What changed in this filing

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Item 1. Financial Statements

2022-12-08 compared with 2022-09-08 · 255 added, 241 removed, 577 unchanged (46% of the section changed)

42 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Cost of sales

1 unchanged sentence

Intangible asset amortization

Operating income

Other (expense)/income, net

Operating income/(loss)

Other income, net

Interest expense, net

Income before income taxes

Income tax expense

Earnings per share

Income/(Loss) before income taxes

Income tax expense/(benefit)

Net income/(loss)

Earnings/(Loss) per share

Weighted average shares outstanding:

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Net income/(loss)

Other comprehensive income:

2 unchanged sentences

Adjustments to net periodic benefit cost

Total comprehensive income

Total comprehensive income/(loss)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Operating Activities:

Adjustments to reconcile net income to net cash

used in operating activities:

(used in)/provided by operating activities:

Depreciation and amortization

14 unchanged sentences

Deferred compensation

Net cash used in operating activities

Net cash (used in)/provided by operating activities

Investing Activities:

4 unchanged sentences

Proceeds from long-term loans

Payments for long-term loans

Proceeds from revolving credit facility

11 unchanged sentences

Non-cash transactions:

Increase/(Decrease) in lease liabilities arising from changes in right-of-use assets

Increase in lease liabilities arising from changes in right-of-use assets

Increase in property and equipment through accrued purchases

6 unchanged sentences

Income (loss)

Balance at May 2, 2021

Net income for the 13 weeks ended August 1, 2021

Balance at August 1, 2021

Net income for the 13 weeks ended October 31, 2021

Unrealized loss on defined benefit plan, net of tax of $ 24

3 unchanged sentences

Performance-based restricted stock units costs

Balance at August 1, 2021

Balance at May 1, 2022

Net income for the 13 weeks ended July 31, 2022

Balance at October 31, 2021

Balance at July 31, 2022

Net income for the 13 weeks ended October 30, 2022

Unrealized loss on defined benefit plan, net of tax of $ 5

4 unchanged sentences

Performance-based restricted stock units costs

Balance at July 31, 2022

Balance at October 30, 2022

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

6 unchanged sentences

Balance at January 31, 2021

Net income for the 26 weeks ended August 1, 2021

Net income for the 39 weeks ended October 31, 2021

Unrealized loss on defined benefit plan, net of tax of $ 72

3 unchanged sentences

Performance-based restricted stock units costs

Balance at August 1, 2021

Balance at October 31, 2021

Balance at January 30, 2022

Net income for the 26 weeks ended July 31, 2022

Net income for the 39 weeks ended October 30, 2022

Unrealized loss on defined benefit plan, net of tax of $ 15

4 unchanged sentences

Performance-based restricted stock units costs

Balance at July 31, 2022

Balance at October 30, 2022

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2 unchanged sentences

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

For the Twenty-Six Weeks Ended July 31, 2022

For the Thirty-Nine Weeks Ended October 30, 2022

Preparation of Interim Financial Statements

9 unchanged sentences

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 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022.

This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began May 3, 2021, and the twenty-six-week period that began February 1, 2021, which both ended August 1, 2021;

and our financial condition as of July 31, 2022 compared to January 30, 2022.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 1, 2022, and the thirty-nine-week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began January 31, 2022, which both ended October 30, 2022.

This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began August 2, 2021, and the thirty-nine-week period that began February 1, 2021, which both ended October 31, 2021;

and our financial condition as of October 30, 2022 compared to January 30, 2022.

References in these notes to the condensed consolidated financial statements of the Company to:

1 unchanged sentence

the 2022 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 1, 2021 and ended January 30, 2022.

On January 31, 2022, the first day of our 2023 fiscal year, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sunset HWM, LLC (“Sunset West”) and its three members (the “Sunset West Members”) to acquire substantially all of the assets of Sunset West (the “Sunset Acquisition”).

