UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
Commission file number
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices, Zip Code)
(
(Registrant’s telephone
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer ☐ | |
| Non-accelerated Filer ☐ | Smaller reporting company |
| Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
As of August 30, 2024, there were
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 5. |
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Item 6. |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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As of |
July 28, |
January 28, |
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2024 |
2024 |
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(unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Trade accounts receivable, net |
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Inventories |
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Income tax recoverable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Cash surrender value of life insurance policies |
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Deferred taxes |
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Operating leases right-of-use assets |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total non-current assets |
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Total assets |
$ | $ | ||||||
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Liabilities and Shareholders’ Equity |
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Current liabilities |
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Current portion of long-term debt |
$ | $ | ||||||
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Trade accounts payable |
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Accrued salaries, wages and benefits |
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Customer deposits |
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Current portion of operating lease liabilities |
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Other accrued expenses |
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Total current liabilities |
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Long term debt |
- | |||||||
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Deferred compensation |
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Operating lease liabilities |
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Other long-term liabilities |
- | |||||||
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Total long-term liabilities |
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Total liabilities |
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Shareholders’ equity |
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| Common stock, no par value, |
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Retained earnings |
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Accumulated other comprehensive income |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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For the |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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Net sales |
$ | $ | $ | $ | ||||||||||||
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Cost of sales |
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Gross profit |
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Selling and administrative expenses |
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Intangible asset amortization |
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Operating (loss) / income |
( |
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Other income, net |
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Interest expense, net |
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(Loss) / income before income taxes |
( |
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Income tax expense / (benefit) |
( |
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Net (loss) / income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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(Loss) / earnings per share |
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Basic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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Cash dividends declared per share |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(In thousands)
(Unaudited)
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For the |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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Net (loss) / income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Other comprehensive income: |
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Actuarial adjustments |
( |
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Income tax effect on adjustments |
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Adjustments to net periodic benefit cost |
( |
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Total comprehensive (loss) / income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For the |
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Twenty-Six Weeks Ended |
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July 28, |
July 30, |
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2024 |
2023 |
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Operating Activities: |
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Net (loss) / income |
$ | ( |
) | $ | ||||
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Adjustments to reconcile net income to net cash (used in) / provided by operating activities: |
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Depreciation and amortization |
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Deferred income tax expense |
( |
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Noncash restricted stock and performance awards |
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Provision for doubtful accounts and sales allowances |
( |
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Gain on life insurance policies |
( |
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(Gain) / loss on disposal of assets |
( |
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Changes in assets and liabilities: |
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Trade accounts receivable |
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Inventories |
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Income tax recoverable |
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Prepaid expenses and other assets |
( |
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Trade accounts payable |
( |
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Accrued salaries, wages, and benefits |
( |
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Customer deposits |
( |
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Operating lease assets and liabilities |
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Other accrued expenses |
( |
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Deferred compensation |
( |
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Net cash provided by operating activities |
$ | $ | ||||||
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Investing Activities: |
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Purchases of property and equipment |
( |
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Premiums paid on life insurance policies |
( |
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Proceeds received on life insurance policies |
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Proceeds from sales of assets |
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Acquisitions |
( |
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Net cash used in investing activities |
$ | ( |
) | $ | ( |
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Financing Activities: |
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Purchase and retirement of common stock |
( |
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Cash dividends paid |
( |
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Payments for long-term loans |
( |
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Net cash used in financing activities |
$ | ( |
) | $ | ( |
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Net (decrease) / increase in cash and cash equivalents |
( |
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Cash and cash equivalents - beginning of year |
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Cash and cash equivalents - end of quarter |
$ | $ | ||||||
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
$ | $ | ||||||
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Cash paid for interest, net |
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Non-cash transactions: |
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Increase / (decrease) in lease liabilities arising from changes in right-of-use assets |
$ | $ | ( |
) | ||||
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Increase in property and equipment through accrued purchases |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
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Accumulated |
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Other |
Total |
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Common Stock |
Retained |
Comprehensive |
Shareholders' |
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Shares |
Amount |
Earnings |
Income |
Equity |
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Balance at April 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Net income for the 13 weeks ended July 30, 2023 |
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| Actuarial adjustments on defined benefit plan, net of tax of $ |
( |
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| Cash dividends paid ($ |
( |
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Purchase and retirement of common stock |
( |
) | $ | ( |
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Restricted stock grants, net of forfeitures |
- | - | ||||||||||||||||||
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Restricted stock compensation cost |
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Performance-based restricted stock units cost |
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Balance at July 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Balance at April 28, 2024 |
$ | $ | $ | $ | ||||||||||||||||
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Net loss for the 13 weeks ended July 28, 2024 |
( |
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| Actuarial adjustments on defined benefit plan, net of tax of $ |
( |
) | ( |
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| Cash dividends paid ($ |
( |
) | ( |
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Restricted stock grants, net of forfeitures |
( |
) | ( |
) | ||||||||||||||||
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Restricted stock compensation cost |
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Performance-based restricted stock units cost |
( |
) | ( |
) | ||||||||||||||||
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Balance at July 28, 2024 |
$ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)
(In thousands, except per share data)
(Unaudited)
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Accumulated |
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Other |
Total |
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Common Stock |
Retained |
Comprehensive |
Shareholders' |
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Shares |
Amount |
Earnings |
Income (loss) |
Equity |
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Balance at January 29, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Net income for the 26 weeks ended July 30, 2023 |
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| Actuarial adjustments on defined benefit plan, net of tax of $ |
( |
) | ( |
) | ||||||||||||||||
| Cash dividends paid ($ |
( |
) | ( |
) | ||||||||||||||||
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Purchase and retirement of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
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Restricted stock grants, net of forfeitures |
( |
) | ( |
) | ||||||||||||||||
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Restricted stock compensation cost |
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Performance-based restricted stock units costs |
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Balance at July 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
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Balance at January 28, 2024 |
$ | $ | $ | $ | ||||||||||||||||
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Net loss for the 26 weeks ended July 28, 2024 |
( |
) | ( |
) | ||||||||||||||||
| Actuarial adjustments on defined benefit plan, net of tax of $ |
( |
) | ( |
) | ||||||||||||||||
| Cash dividends paid ($ |
( |
) | ( |
) | ||||||||||||||||
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Restricted stock grants, net of forfeitures |
( |
) | ( |
) | ||||||||||||||||
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Restricted stock compensation cost |
||||||||||||||||||||
|
Performance-based restricted stock units costs |
( |
) | ( |
) | ||||||||||||||||
|
Balance at July 28, 2024 |
$ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Twenty-Six Weeks Ended July 28, 2024
1. Preparation of Interim Financial Statements
The condensed consolidated financial statements of Hooker Furnishings Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 28, 2024 (“2024 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.
The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2025 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began April 29, 2024, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 29, 2024, which both ended July 28, 2024. This report discusses our results of operations for these periods compared to the 2024 fiscal year thirteen-week period that began May 1, 2023, and the twenty-six-week period that began January 30, 2023, which both ended July 30, 2023; and our financial condition as of July 28, 2024 compared to January 28, 2024.
References in these notes to the condensed consolidated financial statements of the Company to:
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the 2025 fiscal year and comparable terminology mean the fifty-three-week fiscal year that began January 29, 2024 and will end February 2, 2025; and |
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the 2024 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began January 30, 2023 and ended January 28, 2024. |
2. Recently Adopted Accounting Policies
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The new guidance requires enhanced reportable segment disclosures to include significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023 (our fiscal 2025) and interim periods beginning after December 15, 2024 (our fiscal 2026). We are currently evaluating the impact that the adoption of this new guidance will have on our consolidated financial statements and will add necessary disclosures upon adoption.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The new guidance requires enhanced effective tax rate reconciliation and income taxes paid disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 (our fiscal 2026). We are currently evaluating the impact that the adoption of this new guidance will have on our consolidated financial statements and will add necessary disclosures upon adoption.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.
