0.24 million of annual interest expense.
- Total liabilities were $140.7 million and shareholders’ equity was $259.6 million. Operating lease liabilities totaled $54.4 million.
Outlook, risks and notable items
Management gave no numeric sales or earnings forecast. It said economic indicators are mixed and cited rising interest rates, consumer confidence and a slowing housing market as areas being monitored. Management expects lower ocean freight costs to begin benefiting results in calendar Q1 2023, is optimistic about Sunset West, and believes it has resources to fund operations and dividends for the foreseeable future. It expects about $1 million of capital expenditures and about $1 million of additional ERP spending over the remainder of fiscal 2023; ERP implementation is planned at Sunset West in late fiscal 2023 and legacy Hooker divisions in early fiscal 2024.
- Order backlog was $137.3 million at October 30, down from $330.9 million a year earlier and $310.1 million at fiscal year-end. Management cautions backlog is not a reliable long-term sales indicator, especially amid changing demand and supply conditions.
- Key risks include weaker discretionary furniture demand, retailer inventory overhang, offshore sourcing and freight disruption, tariffs, raw-material and labor costs, customer concentration, and integration and debt-service risks related to Sunset West. The company also cited ERP execution, cybersecurity and floating-rate debt exposure.
- Russian Birch plywood supply is a specific risk for one upholstery division; the company said it had alternative supply and materials to support production through January 2023, with the issue expected to be mitigated by early 2023.
- The Sunset West purchase-price allocation remained preliminary. Acquisition consideration was $26.0 million, including escrow and an earn-out component; the company recorded $14.5 million of goodwill and $11.5 million of acquired intangible assets. Acquisition-related costs were $69,000 in the first nine months.
- The company was in compliance with debt covenants and expected continued compliance. It also disclosed a new 10-year High Point showroom lease commencing in November 2022, with estimated minimum commitments of $23.7 million not included in quarter-end lease liabilities.
- After quarter-end, the board declared a $0.22-per-share dividend, payable December 30, 2022, a 10% increase from the prior quarterly dividend.
Most important facts for investors to verify
- Whether inventory converts to sales and operating cash flow improves, given the sharp inventory build and negative year-to-date operating cash flow.
- Whether backlog declines reflect normalized demand or further weakening, and how retailer inventory levels affect shipments and cancellations.
- Whether Home Meridian can reduce operating losses and complete its Georgia warehouse transition without further cost overruns.
- Sunset West integration, final purchase accounting and earn-out outcomes, alongside debt service and covenant headroom as floating rates change.
- Whether planned freight-cost relief and ERP implementation deliver the timing and savings management anticipates.