On January 31, 2022, the first day of our 2023 fiscal year, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sunset HWM, LLC (“Sunset West”) and its three members to acquire substantially all the assets of Sunset West (the “Sunset Acquisition”).

Simultaneously, we closed on the transaction by paying $ 23.9 million in cash and $ 2 million subject to an escrow arrangement and possible earn-out payments to the Sunset West Members up to an aggregate of $ 4 million with the closing cash consideration subject to adjustment for customary working capital estimates.

In the fourth quarter of fiscal 2023, we received $ 639 ,000 from the seller for the final working capital adjustments.

Under the Asset Purchase Agreement, the Company also assumed specified liabilities of Sunset West.

4 unchanged sentences

No new accounting pronouncements have been adopted in the 2023 fiscal year.

We reviewed newly issued accounting pronouncements and concluded 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.

In accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Acquisition has been accounted for using the acquisition method of accounting.

1 unchanged sentence

The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of July 31, 2022.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of October 30, 2022.

The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revision, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized.

Normal post-closing contingencies remain to be resolved, including the final working capital adjustment and any changes due to deviations from the seller’s representations and warranties at closing.

In the fourth quarter of fiscal 2023, we received $ 639 ,000 from the seller for the final working capital adjustments.

Fair Value Estimates of Assets Acquired and Liabilities Assumed

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Cash paid for assets acquired

Cash receivable from the seller for final working capital adjustment

Fair value of earnout

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The total weighted average amortization period for these assets is 10.2 years.

We incurred Acquisition-related costs of $ 414,000 in fiscal 2022 and $ 63,000 in the first six months of fiscal 2023.

We incurred Acquisition-related costs of $ 414,000 in fiscal 2022 and $ 69,000 in the first nine months of fiscal 2023.

These expenses were included in the “Selling and administrative expenses” line of our fiscal 2022 and fiscal 2023 condensed consolidated statements of operations.

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $ 6.9 million in net sales and $ 150,000 of operating income, including $ 282,000 in intangible amortization expense for the fiscal 2023 second quarter and $ 14.8 million in net sales and $ 1.0 million of operating income, including $ 564,000 in intangible amortization expense for the fiscal 2023 first half.

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $ 8.8 million in net sales and $ 1.4 million of operating income, including $ 282,000 in intangible amortization expense for the fiscal 2023 third quarter and $ 23.6 million in net sales and $ 2.4 million of operating income, including $ 846,000 in intangible amortization expense for the fiscal 2023 nine-month period.

Accounts Receivable

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Cloud Computing Hosting Arrangement

We are in the process of implementing a common Enterprise Resource Planning (ERP) system across all divisions and expect to go-live with this system in Sunset West in the second half of fiscal 2023 and in our legacy Hooker divisions in fiscal 2024, with other segments and divisions following thereafter.

We are in the process of implementing a common Enterprise Resource Planning (ERP) system across all divisions and expect to go-live with this system at Sunset West in late fiscal 2023 and in our legacy Hooker divisions in early fiscal 2024, with other segments and divisions following thereafter.

Based on the provisions of ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software, we capitalize implementation costs incurred to develop internal-use software associated with hosting arrangements that are service contracts.

1 unchanged sentence

Amortization expense is expected to commence at system go-live in the second half of fiscal 2023.

The capitalized implementation costs at July 31, 2022 and January 30, 2022 were as follows:

The capitalized implementation costs at October 30, 2022 and January 30, 2022 were as follows:

Implementation Costs

1 unchanged sentence

Costs capitalized during the period

Balance at July 31, 2022

Balance at October 30, 2022

Fair Value Measurements

5 unchanged sentences

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 31, 2022 and January 30, 2022, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs.

As of October 30, 2022 and January 30, 2022, 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.