3. Accounts Receivable
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July 28, |
January 28, |
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2024 |
2024 |
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Gross accounts receivable |
$ | $ | ||||||
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Customer allowances |
( |
) | ( |
) | ||||
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Allowance for doubtful accounts |
( |
) | ( |
) | ||||
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Trade accounts receivable |
$ | $ | ||||||
4. Inventories
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July 28, |
January 28, |
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2024 |
2024 |
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Finished furniture |
$ | $ | ||||||
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Furniture in process |
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Materials and supplies |
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Inventories at FIFO |
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Reduction to LIFO basis |
( |
) | ( |
) | ||||
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Inventories |
$ | $ | ||||||
5. Property, Plant and Equipment
|
Depreciable Lives |
July 28, |
January 28, |
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(In years) |
2024 |
2024 |
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Buildings and land improvements |
$ | $ | |||||||||
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Machinery and equipment |
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Computer software and hardware |
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Leasehold improvements |
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Furniture and fixtures |
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Other |
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Total depreciable property at cost |
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Less accumulated depreciation |
( |
) | ( |
) | |||||||
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Total depreciable property, net |
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Land |
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Construction-in-progress |
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Property, plant and equipment, net |
$ | $ | |||||||||
6. Cloud Computing Hosting Arrangement
We implemented a common Enterprise Resource Planning (ERP) system across all legacy Hooker divisions in fiscal 2023 and 2024.
Based on the provisions of ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software, we capitalize implementation costs associated with hosting arrangements that are service contracts. These costs are recorded in other noncurrent assets of our consolidated balance sheets. We amortize on a straight-line basis over a
Implementation costs and interest expense of $
|
July 28, 2024 |
January 28, 2024 |
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Gross carrying amount |
Accumulated amortization |
Gross carrying amount |
Accumulated amortization |
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Implementation Costs |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
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Interest Expenses |
( |
) | ( |
) | ||||||||||||
7. Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
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■ |
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; |
|
■ |
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
|
■ |
Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
As of July 28, 2024 and January 28, 2024, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.
|
Fair value at July 28, 2024 |
Fair value at January 28, 2024 |
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Description |
Level 1 |
Level 2 |
Level 3 |
Total |
Level 1 |
Level 2 |
Level 3 |
Total |
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(In thousands) |
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Assets measured at fair value |
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|
Company-owned life insurance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
8. Intangible Assets
Our intangible assets with indefinite lives consist of: goodwill related to the Shenandoah, Sunset West and BOBO Intriguing Objects acquisitions; and trademarks and tradenames related to the acquisitions of Bradington-Young, Home Meridian and BOBO Intriguing Objects. Our intangible assets with definite lives are recorded in our Home Meridian and Domestic Upholstery segments.
|
July 28, 2024 |
January 28, 2024 |
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Gross carrying amount |
Accumulated Amortization |
Gross carrying amount |
Accumulated Amortization |
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Intangible assets with indefinite lives: |
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Goodwill |
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Domestic Upholstery - Shenandoah * |
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Domestic Upholstery - Sunset West |
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All Other - BOBO Intriguing Objects |
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Goodwill |
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Trademarks and Trade names * |
- | - | ||||||||||||||
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Intangible assets with definite lives: |
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Customer Relations |
( |
) | ( |
) | ||||||||||||
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Trademarks and Trade names |
( |
) | ( |
) | ||||||||||||
|
Intangible assets, net |
( |
) | ( |
) | ||||||||||||
*:
Amortization expenses for intangible assets with definite lives were $
9. Leases
We have operating leases for warehouses, showrooms, manufacturing facilities, offices and equipment. We recognized sub-lease income of $
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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|
July 28, 2024 |
July 30, 2023 |
July 28, 2024 |
July 30, 2023 |
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Operating lease cost |
$ | $ | $ | $ | ||||||||||||
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Variable lease cost |
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Short-term lease cost |
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Total operating lease cost |
$ | $ | $ | $ | ||||||||||||
|
Operating cash outflows |
$ | $ | $ | $ | ||||||||||||
|
July 28, 2024 |
January 28, 2024 |
|||||||
|
Real estate |
$ | $ | ||||||
|
Property and equipment |
||||||||
|
Total operating leases right-of-use assets |
$ | $ | ||||||
|
Current portion of operating lease liabilities |
$ | $ | ||||||
|
Long term operating lease liabilities |
||||||||
|
Total operating lease liabilities |
$ | $ | ||||||
The weighted-average discount rate is
|
Undiscounted Future Operating Lease Payments |
||||
|
Remainder of fiscal 2025 |
$ | |||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
2029 |
||||
|
2030 and thereafter |
||||
|
Total lease payments |
$ | |||
|
Less: impact of discounting |
( |
) | ||
|
Present value of lease payments |
$ | |||
10. Long-Term Debt
On July 26, 2022, we entered into the Fourth Amendment (the “amendment”) to the Second Amended and Restated Loan Agreement with Bank of America, N.A. (“BofA”) to replenish cash used to make the acquisition of substantially all of the assets of Sunset West (which closed at the beginning of the first quarter of fiscal 2023) (the “Sunset Acquisition”). The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”). Details of the individual credit facilities provided for in the Amendment are as follows:
| ■ | Unsecured Revolving Credit Facility. Under the Amendment, the expiration date of the existing $ |
| ■ | 2022 Secured Term Loan. The Amendment provided us with an $ |
| ■ | 2022 Unsecured Term Loan. The Amendment provided us with a $ |
We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed. As of July 28, 2024, $
We incurred $
The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:
| ■ | Maintain a ratio of funded debt to EBITDA not exceeding: |
|
o |
2.25:1.0 through July 30, 2024; and |
|
o |
2.00:1.00 thereafter. |
|
■ |
A basic fixed charge coverage ratio of at least 1.25:1.00; and |
|
■ |
Limit capital expenditures to no more than $15.0 million during any fiscal year. |
The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Existing Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above if we are not otherwise in default under the Existing Loan Agreement.
Due to our first half results, we were not in compliance with the Existing Loan Agreement’s basic fixed charge ratio covenant in either fiscal 2025 quarterly period; however, subsequent to the end of both quarterly periods, we obtained covenant waivers from BofA. Based on the risk of future non-compliance and according to U.S. GAAP, we have classified all of the debt as current in our consolidated balance sheets. We have sufficient cash and investments on hand to retire the debt if necessary. However, we expect to finalize a new credit facility with BofA during the fiscal 2025 third quarter. Consequently, we expect to be in compliance with our revised financial covenants beginning in our fiscal 2025 third quarter and for the foreseeable future.
As of July 28, 2024, we had $
11. Earnings Per Share
We refer you to the discussion of Earnings Per Share in Note 1. Summary of Significant Accounting Policies, in the financial statements included in our 2024 Annual Report, for additional information concerning the calculation of earnings per share (EPS).
All stock awards are designed to encourage retention and to provide an incentive for increasing shareholder value. We have issued restricted stock awards to non-employee members of the board of directors since 2006 and to certain non-executive employees since 2014. We have issued restricted stock units (“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company subject to a three-year vesting schedule. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. Historically, one target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. For the PSUs issued under the Company’s 2024 Stock Incentive Plan in fiscal 2025, one target is the Company’s annual EPS growth over the performance period and the other target is the Company’s total shareholder return during the performance period compared to the Company’s peer group. The payout or settlement of the PSUs will be made in shares of our common stock.
|
July 28, |
January 28, |
|||||||
|
2024 |
2024 |
|||||||
|
Restricted shares |
||||||||
|
RSUs and PSUs |
||||||||
All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share.
