Hooker Furniture Corporation — Form 10-K Summary
Reporting period: Fiscal year ended February 2, 2020 (52 weeks), filed April 17, 2020. The prior fiscal year ended February 3, 2019 and covered 53 weeks; management estimates the extra week contributed approximately $13.4 million of prior-year sales. The filing’s fiscal 2020 fourth quarter is the quarter ended February 2, 2020.
Business context
The company designs, imports, manufactures and markets residential, hospitality and contract furniture. Its reportable segments are Hooker Branded, Home Meridian and Domestic Upholstery; H Contract and Lifestyle Brands are reported in All Other. In the fourth quarter, domestic upholstery businesses were regrouped into a new reportable segment, and prior-period segment results were recast.
Key financial results
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $610.8 million | $683.5 million |
| Gross profit / margin | $114.0 million / 18.7% | $147.0 million / 21.5% |
| Operating income / margin | $22.7 million / 3.7% | $52.7 million / 7.7% |
| Net income | $17.1 million | $39.9 million |
| Diluted EPS | $1.44 | $3.38 |
| Cash from operating activities | $41.4 million | $9.7 million |
| Cash and cash equivalents at year-end | $36.0 million | $11.4 million |
| Long-term debt, including current maturities | $30.1 million | $35.5 million |
Fiscal 2020 fourth-quarter sales were $164.9 million versus $200.5 million in the prior-year quarter; net income was $7.0 million versus $14.7 million.
At year-end, working capital was $171.8 million, current assets were $222.0 million and current liabilities were $50.1 million. The company had $25.7 million available under its revolving credit facility, with no revolver borrowings and $4.3 million of letters of credit outstanding. Operating lease liabilities were $40.1 million, recognized following adoption of lease accounting standards.
Material changes and management commentary
- Annual sales declined 10.6% and net income declined 57.2%. Lower sales across three major segments, higher product costs, tariffs, freight and warehousing costs, and customer-related quality and chargeback issues pressured results. The shorter fiscal year also affected the comparison.
- Home Meridian sales fell 12.2% to $340.6 million and the segment recorded a $7.2 million operating loss, versus $18.8 million operating income the prior year. A major customer accounted for nearly 80% of the segment’s sales decline. Tariffs and quality-related inventory and handling costs were significant pressures.
- Hooker Branded sales fell 9.4% to $162.0 million, with operating income of $21.5 million. Domestic Upholstery sales declined 10.2% to $95.7 million and operating income was $6.6 million. All Other sales rose 20.7% to $12.5 million, supported by H Contract.
- Gross margin fell to 18.7% from 21.5%. Management cited a nearly $12 million gross-profit impact at Home Meridian from excess tariffs and quality-related inventory, among other factors. The company increased prices on certain China-sourced products, but said price increases did not fully offset tariff costs in some channels.
- Operating cash flow was $41.4 million, supported in part by lower receivables and inventory. The company spent $5.1 million on capital expenditures, paid $7.2 million in dividends and paid $6.4 million in term-loan principal and interest.
- Debt of $30.1 million was due February 1, 2021; management expected to refinance during fiscal 2021. The company reported compliance with its financial covenants at year-end. A 1% increase in LIBOR was estimated to increase annual interest expense by approximately $270,000.
Outlook, risks and unusual items
- COVID-19 had reduced demand, driven order cancellations and disrupted Asian supply. Management expected materially lower sales and earnings in fiscal 2021, including the first quarter, but could not reasonably estimate the size of the declines. It was preparing for a downturn lasting four to six months and warned that the impact could be longer or more severe.
- Management reported slower expected customer collections and requests for extended payment terms. Cost and cash-preservation actions included furloughs, staff and compensation reductions, temporary domestic plant closures, purchase-order rationalization and indefinite deferral of about $3 million in noncritical capital spending.
- Imports represented approximately 83% of fiscal 2020 net sales. Nearly all import purchases came from Vietnam and China; the top five suppliers in those countries accounted for about half of import purchases. The company had reduced China sourcing by about half by year-end while shifting production to non-tariff countries, primarily Vietnam.
- Customer concentration is material: one customer represented about 11% of sales, the top five about 30% of sales, and the top five held 35% of receivables. Other key risks include tariff and freight changes, supply interruptions, demand cyclicality, customer credit, and refinancing and variable-rate debt risk.
- Unusual items included a $1.0 million Home Meridian inventory write-down related to a quality issue, approximately $4 million of unexpected chargebacks from a major customer, and a $520,000 gain associated with settlement of the pension plan. Fiscal 2019 included a $500,000 casualty loss for warehouse damage.
- The company declared fiscal 2020 dividends of $0.61 per share. In April 2020, it terminated its long-standing share repurchase authorization. Management reported no material pending legal proceedings; the auditor expressed unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether COVID-19-related sales losses, cancellations, supply disruptions and slower collections exceeded management’s initial expectations.
- Progress and terms of refinancing the $30.1 million term loans due February 1, 2021, including covenant compliance and interest costs.
- Recovery in Home Meridian profitability, customer relationships and quality performance, and the effectiveness of tariff mitigation and sourcing shifts.
- Receivables quality and exposure to the largest customers, alongside inventory levels and potential further markdowns or storage costs.
- Cash flow sustainability: fiscal 2020 operating cash flow benefited from working-capital reductions, while planned capital spending and dividends compete with liquidity needs.