Our assets measured at fair value on a recurring basis at July 31, 2022 and January 30, 2022, were as follows:

Fair value at July 31, 2022

Our assets measured at fair value on a recurring basis at October 30, 2022 and January 30, 2022, were as follows:

Fair value at October 30, 2022

Fair value at January 30, 2022

3 unchanged sentences

Intangible Assets

During the fiscal 2023 first half, we recorded both non-amortizable and amortizable intangible assets as a result of the Acquisition.

During the fiscal 2023 nine-month period, we recorded both non-amortizable and amortizable intangible assets because of the Acquisition.

Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Domestic Upholstery and Home Meridian segments, are shown in the following two tables:

January 30, 2022

July 31, 2022

October 30, 2022

Non-amortizable Intangible Assets

3 unchanged sentences

Domestic Upholstery

$ 490 $ - $ 490

Goodwill - Sunset West

Domestic Upholstery

- 14,462 14,462

Total Goodwill

$ 490 $ 14,462 $ 14,952

Trademarks and trade names - Home Meridian

Home Meridian

Trademarks and trade names - Bradington-Young

Domestic Upholstery

Trademarks and trade names - Sam Moore

6,650 - 6,650

Trademarks and trade names

Domestic Upholstery

1,257 - 1,257

Total Trademarks and trade names

$ 7,907 $ - $ 7,907

Total non-amortizable assets

$ 8,397 $ 14,462 $ 22,859

Our amortizable intangible assets are recorded in our Home Meridian and Domestic Upholstery segments.

3 unchanged sentences

Balance at January 30, 2022

Balance at July 31, 2022

For the remainder of fiscal 2023, amortization expense is expected to be approximately $ 1.8 million.

Balance at October 30, 2022

For the remainder of fiscal 2023, amortization expense is expected to be approximately $ 878 ,000.

We have operating leases for warehouses, showrooms, manufacturing facilities, offices and equipment.

We recognized sub-lease income of $ 34,000 for the three-month period and $ 381,000 for the six-month period, both ended July 31, 2022.

We recognized sub-lease income of $ 150,000 for the three-month period and $ 296,000 for the six-month period, both ended August 1, 2021.

The components of lease cost and supplemental cash flow information for leases for the three-months and six-months ended July 31, 2022 and August 1, 2021 were:

We recognized sub-lease income of $ 34,000 for the three-month period and $ 415,000 for the nine-month period, both ended October 30, 2022.

We recognized sub-lease income of $ 266,000 for the three-month period and $ 561,000 for the nine-month period, both ended October 31, 2021.

The components of lease cost and supplemental cash flow information for leases for the three-months and nine-months ended October 30, 2022 and October 31, 2021 were:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Thirty-Nine Weeks Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

Operating lease cost

3 unchanged sentences

Operating lease cash outflows

The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of July 31, 2022 and January 30, 2022 were as follows:

July 31, 2022

The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of October 30, 2022 and January 30, 2022 were as follows:

October 30, 2022

January 30, 2022

9 unchanged sentences

The weighted-average remaining lease term is 8.0 years.

The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheets on July 31, 2022:

The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheets on October 30, 2022:

Undiscounted Future

5 unchanged sentences

Present value of lease payments

As of July 31, 2022, the Company had an additional lease for a showroom in High Point, North Carolina.

This lease is expected to commence in the Fall of calendar 2022 with an initial lease term of 10 years and estimated future minimum rental commitments of approximately $ 23.7 million.

Since the lease has not yet commenced, the undiscounted amounts are not included in our financial statements or in the table above.

As of October 30, 2022, the Company had an additional lease for a showroom in High Point, North Carolina.

This lease was commenced in November 2022 with an initial lease term of 10 years and estimated future minimum rental commitments of approximately $ 23.7 million.

Since the lease was not commenced as of October 30, 2022, the undiscounted amounts are not included in our financial statements or in the table above.

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”) in order to replenish cash used to make the Acquisition.

(“BofA”) to replenish cash used to make the 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”).

1 unchanged sentence

Unsecured Revolving Credit Facility.

Under this Amendment, the expiration date of the existing $ 35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027.