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||
|
July 28, |
July 30, |
July 28, |
July 30, |
|||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Net (loss) / income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Less: Unvested participating restricted stock dividends |
||||||||||||||||
|
Net earnings allocated to unvested participating restricted stock |
||||||||||||||||
|
(Loss) / Earnings available for common shareholders |
( |
) | ( |
) | ||||||||||||
|
Weighted average shares outstanding for basic earnings per share |
||||||||||||||||
|
Dilutive effect of unvested restricted stock, RSU and PSU awards |
||||||||||||||||
|
Weighted average shares outstanding for diluted earnings per share |
||||||||||||||||
|
Basic (loss) / earnings per share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Diluted (loss) / earnings per share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Due to net losses in the fiscal 2025 second quarter and first half, approximately
12. Income Taxes
During the second quarters of fiscal 2025 and 2024, we recorded income tax expenses of $
No material and non-routine positions have been identified as uncertain tax positions.
Tax years ending January 31, 2021 through January 28, 2024 remain subject to examination by federal and state taxing authorities.
13. Segment Information
As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:
|
■ |
better understand our performance; |
|
■ |
better assess our prospects for future net cash flows; and |
|
■ |
make more informed judgments about us as a whole. |
We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.
For financial reporting purposes, we are organized into
|
■ |
Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; |
|
■ |
Home Meridian, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; |
|
■ |
Domestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, HF Custom (formerly Sam Moore), Shenandoah Furniture and Sunset West; and |
|
■ |
All Other, consisting of H Contract, Lifestyle Brands and BOBO Intriguing Objects. None of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280. |
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
|
July 28, |
July 30, |
July 28, |
July 30, |
|||||||||||||||||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||||||
|
% Net |
% Net |
% Net |
% Net |
|||||||||||||||||||||||||||||
|
Net Sales |
Sales |
Sales |
Sales |
Sales |
||||||||||||||||||||||||||||
|
Hooker Branded |
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
|
Home Meridian |
% | % | % | % | ||||||||||||||||||||||||||||
|
Domestic Upholstery |
% | % | % | % | ||||||||||||||||||||||||||||
|
All Other |
% | % | % | % | ||||||||||||||||||||||||||||
|
Consolidated |
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
|
Gross Profit |
||||||||||||||||||||||||||||||||
|
Hooker Branded |
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
|
Home Meridian |
% | % | % | % | ||||||||||||||||||||||||||||
|
Domestic Upholstery |
% | % | % | % | ||||||||||||||||||||||||||||
|
All Other |
( |
) | - |
% | % | % | % | |||||||||||||||||||||||||
|
Consolidated |
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
|
Operating (Loss) / Income |
||||||||||||||||||||||||||||||||
|
Hooker Branded |
$ | ( |
) | - |
% | $ | % | $ | ( |
) | - |
% | $ | % | ||||||||||||||||||
|
Home Meridian |
( |
) | - |
% | ( |
) | - |
% | ( |
) | - |
% | ( |
) | - |
% | ||||||||||||||||
|
Domestic Upholstery |
( |
) | - |
% | % | ( |
) | - |
% | % | ||||||||||||||||||||||
|
All Other |
( |
) | - |
% | ( |
) | - |
% | ( |
) | - |
% | % | |||||||||||||||||||
|
Consolidated |
$ | ( |
) | - |
% | $ | % | $ | ( |
) | - |
% | $ | % | ||||||||||||||||||
|
Capital Expenditures (net of disposals) |
||||||||||||||||||||||||||||||||
|
Hooker Branded |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
|
Home Meridian |
||||||||||||||||||||||||||||||||
|
Domestic Upholstery |
||||||||||||||||||||||||||||||||
|
All Other |
||||||||||||||||||||||||||||||||
|
Consolidated |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
|
Depreciation & Amortization |
||||||||||||||||||||||||||||||||
|
Hooker Branded |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
|
Home Meridian |
||||||||||||||||||||||||||||||||
|
Domestic Upholstery |
||||||||||||||||||||||||||||||||
|
All Other |
||||||||||||||||||||||||||||||||
|
Consolidated |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
|
As of July 28, |
As of January 28, |
|||||||||||||||||||||||||||||||
|
2024 |
%Total |
2024 |
%Total |
|||||||||||||||||||||||||||||
|
Identifiable Assets |
Assets |
Assets |
||||||||||||||||||||||||||||||
|
Hooker Branded |
$ | % | $ | % | ||||||||||||||||||||||||||||
|
Home Meridian |
% | % | ||||||||||||||||||||||||||||||
|
Domestic Upholstery |
% | % | ||||||||||||||||||||||||||||||
|
All Other |
% | % | ||||||||||||||||||||||||||||||
|
Consolidated |
$ | % | $ | % | ||||||||||||||||||||||||||||
|
Consolidated Goodwill and Intangibles |
||||||||||||||||||||||||||||||||
|
Total Consolidated Assets |
$ | $ | ||||||||||||||||||||||||||||||
|
Net Sales (in thousands) |
||||||||||||||||||||||||||||||||
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
|
July 28, 2024 |
%Total |
July 30, 2023 |
%Total |
July 28, 2024 |
%Total |
July 30, 2023 |
%Total |
|||||||||||||||||||||||||
|
Casegoods |
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
|
Upholstery |
% | % | % | % | ||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
14. Subsequent Events
Dividends
On
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker,” “Hooker Division(s),” “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to all current business units and brands except for those in the Home Meridian segment. The Hooker Branded segment includes Hooker Casegoods and Hooker Upholstery. The Domestic Upholstery segment includes Bradington-Young, HF Custom (formerly Sam Moore), Shenandoah Furniture and Sunset West. All Other includes H Contract, Lifestyle Brands, and BOBO Intriguing Objects.
Forward-Looking Statements
Certain statements made in this report, including statements under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negatives thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to:
|
1) |
general economic or business conditions, both domestically and internationally, including the current macro-economic uncertainties and challenges to the retail environment for home furnishings along with instability in the financial and credit markets, in part due to inflation and high interest rates, including their potential impact on (i) our sales and operating costs and access to financing, (ii) customers, and (iii) suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; |
|
2) |
the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; |
|
3) |
risks associated with the ultimate outcome of our planned cost reduction plans, including the amounts and timing of savings realized; |
|
4) |
risks associated with the outcome of the HMI segment restructuring which we expect to complete in fiscal 2025, including whether we can return the segment to consistent profitability; |
|
5) |
risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, customs issues, freight costs, including the price and availability of shipping containers, ocean vessels, domestic trucking, and warehousing costs and the risk that a disruption in our offshore suppliers or the transportation and handling industries, including labor stoppages, strikes, or slowdowns, could adversely affect our ability to timely fill customer orders; |
|
6) |
the impairment of our long-lived assets, which can result in reduced earnings and net worth; |
|
7) |
difficulties in forecasting demand for our imported products and raw materials used in our domestic operations; |
|
8) |
adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government; |
|
9) |
our inability to collect amounts owed to us or significant delays in collecting such amounts; |
|
10) |
the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information, hacking or other cyber-security threats or inadequate levels of cyber-insurance or risks not covered by cyber-insurance; |
|
11) |
risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs; |
|
12) |
the risks related to the Sunset Acquisition including maintaining Sunset West’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, the loss of key employees from Sunset West, the costs and risk associated with the expansion of Sunset West distribution to our East Coast facilities, and failure to realize benefits anticipated from the Sunset Acquisition; |
|
13) |
disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia, North Carolina or California administrative facilities, our High Point, Las Vegas, and Atlanta showrooms or our representative offices or warehouses in Vietnam and China; |
|
14) |
changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products; |
|
15) |
risks associated with product defects, including higher than expected costs associated with product quality and safety, regulatory compliance costs (such as the costs associated with the US Consumer Product Safety Commission’s new mandatory furniture tip-over standard, STURDY) related to the sale of consumer products and costs related to defective or non-compliant products, product liability claims and costs to recall defective products and the adverse effects of negative media coverage; |
|
16) |
the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers, including the loss of several large customers through business consolidations, failures or other reasons, or the loss of significant sales programs with major customers; |
|
17) |
the direct and indirect costs and time spent by our associates associated with the implementation of our Enterprise Resource Planning system (“ERP”), including costs resulting from unanticipated disruptions to our business; |
|
18) |
achieving and managing growth and change, and the risks associated with new business lines, acquisitions, including the selection of suitable acquisition targets, restructurings, strategic alliances and international operations; |
|
19) |
risks associated with securing a suitable credit facility, which may include restrictive covenants that could limit our ability to pursue our business strategies; |
|
20) |
risks associated with distribution through third-party retailers, such as non-binding dealership arrangements; |
|
21) |
the cost and difficulty of marketing and selling our products in foreign markets; |
|
22) |
changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials; |
|
23) |
price competition in the furniture industry; |
|
24) |
competition from non-traditional outlets, such as internet and catalog retailers; and |
|
25) |
changes in consumer preferences, including increased demand for lower-priced furniture. |
Our forward-looking statements could be wrong considering these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.