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 %.

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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 October 30, 2022, $ 6.6 million was outstanding under the Unsecured Term Loan, $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 31, 2022, unamortized loan costs of $ 37,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

As of October 30, 2022, unamortized loan costs of $ 35,625 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:

6 unchanged sentences

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.

We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

We were in compliance with each of these financial covenants at October 30, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

During the fiscal 2023 second quarter, we drew $ 30.3 million under our $35 million Existing Revolver to cover working capital needs driven by finished goods inventory purchases from our Asian suppliers but had repaid such amounts by the end of the quarter due in part to receiving the proceeds from the Secured Term Loan and Unsecured Term Loan.

As of July 31, 2022, we had $ 27.9 million available under our $ 35 million Existing Revolver to fund working capital needs.

Standby letters of credit in the aggregate amount of $ 7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of July 31, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

During the fiscal 2023 third quarter, we drew $ 5.9 million from the Existing Revolver but repaid such amounts by the end of the quarter.

As of October 30, 2022, we had $ 26.4 million available under our $ 35 million Existing Revolver to fund working capital needs.

Standby letters of credit in the aggregate amount of $ 8.6 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 30, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of October 30, 2022.

Earnings Per Share

15 unchanged sentences

All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share.

During the fiscal 2023 second quarter, we purchased and retired 68,400 shares of our common stock (at an average price of $ 16.59 per share) under the $ 20 million share repurchase authorization approved by our board of directors earlier this quarter.

These repurchases reduced our total outstanding shares and, consequently, reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2023 second quarter and year-to-date periods shown below.

Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $ 5.9 million.

The following table sets forth the computation of basic and diluted earnings per share:

During the fiscal 2023 nine-month period, we purchased and retired 598,000 shares of our common stock (at an average price of $ 15.63 per share) under the $ 20 million share repurchase authorization approved by our board of directors in the second quarter.

These repurchases reduced our total outstanding shares and, consequently, reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2023 third quarter and year-to-date periods shown below.

The following table sets forth the computation of basic and diluted earnings/(loss) per share:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Net income/(loss)

Unvested participating restricted stock dividends

Net earnings allocated to unvested participating restricted stock

Earnings available for common shareholders

Earnings/(Loss) available for common shareholders

Weighted average shares outstanding for basic earnings per share

1 unchanged sentence

Weighted average shares outstanding for diluted earnings per share

Basic earnings per share

Diluted earnings per share

We recorded income tax expense of $ 1.6 million for the fiscal 2023 second quarter compared to $ 2.2 million for the comparable prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6 % and 22.7 %, respectively.

For the fiscal 2023 first half, we recorded income tax expense of $ 2.6 million, compared to $ 5.0 million for the comparable prior year period.

The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0 % and 22.7 %, respectively.

Basic earnings/(loss) per share

Diluted earnings/(loss) per share

We recorded income tax expense of $ 1.3 million for the fiscal 2023 third quarter compared to income tax benefit of $ 403 ,000 for the comparable prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 third quarters were 21.6 % and 24.8 %, respectively.

For the fiscal 2023 nine-month period, we recorded income tax expense of $ 3.9 million, compared to $ 4.6 million for the comparable prior year period.

The effective tax rates for the fiscal 2023 and 2022 nine-month periods were both 22.5 %.

No material and non-routine positions have been identified that are uncertain tax positions.

29 unchanged sentences

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Thirty-Nine Weeks Ended

Hooker Branded

1 unchanged sentence

Domestic Upholstery

Gross Profit/(Loss)

Hooker Branded

5 unchanged sentences

Domestic Upholstery

Capital Expenditures

Capital Expenditures (net of disposals)

Hooker Branded

5 unchanged sentences

Domestic Upholstery

As of July 31,

As of October 30,

As of January 30,

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Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Thirty-Nine Weeks Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

Subsequent Events

On September 7, 2022 , our board of directors declared a quarterly cash dividend of $ 0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022 .

On December 5, 2022 , our board of directors declared a quarterly cash dividend of $0.22 per share which will be paid on December 30, 2022 to shareholders of record at December 16, 2022 .

This represents a 10 % increase over the previous quarterly dividend and the seventh consecutive annual dividend increase.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

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Those risks and uncertainties include but are not limited to:

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 rising interest rates, including their potential impact on (i) our sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses ;

difficulties in forecasting demand for our imported products;

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, ocean and 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;

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and the impact on our global supply chain, inflation, the retail environment and our customer base;

general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

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.

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and foreign government regulations and in the political, social and economic climates of the countries from which we source our products;

difficulties in forecasting demand for our imported products;

risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products and the adverse effects of negative media coverage;

disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia or North Carolina administrative facilities, our North Carolina and Las Vegas showrooms or our representative offices or warehouses in Vietnam and China;

risks associated with product defects and changing consumer product safety laws, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products and the adverse effects of negative media coverage;

disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia, North Carolina or California administrative facilities, our North Carolina and Las Vegas showrooms or our representative offices or warehouses in Vietnam and China;

risks associated with our newly leased warehouse space in Georgia including information systems, access to warehouse labor and the inability to realize anticipated cost savings;

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changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture.

Our forward-looking statements could be wrong considering these and other risks, uncertainties and assumptions.

Our forward-looking statements could be wrong or incomplete 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.

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 because 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.

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Quarterly Reporting

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022.

and our financial condition as of July 31, 2022 compared to January 30, 2022.

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 1, 2022, and the thirty-nine-week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began January 31, 2022, which both ended October 30, 2022.

and our financial condition as of October 30, 2022 compared to January 30, 2022.

References in this report to:

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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 of our recent public filings made with the SEC, especially our 2022 Annual Report.

We also encourage users of this report to familiarize themselves with all our recent public filings made with the SEC, especially our 2022 Annual Report.

Our 2022 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.

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Before the fiscal 2023 first quarter, H Contract’s results included sales of seating products sourced from Sam Moore.

Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2023 first quarter Sam Moore’s results now include sales of seating products formerly included in H Contract’s results.

Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2023 first quarter Sam Moore’s results, which are included in Domestic Upholstery, now include sales of seating products formerly included in H Contract’s results.

Fiscal 2022 results discussed below have been recast to reflect this change.

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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.

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” 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.

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 later.

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;

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They are discussed in greater detail below and are essential to understanding our prospects.

During fiscal 2022, orders were not converting 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.

As a result, backlogs were elevated to historical high levels.

At July 31, 2022, our backlog of unshipped orders was as follows and a further discussion of our current backlog by segment is discussed below under “Review”:

In the prior year, orders were not converting 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.

As a result, backlogs were significantly elevated.

At October 30, 2022, our backlog of unshipped orders was as follows and a further discussion of our current backlog by segment is discussed below under “Review”:

Order Backlog

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Reporting Segment

July 31, 2022

October 30, 2022

January 30, 2022

August 1, 2021

October 31, 2021

Hooker Branded

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Executive Summary-Results of Operations

Consolidated net sales for the fiscal 2023 second quarter decreased by $9.6 million, or 5.9%, as compared to the prior year quarter, driven by decreased net sales in the Home Meridian segment, partially offset by sales increases in the Domestic Upholstery (due in part to the addition of Sunset West results) and Hooker Branded segments, and the recovery in the H Contract business.

Consolidated gross profit decreased due to decreases in the Home Meridian and Hooker Branded segments, partially offset by increased gross profit in the Domestic Upholstery segment.

Consolidated gross margin increased due to improved margin at Home Meridian.

Consolidated operating income was $7.3 million or 4.8% of net sales as compared to a $9.7 million or 5.9% of net sales in the prior year period.

Consolidated net income was $5.5 million or $0.46 per diluted share for the fiscal 2023 second quarter, as compared to $7.5 million or $0.62 per diluted share in the prior year quarter.