Also, our business is subject to significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 2024 Annual Report.
Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.
Quarterly Reporting
This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2025 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began April 29, 2024 and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 29, 2024, which both ended July 28, 2024. This report discusses our results of operations for these periods compared to the 2024 fiscal year thirteen-week period that began May 1, 2023, and the twenty-six-week period that began January 30, 2023, which both ended July 30, 2023; and our financial condition as of July 28, 2024 compared to January 28, 2024.
References in this report to:
|
■ |
the 2025 fiscal year and comparable terminology mean the fiscal year that began January 29, 2024, and will end February 2, 2025; and |
|
■ |
the 2024 fiscal year and comparable terminology mean the fiscal year that began January 30, 2023, and ended January 28, 2024. |
Dollar amounts presented in the tables below are in thousands except for per share data.
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all our recent public filings made with the SEC, especially our 2024 Annual Report. Our 2024 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.
Our 2024 Annual Report and other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurnishings.com.
Overview
Hooker Furnishings Corporation, incorporated in Virginia in 1924, is a designer, marketer, and importer of casegoods (wooden and metal furniture), leather furniture, fabric-upholstered furniture, lighting, accessories, and home décor for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather, custom fabric-upholstered furniture and outdoor furniture.
Orders and Backlog
In the discussion below and herein, we reference changes in sales orders or “orders” and sales order backlog (unshipped orders at a point in time) or “backlog” over and compared to certain periods of time and changes discussed are in sales dollars and not units of inventory, unless stated otherwise. We believe orders are generally good current indicators of sales momentum and business conditions. If the items ordered are in stock and the customer has requested immediate delivery, we generally ship products in about seven days or less from receipt of order; however, orders may be shipped later if they are out of stock or there are production or shipping delays or the customer has requested the order to be shipped at a later date. It is our policy and industry practice to allow order cancellation for casegoods up to the time of shipment or, in the case of container direct orders, up until the time the container is booked with the ocean freight carrier; therefore, customer orders for casegoods are not firm. However, domestically produced upholstered products are predominantly custom-built and consequently, cannot be cancelled once the leather or fabric has been cut. Our hospitality products are highly customized and are generally non-cancellable. For our outdoor furnishings, most orders require a deposit upon order and the balance before production is started, and hence are generally non-cancellable.
For the Hooker Branded and Domestic Upholstery segments and All Other, we generally consider backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies, we do not consider order backlogs to be a reliable indicator of expected long-term sales. At times, the ratio of new products to currently available inventory items can affect the amount of the backlog that can be converted to shipments in the short-term. We generally consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period. Due to (i) the average sales order sizes of its mass and mega account channels of distribution, (ii) the proprietary nature of many of its products and (iii) the project nature of its hospitality business, for which average order sizes tend to be larger and consequently, the Home Meridian segment’s order backlog tends to be larger.
There have been exceptions to the general predictive nature of our orders and backlogs noted in the above paragraph, such as during times of extremely high demand and supply chain challenges as experienced during the immediate aftermath of the initial COVID-19 crisis and subsequent recovery. Orders were not being converted to shipments as quickly as would be expected compared to the pre-pandemic environment due to the lack and cost of shipping containers and vessel space as well as limited overseas vendor capacity and our domestic production capacity. As a result, backlogs were significantly elevated and reached historical levels in the prior two years.
At July 28, 2024, our backlog of unshipped orders was as follows:
|
Order Backlog |
||||||||||||||||
|
(Dollars in 000s) |
||||||||||||||||
|
Reporting Segment |
July 28, 2024 |
January 28, 2024 |
July 30, 2023 |
*August 4, 2019 |
||||||||||||
|
Hooker Branded |
$ | 14,765 | $ | 15,416 | $ | 18,838 | $ | 12,267 | ||||||||
|
Home Meridian |
43,918 | 36,013 | 43,001 | 92,388 | ||||||||||||
|
Domestic Upholstery |
18,066 | 18,920 | 24,130 | 12,114 | ||||||||||||
|
All Other |
1,130 | 1,475 | 2,264 | 2,213 | ||||||||||||
|
Consolidated |
$ | 77,879 | $ | 71,824 | $ | 88,233 | $ | 118,982 | ||||||||
Consolidated order backlog decreased compared to the end of the second quarter of the prior year but increased from year-end in January 2024, driven by a higher backlog in Home Meridian’s hospitality business. Order backlog in the Hooker Branded and Domestic Upholstery segments decreased slightly from year-end but remained above pre-COVID levels in calendar 2019.
*For comparison purposes, we included order backlog as of fiscal 2020 second quarter end, the year before the COVID crisis. At fiscal 2020 second quarter end, Home Meridian backlog included approximately $14 million orders from the unprofitable ready-to-assemble (RTA), Clubs and Accentrics Home e-commerce (ACH) businesses which we decided to exit in fiscal 2022 and fiscal 2023, respectively. Domestic Upholstery backlog did not include Sunset West, the business we acquired in the beginning of fiscal 2023. At fiscal 2020 second quarter end, Sunset West had approximately $3 million in backlog. See Review below for additional information on our incoming orders and backlog.
Executive Summary-Results of Operations
Our fiscal 2025 second quarter and first half results were adversely affected by continued anemic demand for home furnishings which is impacting most of home furnishings industry. Additionally, in the prior year’s second quarter and first half, the $3.5 million and $11 million in liquidation sales from the unprofitable businesses we exited were not present in the current year periods. Year-over-year industry-wide U.S. furniture store sales fell compared to the prior year same months for 17 consecutive months, according to the U.S. Census Bureau.
During the fiscal 2025 second quarter, consolidated net sales decreased by $2.7 million, or 2.8%, compared to the same quarter last year. Net sales decreased by $2.3 million at Domestic Upholstery and $1.6 million at Hooker Branded, while Home Meridian saw a $1.6 million increase, driven by strong sales in its hospitality business. Consolidated gross profit and margin decreased for the quarter, primarily due to decreased profitability in the Hooker Branded and Domestic Upholstery segments, which were attributed to lower sales and higher product costs, as well as under-absorbed indirect costs. This decrease was partially offset by improved profitability in the Home Meridian segment. The Company reported a quarterly consolidated operating loss of $3.1 million, with a margin of (3.3%), driven by low sales volume and under-absorbed expenses, compared to an operating income of $1.3 million and a 1.3% margin in the prior year’s second quarter. The consolidated net loss for the quarter was $2.0 million, or ($0.19) per diluted share, compared to net income of $785,000, or $0.07 per diluted share, in the same quarter last year.
During the fiscal 2025 first half, consolidated net sales decreased by $31.0 million, or 14.1%, compared to the same period last year, also due to the persistent low demand for home furnishings driven by macroeconomic uncertainties. All three segments experienced sales decreases during the six-month period. Consolidated gross profit and margin decreased, impacted by lower overall sales, higher product costs in the Hooker Branded and Domestic Upholstery segments, and an unfavorable customer mix in the Home Meridian segment. However, these decreases were partially offset by strong profitability in the hospitality business. The company reported an operating loss of $8.2 million, with a margin of (4.3%), compared to an operating income of $3.2 million and a 1.5% margin in the same period last year. The consolidated net loss for the six-month period was $6.0 million, or ($0.57) per diluted share, compared to $2.2 million, or $0.20 per diluted share, in the prior year period.