For the fiscal 2023 first half, consolidated net sales decreased by $25.2 million, or 7.7%, compared to the prior year period due to decreased net sales in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment and the addition of Sunset West results therein.

Consolidated gross profit decreased while gross margin stayed about the same.

Consolidated operating income was $11.2 million or 3.7% of net sales as compared to $21.9 million or 6.7% of net sales in the prior year first half.

Consolidated net income was $8.7 million or $0.73 per diluted share for the fiscal 2023 first half, as compared to $16.9 million or $1.40 per diluted share in the prior year period.

Our fiscal 2023 second quarter and first-half performance are discussed in greater detail below under “Review” and “Results of Operations.”

In the second quarter and first half of fiscal 2023, consolidated net sales and profitability both decreased as compared to the corresponding periods in the prior year.

In the first half of the prior year, sales and profitability were favorably impacted by the demand surge that followed the initial Covid crisis and a return to more normal factory production, which benefitted home furnishings and other industries, before new Covid variants resulted in new lockdowns at many of our Asian suppliers in the second half of fiscal 2022.

Effects of these lockdowns continued into the fiscal 2023 first quarter, however factory production improved substantially during the second quarter of fiscal 2023 and helped us exceed our internal expectations for the quarter.

The Hooker Branded segment ’ s net sales increased by $2.9 million, or 5.8%, as compared to the prior year quarter when sales were already elevated, due to sales increases at both Hooker Casegoods and Hooker Upholstery.

The unexpected COVID-related lockdown at our suppliers in Vietnam last summer and their slow re-openings caused low inventory receipts in our U.S.

warehouses and resulted in a sales decline in the second half of fiscal 2022 and the fiscal 2023 first quarter.

As these suppliers resumed production and shipments after the Lunar New Year, inventory receipts at our U.S.

warehouses have increased each month, allowing us to fulfill orders and reduce backlogs.

At the end of fiscal 2023 second quarter, inventory levels for this segment increased by $33 million as compared to fiscal 2022 year-end and $15 million as compared to fiscal 2023 first quarter end, including $24 million of in-transit inventory.

The majority of Hooker Branded sales are shipped out of U.S.

warehouses, so we believe our investment in inventory is essential to keep our best sellers in stock, support our inventory positioning, help reduce impacts of the ongoing supply chain disruptions, flow imports from Asia, and prepare for the fall and holiday selling seasons.

Additionally, a large percentage of this inventory is designated for sales orders in our backlog and carries the price increases we implemented last year and earlier this year to mitigate higher freight and product costs.

This segment reported $6.1 million operating income and a 11.5% operating margin for the fiscal 2023 second quarter.

Incoming orders decreased as compared to the prior year quarter and the quarter-end backlog was at a comparable level to the prior year second quarter end but was 21% lower than at fiscal 2022 year-end due to increased shipments during the quarter.

Hooker Branded backlog was still about four times higher than pre-pandemic levels in fiscal 2020.

The Home Meridian segment ’ s net sales decreased by $28.3 million, or 32.4%, as compared to the prior year quarter.

Sales with mass merchants and major furniture chains decreased due to retailers accelerating orders in the prior year and rationalizing their inventory levels in the current year.

In addition, our exit of the unprofitable Clubs channel, which accounted for about 40% of the sales decline.

E-commerce sales decreased as sales in this channel returned to pre-pandemic levels and growth rates.

These decreases were partially offset by the continued recovery of hospitality business and the launch of the Pulaski Upholstery division.

Despite significant sales declines, Home Meridian gross margin improved in fiscal 2023 second quarter due to the fact that most shipments carried price increases and freight surcharges to help mitigate higher freight costs and lower allowances as a result of our exit from the Clubs channel.

Profitability was negatively impacted by a large quality-related chargeback and transition and start-up costs at the new Georgia warehouse.

On a more positive note, during the quarter we completed the exit from all three older warehouses and leased additional space at our new Georgia warehouse to support HMI’s expansion into higher-margin channels of distribution.

This segment reported an operating loss of $991,000, as compared to breakeven in the prior year quarter;

however, it improved from $3.1 million operating loss in the first quarter of fiscal 2023.

Quarter-end backlog was lower than the prior year second quarter end and fiscal 2022 year-end due to decreased incoming orders with mass merchants, as these customers continue to rationalize their inventories to match current demand levels, and the absence of Clubs channel orders but was at about the same levels the segment experienced in fiscal 2020.

The Domestic Upholstery segment ’ s net sales increased by $14.7 million, or 62.0%, as compared to the prior year quarter due to organic sales growth at Bradington Young, Sam Moore and Shenandoah, as well as the addition of Sunset West results.

Despite strong sales, gross margins decreased in the fiscal 2023 second quarter due to significantly increased raw material costs, partially offset by overhead absorption on higher sales volume and higher gross margin at the Shenandoah division whose production was impacted by a foam shortage issue in the prior year period.

This segment reported an operating income of $1.7 million and a 4.5% operating margin for the fiscal 2023 second quarter.

Incoming orders decreased due to current lead times and high backlogs.

Quarter-end backlog was at the same level as prior year quarter, but was 7.8% lower than at fiscal 2022 year-end as higher shipments reduced backlog.

Domestic Upholstery backlog was almost five times pre-pandemic levels in fiscal 2020.

Cash and cash equivalents stood at $11.7 million at fiscal 2023 second quarter-end, down $57.7 million as compared to the balance at the fiscal 2022 year-end due principally to a $56.1 million increase in inventory.

At fiscal 2023 second quarter end, inventory stood at $131.1 million, $27.5 million higher than prior year second quarter end and $38.3 million higher than pre-pandemic level at fiscal 2020 year-end.

Consolidated net sales for the fiscal 2023 third quarter increased by $18.2 million, or 13.6%, compared to the prior year quarter.

This increase was primarily attributable to higher net sales in the Domestic Upholstery segment due to the addition of Sunset West results as well as sales growth across its divisions, higher net sales at Home Meridian, and the recovery in the H Contract business.

The increases were slightly offset by $1.3 million or 2.4% sales decrease at Hooker Branded.

Gross profit and margin improved in all three segments.

Consolidated operating income and margin were $6.4 million or 4.2% as compared to an operating loss of $1.7 million or (1.3%) of net sales in the prior year quarter.

Consolidated net income was $4.8 million or $0.42 per diluted share for the fiscal 2023 third quarter, compared to a net loss of $1.2 million or ($0.10) per diluted share in the prior year quarter.

Consolidated net sales for the fiscal 2023 nine-month period decreased by $7.0 million, or 1.5%, as compared to the same period last year due to decreased net sales in the Home Meridian and Hooker Branded segments, partially offset by higher net sales in the Domestic Upholstery segment and All Other.

Consolidated gross profit and margin increased due to the increases at the Domestic Upholstery and Home Meridian segments and All Other, partially offset by a decline in Hooker Branded’s gross profit and margin due to a drop in sales in the first quarter of fiscal 2023.

Consolidated operating income and margin were $17.6 million or 3.9% as compared to $20.2 million and 4.4% in the prior year period.

Consolidated net income was $13.6 million or $1.14 per diluted share for the fiscal 2023 nine-month period, as compared to $15.7 million or $1.30 per diluted share in the prior year period.

Our fiscal 2023 third quarter and nine months performance are discussed in greater detail below under “Review” and “Results of Operations.”

Despite macro-economic uncertainties and a challenging retail environment, especially for the home furnishings industry, we were grateful that many of the obstacles we faced in the prior year were behind us and were able to report revenue and earnings both exceeded the prior year third quarter.

The Hooker Branded segment ’ s net sales decreased by $1.3 million, or 2.4%, compared to record sales in the third quarter of last year.