Our fiscal 2025 second quarter and first-half performance are discussed in greater detail below under “Review” and “Results of Operations.”
Review
The softness in the macroeconomic environment and ongoing challenges in the home furnishings industry, which we observed in the previous quarters, have extended beyond our initial expectations. In response to this downturn, we have focused on maintaining a strong balance sheet while protecting our 50-plus year history of quarterly dividends. We have continued to grow our profitable businesses, including driving Home Meridian’s gross margin to one of the highest levels since its acquisition in 2016. We continue to invest in growth initiatives, including the addition of new talent in areas like merchandising, interior design sales and support, increased showroom footprint as well as the continued expansion of Sunset West, all of which we believe will position us for improved profitability when demand returns. Additionally, we are in the process of implementing cost reduction measures including the consolidation of certain operations and other fixed cost reductions. In the fiscal 2025 second quarter, we reported a modest 2.8% decrease in revenue compared to the same period last year. However, sales volumes remained insufficient to reach breakeven. Despite the quarterly operating loss, we strongly believe in our strategic positioning and expect profitability to resume once the market recovers and sales volumes rebound.
The Hooker Branded segment’s net sales decreased by $1.6 million, or 4.5%, compared to the second quarter of the prior year, driven by the lower average selling prices due to the price reductions we implemented on orders after August of the prior year to align with reduced ocean freight costs. Incoming orders decreased by 6.8% during the quarter, reflecting the persistent industry-wide weak demand for home furnishings. Although unit volume exceeded both the prior year's second quarter and the current fiscal year's first quarter, it was still among the lowest quarters in recent history. On a more positive note, the quarter-end order backlog remained 20% higher than pre-pandemic levels at the end of the fiscal 2020 second quarter.
Gross profit and gross margin both decreased during the quarter due to reduced net sales and higher product costs, driven by the recent increase in freight costs. The prior period's gross margin benefited from lower freight costs and price increases implemented two years ago, making the current quarter's comparison more challenging. Additionally, warehousing and distribution costs increased during the quarter, largely due to increased labor costs.
Despite achieving a 30% gross margin, the segment recorded a small operating loss of $406,000 for the quarter, driven by under-absorbed selling and administrative (S&A) expenses due to low sales, compared to a $3.9 million operating income in the prior quarter. S&A expenses were higher as a percentage of sales due to the impact of lower sales on the mostly fixed nature of these expenses. Additionally, S&A expenses increased in part because this segment assumes the majority of expenses associated with the Company’s growth and strategic initiatives, including investments in talent, ERP implementation expenses, professional services expenses, and other sales and marketing expenses. Given that much of the increased spending is in growth initiatives, we believe the additional spending is warranted. Notably, management remains committed to optimizing spending and expects to see significant fixed cost reductions beginning in the second half of fiscal 2025 and beyond.
The Home Meridian segment reported a $1.6 million, or 5.6%, increase in net sales for the fiscal 2025 second quarter, despite the absence of $3.5 million ACH liquidation sales that were in the prior period. This marks the first year-over-year quarterly sales increase for the segment in two years. The growth was primarily driven by strong sales at Samuel Lawrence Hospitality (SLH). Additionally, we saw a sales uptick with major furniture chains and mass merchants during the quarter. However, these increases were partially offset by decreased sales to independent furniture stores and e-commerce channels.
Home Meridian reported an increase in gross profit, achieving a gross margin of 19.5%, one of the highest levels since the acquisition of the business in 2016. This was driven by strong profitability at SLH, along with reduced Georgia warehouse costs and lower expenses in Asian operations, though it was partially offset by sales of some lower-margin products and customer mix. The segment recorded a quarterly operating loss of $896,000 due to sales volume deficit; however, it improved from a $3.3 million operating loss in the same quarter last year and a $3.4 million loss in the first quarter of the current fiscal year. This result was in line with management's expectations given the current industry conditions. While incoming orders decreased during the second quarter, the quarter-end backlog was 2.1% higher than the same period last year and 22% higher than the fiscal 2024 year-end in January.
The Domestic Upholstery segment’s net sales decreased by $2.3 million, or 7.6%, compared to the prior year second quarter due to decreased sales at Bradington-Young and HF Custom, partially offset by increased sales at Sunset West and Shenandoah. Industry weakness affected order rates and backlog levels, leading to reduced production at Bradington-Young and HF Custom during the quarter. On a more positive note, excluding Sunset West, the order backlog remained 20% higher than the pre-pandemic levels at the end of the fiscal 2020 second quarter. Gross profit and margin both decreased during the quarter due to increased direct material costs and under-absorbed indirect costs attributed to lower sales and resulting reduced production efficiencies at these domestic facilities, which negatively impacted margins by 150 bps and 180 bps, respectively. Additionally, warehousing costs increased due to higher labor costs and increased warehouse rent expenses, as Sunset West has expanded into a portion of the Georgia warehouse for its growing East Coast footprint. S&A expenses also increased by 240 bps during the quarter. As a result, the segment recorded an operating loss of $1.3 million, compared to operating income of $724,000 in the prior year period.
Cash and cash equivalents were $42.1 million at the end of the second quarter, down $1.1 million from the fiscal 2024 year-end, but up $1.2 million from the first quarter ended in April 2024. Inventory levels decreased by $4.7 million from year-end. During the six-month period, we used cash and cash equivalents on hand and $5.3 million cash generated from operating activities to fund $4.9 million in cash dividends to our shareholders, $2.4 million for further development of our cloud-based ERP system, and $1.4 million in capital expenditures. In addition to our cash balance, we had an aggregate of $28.3 million available under our existing revolver at quarter-end to fund working capital needs, as well as $29.4 million cash surrender value of company-owned life insurance. With strategic inventory management, reasonable capital expenditures, and prudent expense management, we believe we have sufficient financial resources to support our business operations for the foreseeable future.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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|
2024 |
2023 |
2024 |
2023 |
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|
Net sales |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
Cost of sales |
78.0 | 76.1 | 78.6 | 76.7 | ||||||||||||
|
Gross profit |
22.0 | 23.9 | 21.4 | 23.3 | ||||||||||||
|
Selling and administrative expenses |
24.3 | 21.6 | 24.7 | 21.0 | ||||||||||||
|
Intangible asset amortization |
1.0 | 0.9 | 1.0 | 0.8 | ||||||||||||
|
Operating (loss)/income |
(3.3 | ) | 1.3 | (4.3 | ) | 1.5 | ||||||||||
|
Other income, net |
1.5 | 0.4 | 1.0 | 0.2 | ||||||||||||
|
Interest expense |
0.2 | 0.7 | 0.3 | 0.4 | ||||||||||||
|
(Loss)/income before income taxes |
(2.0 | ) | 1.0 | (3.6 | ) | 1.3 | ||||||||||
| Income tax expense / (benefit) | 0.1 | 0.2 | (0.4 | ) | 0.3 | |||||||||||
|
Net (loss)/income |
(2.1 | ) | 0.8 | (3.2 | ) | 1.0 | ||||||||||
Fiscal 2025 Second Quarter and First Half Compared to Fiscal 2024 Second Quarter and First Half
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Net Sales |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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|
Hooker Branded |
$ | 34,756 | 36.6 | % | $ | 36,381 | 37.1 | % | $ | (1,625 | ) | -4.5 | % | $ | 70,109 | 37.1 | % | $ | 79,813 | 36.3 | % | $ | (9,704 | ) | -12.2 | % | ||||||||||||||||||||||
|
Home Meridian |
30,516 | 32.1 | % | 28,911 | 29.6 | % | 1,605 | 5.6 | % | 56,940 | 30.2 | % | 70,832 | 32.3 | % | (13,892 | ) | -19.6 | % | |||||||||||||||||||||||||||||
|
Domestic Upholstery |
28,556 | 30.0 | % | 30,892 | 31.6 | % | (2,336 | ) | -7.6 | % | 58,583 | 31.1 | % | 65,996 | 30.0 | % | (7,413 | ) | -11.2 | % | ||||||||||||||||||||||||||||
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All Other |
1,253 | 1.3 | % | 1,622 | 1.7 | % | (369 | ) | -22.7 | % | 3,020 | 1.6 | % | 2,980 | 1.4 | % | 40 | 1.3 | % | |||||||||||||||||||||||||||||
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Consolidated |
$ | 95,081 | 100 | % | $ | 97,806 | 100 | % | $ | (2,725 | ) | -2.8 | % | $ | 188,652 | 100 | % | $ | 219,621 | 100 | % | $ | (30,969 | ) | -14.1 | % | ||||||||||||||||||||||
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Unit Volume |
FY25 Q2 vs. FY24 Q2 Change |
FY25 YTD vs. FY24 YTD Change |
Average Selling Price (“ASP”) |
FY25 Q2 vs. FY24 Q2 Change |
FY25 YTD vs. FY24 YTD Change |
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|
Hooker Branded |
11.6 | % | -0.6 | % |
Hooker Branded |
-8.6 | % | -6.1 | % | |||||||||
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Home Meridian |
-32.7 | % | -43.6 | % |
Home Meridian |
50.3 | % | 40.7 | % | |||||||||
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Domestic Upholstery |
-2.9 | % | -7.6 | % |
Domestic Upholstery |
-3.1 | % | -2.3 | % | |||||||||
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All Other |
-47.8 | % | -41.4 | % |
All Other |
-37.4 | % | -32.2 | % | |||||||||
|
Consolidated |
-22.6 | % | -33.5 | % |
Consolidated |
25.4 | % | 29.9 | % | |||||||||
Consolidated net sales decreased in the second quarter of fiscal 2025, primarily due to decreases in the Domestic Upholstery and Hooker Branded segments, partially offset by an increase in net sales at Home Meridian. For the first half of fiscal 2025, consolidated net sales decreased as all three segments experienced a downturn in sales.
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■ |
The Hooker Branded segment’s net sales decreased by $1.6 million, or 4.5%, in the second quarter of fiscal 2025, primarily due to lower average selling prices following price reductions implemented in the second half of previous year, driven by reduced ocean freight costs. While unit volume exceeded both the previous year's second quarter and the current fiscal year's first quarter, the price reductions had a more significant impact on overall revenue. For the six-month period, net sales decreased by $9.7 million, or 12.2%, driven by the same decrease in average selling prices and, to a lesser extent, decreased unit volume in the first quarter, reflecting the ongoing industry headwinds. |
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■ |
The Home Meridian segment’s net sales increased by $1.6 million, or 5.6%, in the second quarter of fiscal 2025, primarily driven by strong performance in its hospitality business. Additionally, sales through major furniture chains and mass merchants increased during the quarter. These gains were partially offset by decreases in sales to independent furniture stores and through e-commerce channels. In the previous year's second quarter, ACH liquidation sales accounted for $3.5 million, or 34% of unit volume. For the six-month period, net sales decreased by $13.9 million, or 19.6%, largely due to the absence of $11 million in liquidation sales, which accounted for 39% of total unit volume in the first half of the prior year. The remaining decrease was attributed to lower sales through independent furniture stores and e-commerce, while partially offset by increased sales in its hospitality business. The average selling price increased significantly in the second quarter and first half of fiscal 2025 due to the absence of liquidation sales. |
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■ |
The Domestic Upholstery segment’s net sales decreased by $2.3 million, or 7.6%, in the second quarter of fiscal 2025, primarily due to lower unit volume at Bradington-Young and HF Custom. Sunset West and Shenandoah each reported single-digit sales increases. Over the six-month period, net sales decreased by $7.4 million, or 11.2%, with Bradington-Young, HF Custom, and Shenandoah experiencing sales decreases, while Sunset West reported a 10.7% sales growth. This growth was attributed to the Company's efforts to expand its distribution along the East Coast and the stabilization of its ERP system over the past year. |
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Gross Profit and Margin |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Hooker Branded |
$ | 10,417 | 30.0 | % | $ | 13,103 | 36.0 | % | $ | (2,686 | ) | -20.5 | % | $ | 21,465 | 30.6 | % | $ | 26,621 | 33.4 | % | $ | (5,156 | ) | -19.4 | % | ||||||||||||||||||||||
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Home Meridian |
5,946 | 19.5 | % | 3,210 | 11.1 | % | 2,736 | 85.2 | % | 9,397 | 16.5 | % | 9,923 | 14.0 | % | (526 | ) | -5.3 | % | |||||||||||||||||||||||||||||
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Domestic Upholstery |
4,646 | 16.3 | % | 6,365 | 20.6 | % | (1,719 | ) | -27.0 | % | 9,351 | 16.0 | % | 13,387 | 20.3 | % | (4,036 | ) | -30.1 | % | ||||||||||||||||||||||||||||
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All Other |
(87 | ) | -6.9 | % | 663 | 40.9 | % | (750 | ) | -113.1 | % | 81 | 2.7 | % | 1,316 | 44.2 | % | (1,235 | ) | -93.8 | % | |||||||||||||||||||||||||||
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Consolidated |
$ | 20,922 | 22.0 | % | $ | 23,341 | 23.9 | % | $ | (2,419 | ) | -10.4 | % | $ | 40,294 | 21.4 | % | $ | 51,247 | 23.3 | % | $ | (10,953 | ) | -21.4 | % | ||||||||||||||||||||||
Consolidated gross profit decreased in the fiscal 2025 second quarter and first half primarily due to overall lower net sales, while consolidated gross margin decreased in both periods due to reduced margins in the Hooker Branded and Domestic Upholstery segments, partially offset by increased gross margin at Home Meridian.
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■ |
The Hooker Branded segment’s profit and gross margin both decreased in fiscal 2025 second quarter, due to lower net sales and increased product costs. The gross margin in the previous year's second quarter had been elevated by a combination of reduced ocean freight costs and price increases implemented during the post-COVID years to mitigate higher freight costs. Warehousing and distribution expenses also increased during the quarter, driven by higher labor costs. For the six-month period, gross profit decreased due to lower net sales, while gross margin decreased due to increased product costs and warehousing and distribution expenses. |
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■ |
The Home Meridian segment’s gross profit increased in the second quarter of fiscal 2025, driven by strong sales in the hospitality business, but decreased over the six-month period due to lower overall net sales. Gross margin increased in both periods, due to higher profitability at SLH as well as reduced Georgia warehouse and Asian operation costs. However, these gains were partially offset by an unfavorable customer and product mix. |
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■ |
The Domestic Upholstery segment’s gross profit and margin both decreased in the second quarter and first half of fiscal 2025. Direct material costs increased by 150 bps in the quarter and 130 bps over the six-month period, driven by increased raw material costs. Indirect costs increased by 180 bps and 150 bps, respectively, for both periods due to lower net sales resulting in under-absorbed fixed overhead costs. Although direct labor costs decreased in absolute terms, they remained unchanged as a percentage of net sales, as Bradington-Young and HF Custom operated on reduced schedules to align production with lower backlog levels. Additionally, warehousing and distribution expenses increased in both periods due to higher labor costs and increased rent expenses, as a portion of the Georgia warehouse was redeployed to support Sunset West’s East Coast expansion. |
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Selling and Administrative Expenses (S&A) |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Hooker Branded |
$ | 10,823 | 31.1 | % | $ | 9,208 | 25.3 | % | $ | 1,615 | 17.5 | % | $ | 21,864 | 31.2 | % | $ | 20,007 | 25.1 | % | $ | 1,857 | 9.3 | % | ||||||||||||||||||||||||
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Home Meridian |
6,511 | 21.3 | % | 6,215 | 21.5 | % | 296 | 4.8 | % | 12,905 | 22.7 | % | 14,717 | 20.8 | % | (1,812 | ) | -12.3 | % | |||||||||||||||||||||||||||||
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Domestic Upholstery |
5,338 | 18.7 | % | 5,047 | 16.3 | % | 291 | 5.8 | % | 10,756 | 18.4 | % | 10,189 | 15.4 | % | 567 | 5.6 | % | ||||||||||||||||||||||||||||||
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All Other |
475 | 37.9 | % | 674 | 41.6 | % | (199 | ) | -29.5 | % | 1,089 | 36.0 | % | 1,278 | 42.9 | % | (189 | ) | -14.8 | % | ||||||||||||||||||||||||||||
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Consolidated |
$ | 23,147 | 24.3 | % | $ | 21,144 | 21.6 | % | $ | 2,003 | 9.5 | % | $ | 46,614 | 24.7 | % | $ | 46,191 | 21.0 | % | $ | 423 | 0.9 | % | ||||||||||||||||||||||||
Consolidated selling and administrative (“S&A”) expenses increased both in absolute terms and as a percentage of net sales in the fiscal 2025 second quarter and the six-month period.
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■ |
The Hooker Branded segment’s S&A expenses increased in absolute terms in both the second quarter and first half of fiscal 2025. This increase was attributed to higher compensation costs due to wage inflation and investment in talent, higher bad debt, increased ERP system implementation expenses, and increased costs to support strategic growth initiatives. S&A expenses increased as a percentage of net sales in the second quarter and the first half, primarily due to low sales, caused by the ongoing challenges in the home furnishings industry, as well as increased spending. |
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■ |
The Home Meridian segment’s S&A expenses increased slightly in absolute terms during fiscal 2025 second quarter but remained unchanged as a percentage of net sales. Increased compensation costs, higher bad debt, and increased selling costs associated with higher net sales contributed to the uptick, partially offset by reduced spending in other areas. For the fiscal 2025 first half, S&A expenses decreased due to lower selling costs on reduced net sales, decreased compensation expenses from personnel changes, and other cost-saving initiatives. S&A expenses increased as a percentage of net sales due to lower net sales over the six-month period. |
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■ |
The Domestic Upholstery segment’s S&A expenses increased both in absolute terms and as a percentage of net sales during the second quarter and first half of fiscal 2025. This increase was primarily driven by higher professional services expenses, as well as increased selling expenses. These increases were partially offset by lower compensation expenses and other cost reductions. |
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Intangible Asset Amortization |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Intangible asset amortization |
$ | 924 | 1.0 | % | $ | 924 | 0.9 | % | $ | - | 0.0 | % | $ | 1,849 | 1.0 | % | $ | 1,807 | 0.8 | % | $ | 42 | 2.3 | % | ||||||||||||||||||||||||
Intangible asset amortization expense remained unchanged in the second quarter of fiscal 2025 but increased slightly over the six-month period due to the reassessment and subsequent amortization of the Sam Moore trade name, which began in April of the previous year. See Note 8 to our Condensed Consolidated Financial Statements for additional information.
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Operating (Loss) / Profit and Margin |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Hooker Branded |
$ | (406 | ) | -1.2 | % | $ | 3,896 | 10.7 | % | $ | (4,302 | ) | -110.4 | % | $ | (399 | ) | -0.6 | % | $ | 6,614 | 8.3 | % | $ | (7,013 | ) | -106.0 | % | ||||||||||||||||||||
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Home Meridian |
(896 | ) | -2.9 | % | (3,336 | ) | -11.5 | % | 2,440 | 73.1 | % | (4,169 | ) | -7.3 | % | (5,454 | ) | -7.7 | % | 1,285 | 23.6 | % | ||||||||||||||||||||||||||
|
Domestic Upholstery |
(1,285 | ) | -4.5 | % | 724 | 2.3 | % | (2,009 | ) | -277.5 | % | (2,593 | ) | -4.4 | % | 2,051 | 3.1 | % | (4,644 | ) | -226.4 | % | ||||||||||||||||||||||||||
|
All Other |
(562 | ) | -44.9 | % | (11 | ) | -0.7 | % | (551 | ) | -5009.1 | % | (1,008 | ) | -33.4 | % | 38 | 1.3 | % | (1,046 | ) | -2752.6 | % | |||||||||||||||||||||||||
|
Consolidated |
$ | (3,149 | ) | -3.3 | % | $ | 1,273 | 1.3 | % | $ | (4,422 | ) | -347.4 | % | $ | (8,169 | ) | -4.3 | % | $ | 3,249 | 1.5 | % | $ | (11,418 | ) | -351.4 | % | ||||||||||||||||||||
The Company reported operating losses in the fiscal 2025 second quarter and first half due to the factors discussed above.
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Income taxes |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 28, |
July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Consolidated income tax expense / (benefits) |
$ | 85 | 0.1 | % | $ | 191 | 0.2 | % | $ | (106 | ) | -55.5 | % | $ | (731 | ) | -0.4 | % | $ | 593 | 0.3 | % | $ | (1,324 | ) | -223.3 | % | |||||||||||||||||||||
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Effective Tax Rate |
-4.5 | % | 19.6 | % | 10.8 | % | 21.0 | % | ||||||||||||||||||||||||||||||||||||||||
During the second quarters of fiscal 2025 and 2024, we recorded income tax expenses of $85,000 and $191,000, respectively. The effective tax rates for these periods were (4.5%) and 19.6%, respectively. Due to the annualization method, we recognized income tax expenses on a loss before income tax in fiscal 2025 second quarter. For the fiscal 2025 first half, we recorded income tax benefits of $731,000 compared to the income tax expense of $593,000 for the previous year’s first half. The effective tax rates for the fiscal 2025 and 2024 first half periods were 10.8% and 21.0%, respectively.
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Net (Loss) / Income |
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Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
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July 30, |
July 28, |
July 30, |
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2024 |
2023 |
2024 |
2023 |
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% Net Sales |
% Net Sales |
$ Change |
% Change |
% Net Sales |
% Net Sales |
$ Change |
% Change |
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Consolidated net (loss) / income |
$ | (1,951 | ) | -2.1 | % | $ | 785 | 0.8 | % | $ | (2,736 | ) | -348.5 | % | $ | (6,042 | ) | -3.2 | % | $ | 2,234 | 1.0 | % | $ | (8,276 | ) | -370.5 | % | ||||||||||||||||||||
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Diluted (loss) / earnings per share |
$ | (0.19 | ) | $ | 0.07 | $ | (0.57 | ) | $ | 0.20 | ||||||||||||||||||||||||||||||||||||||
Outlook
We are encouraged that inflation hit its lowest post-pandemic level in July, with the Consumer Price Index cooling to 2.9%, setting up a possible interest rate cut in September. There has been a recent surge in mortgage refinancing in August, which is a positive indicator. We believe, if the Federal Reserve lowers interest rates, housing activity will accelerate.
While the U.S. Department of Commerce reported its 17th consecutive month of lower home furnishings retail sales in July, overall retail sales rose about 3% during the same period, and the University of Michigan Consumer Sentiment Index rose in early August for the first time since March. Additionally, existing-home sales grew in July ending a four-month sales decline.
Our strong balance sheet, financial condition and seasoned management team will well equip us to navigate the remaining downturn, as we focus on maximizing efficiencies with the planned cost reductions. We are in the process of refinancing our credit facility and expect to have that completed in the near future. In addition, we plan to pay off $22 million in term debt during the third quarter, demonstrating our confidence in our future. We will continue investing in expansion strategies that will position us for improved profitability and revenue growth when demand returns.
Financial Condition, Liquidity and Capital Resources
Cash Flows – Operating, Investing and Financing Activities
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Twenty-Six Weeks Ended |
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July 28, |
July 30, |
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2024 |
2023 |
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Net cash provided by operating activities |
$ | 5,314 | $ | 51,412 | ||||
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Net cash used in investing activities |
(808 | ) | (6,211 | ) | ||||
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Net cash used in financing activities |
(5,615 | ) | (14,224 | ) | ||||
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Net (decrease) / increase in cash and cash equivalents |
$ | (1,109 | ) | $ | 30,977 | |||
During fiscal 2025 first half ended July 28, 2024, we used existing cash and cash equivalent on hand, $5.3 million cash generated from operations and $936,000 life insurance proceeds to fund $4.9 million in cash dividends to our shareholders, $2.4 million for further development of our cloud-based ERP system, $1.4 million capital expenditures and $326,000 in life insurance premiums on Company-owned life insurance policies.
In comparison, during the six months ended July 30, 2023, we used a portion of the $51.4 million cash generated from operations and $444,000 life insurance proceeds to fund $8.7 million share repurchases, $4.9 million in cash dividends to our shareholders, $4.0 million capital expenditures including investments in our new showrooms, $2.6 million for development of our cloud-based ERP system, $2.4 million on the BOBO acquisition, and $317,000 in life insurance premiums on Company-owned life insurance policies.
Liquidity, Financial Resources and Capital Expenditures
Our financial resources include:
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available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance; |
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expected cash flow from operations; |
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available lines of credit; and |
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cash surrender value of Company-owned life insurance. |
The most significant components of our working capital are inventory, accounts receivable and cash and cash equivalents reduced by accounts payable and accrued expenses.
Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for inventory, lease payments and payroll), quarterly dividend payments and capital expenditures related primarily to our ERP project, showroom renovations and upgrading systems, buildings and equipment. The timing of our working capital needs can vary greatly depending on demand for and availability of raw materials and imported finished goods but is generally the greatest in mid-summer because of inventory build-up for the traditional fall selling season. Long term cash requirements relate primarily to funding lease payments and repayment of long-term debt.
Loan Agreements and Revolving Credit Facility
On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) to replenish cash used to make the Sunset Acquisition. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”). Details of the individual credit facilities provided for in the Amendment are as follows:
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Unsecured Revolving Credit Facility. Under the Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00%. The interest rate will be adjusted on a monthly basis. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; |
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2022 Secured Term Loan. The Amendment provided us with an $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and |
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2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to make monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. |
We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed. As of July 28, 2024, $4.2 million was outstanding under the Unsecured Term Loan and $18 million was outstanding under the Secured Term Loan.
We incurred $37,500 in debt issuance costs in connection with our term loans. As of July 28, 2024, unamortized loan costs of $22,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.
The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:
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Maintain a ratio of funded debt to EBITDA not exceeding: |
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2.25:1.0 through July 30, 2024; and |
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2.00:1.00 thereafter. |
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A basic fixed charge coverage ratio of at least 1.25:1.00; and |
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Limit capital expenditures to no more than $15.0 million during any fiscal year. |
The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Existing Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above if we are not otherwise in default under the Existing Loan Agreement.
Due to our first half results, we were not in compliance with the Existing Loan Agreement’s basic fixed charge ratio covenant in either fiscal 2025 quarterly period; however, subsequent to the end of both quarterly periods, we obtained covenant waivers from BofA. Based on the risk of future non-compliance and according to U.S. GAAP, we have classified all of the debt as current in our consolidated balance sheets. We have sufficient cash and investments on hand to retire the debt if necessary. However, we expect to finalize a new credit facility with BofA during the fiscal 2025 third quarter. Consequently, we expect to be in compliance with our revised financial covenants beginning in our fiscal 2025 third quarter and for the foreseeable future.
As of July 28, 2024, we had $28.3 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $6.7 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of July 28, 2024. There were no additional borrowings outstanding under the Existing Revolver as of July 28, 2024.
Capital Expenditures
We expect to spend approximately $1 million in capital expenditures over the remainder of fiscal 2025 to maintain and enhance our operating systems and facilities, excluding any possible spending decreases resulting from the cost reduction plan discussed above.
Enterprise Resource Planning Project
During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts begun shortly thereafter. The ERP system went live at Sunset West in December 2022 and in the legacy Hooker divisions in early September 2023. Due to our cost reduction initiatives, we have paused the ERP project in the Home Meridian segment. We do not anticipate further significant ERP spending in fiscal 2025.
Dividends
On September 3, 2024, our board of directors declared a quarterly cash dividend of $0.23 per share which will be paid on September 30, 2024, to shareholders of record at September 13, 2024.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2024 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, raw materials price risk and changes in foreign currency exchange rates, which could impact our results of operations or financial condition. We manage our exposure to this risk through our normal operating activities.
Interest Rate Risk
Borrowings under our revolving credit facility, the Secured Term Loan and the Unsecured Term loan bear interest based on BSBY plus 1.00%, BSBY plus 0.90% and BSBY plus 1.40%, respectively. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of July 28, 2024 other than standby letters of credit in the amount of $6.7 million. As of July 28, 2024, $22.2 million was outstanding under our term loans. A 1% increase in the BSBY rate would result in an annual increase in interest expenses on our terms loans of approximately $216,000.
Raw Materials Price Risk
We are exposed to market risk from changes in the cost of raw materials used in our domestic upholstery manufacturing processes; principally, wood, fabric, and foam products. Increases in home construction activity could result in increases in wood and fabric costs. Additionally, the cost of petroleum-based foam products we utilize are sensitive to crude oil prices, which vary due to supply, demand, and geo-political factors.
Currency Risk
For imported products, we generally negotiate firm pricing denominated in U.S. Dollars with our foreign suppliers, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Most of our imports are purchased from suppliers located in Vietnam and China. The Chinese currency floats within a limited range in relation to the U.S. Dollar, resulting in exposure to foreign currency exchange rate fluctuations.
Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effect of any price increases from suppliers in the prices we charge for imported products. However, these changes could adversely impact sales volume or profit margins during affected periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended July 28, 2024. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of July 28, 2024 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
During fiscal 2024 second quarter, we closed on the acquisition of substantially all of the assets of BOBO Intriguing Objects (“BOBO”). As permitted by SEC guidance for newly acquired businesses, we excluded BOBO’s operations from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ending January 28, 2024. We are in the process of implementing our internal control structure at BOBO and expect that this effort will be completed in fiscal 2025.
There have been no changes in our internal control over financial reporting during the fiscal quarter ended July 28, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5. Other Information
During the three months ended July 28, 2024, no director or officer of the Company
As further described under “Liquidity, Financial Resources and Capital Expenditures” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations herein, the Company entered into a covenant waiver with BofA under the Existing Loan Agreement on September 3, 2024 (the “Waiver”). A copy of the Waiver is filed herewith as Exhibit 10.3 to this Quarterly Report on Form 10-Q and its terms are hereby incorporated by reference into this Item 5.
Item 6. Exhibits
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3.1 |
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3.2 |
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4.1 |
Articles of Incorporation of the Company, as amended (See Exhibit 3.1) |
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4.2 |
Amended and Restated Bylaws of the Company, as amended (See Exhibit 3.2) |
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10.1* |
Form of Performance Stock Units Grant Agreement, for grants made in fiscal 2025 |
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10.2* |
Form of RSU Time-based Vesting Grant Agreement, for grants made in fiscal 2025 |
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10.3* |
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31.1* |
Rule 13a-14(a) Certification of the Company’s principal executive officer |
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31.2* |
Rule 13a-14(a) Certification of the Company’s principal financial officer |
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32.1** |
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101* |
Interactive Data Files (formatted as Inline XBRL) |
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104* |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
** Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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HOOKER FURNISHINGS CORPORATION |
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Date: September 6, 2024 |
By: |
/s/ Paul A. Huckfeldt |
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Paul A. Huckfeldt |
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Chief Financial Officer and Senior Vice President – Finance and Accounting |
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