The inventory unavailability issues experienced in the fiscal 2022 fourth quarter and fiscal 2023 first quarter caused by the unexpected COVID-related lockdowns at our suppliers in Vietnam were no longer an issue.

At the end of fiscal 2023 third quarter, inventory levels for this segment increased by $42 million as compared to fiscal 2022 year-end and $44 million as compared to prior year third quarter end, which positions us well for the holiday selling seasons.

Shipments were somewhat lower than our expectations in the third quarter due to a temporary inventory mix issue.

Some inventories were received as incomplete collections in our U.S.

warehouses missing some pieces.

Dealers delayed receipts of orders until collections could ship complete.

On a more positive note, a large percentage of the shipments carried the price increases we implemented last year and early this year to mitigate higher freight and product costs;

as a result, gross profit increased despite a decline in sales and gross margin grew by 100 basis points as compared to prior year quarter.

This segment reported $5.2 million operating income and a 9.5% operating margin for the fiscal 2023 third quarter.

Incoming orders decreased as compared to the prior year quarter as the pace of orders returned to near pre-pandemic levels.

Quarter-end backlog was lower than prior year quarter end and fiscal 2022 year-end but was still about three times higher than pre-pandemic levels in calendar 2019.

The Home Meridian segment ’ s net sales increased by $4.4 million, or 9.4%, as compared to the prior year quarter when container direct sales, which comprise a large portion of the revenue in this segment, decreased significantly due to the temporary COVID-related lockdowns in Vietnam and Malaysia.

As a result, sales with major furniture chains and mass merchants increased during the current year quarter.

Additionally, the hospitality business reported strong sales as that sector continues to recover from the COVID-related downturn.

These increases were largely offset by the absence of Clubs channel sales and decreased E-commerce sales.

The exit from the unprofitable Clubs channel resulted in a significant improvement in returns and allowances.

E-commerce sales decreased mostly due to normalization of post-COVID consumer demand.

Gross profit and margin improved significantly in the fiscal 2023 third quarter due to the absence of excess chargebacks from the Clubs channel and order cancellation costs when we exited the Ready-To-Assemble furniture category in the prior year quarter.

Additionally, most shipments carried price increases and freight surcharges to help mitigate higher freight costs.

While sales volume improved over the abnormally low prior-year year levels, HMI shipped far less than expected due mostly to dealers with high inventory levels delaying shipments.

Additionally, HMI recorded higher-than-expected transition and labor costs related to the new Georgia warehouse.

Consequently, it reported an operating loss of $3.2 million, which was $7 million improvement from a $10 million operating loss in the prior year quarter.

As expected, incoming orders and quarter-end backlog decreased significantly due to the absence of Clubs channel orders as well as decreased orders from our retail customers due to the delayed shipments previously mentioned.

The Domestic Upholstery segment ’ s net sales increased by $14.1 million, or 48.2%, as compared to the prior year quarter due to the addition of Sunset West results as well as organic sales growth at Bradington Young, Sam Moore and Shenandoah which all delivered double-digit net sales increases for the quarterly and nine-month periods.

Gross profit and margin increased due to the inclusion of Sunset West results, favorable sales variances, better overhead absorption on higher sales volumes and near full operating capacity.

These improvements were partially offset by increased raw material costs such as leather, foam and upholstery materials.

This segment generated operating income of $3.8 million and reported an operating margin of 8.8% for the fiscal 2023 third quarter.

Incoming orders decreased as compared to prior year quarter due to current demand, long lead times and high backlogs, but were at about the same level as year-to-date calendar 2019.

Quarter-end backlog was lower than prior year quarter end and fiscal 2022 year-end when demand was exceptionally strong while production capacity was constrained.

Comparing to calendar 2019, backlog was more than three times higher than pre-pandemic levels.

Cash and cash equivalents stood at $6.5 million at fiscal 2023 third quarter-end, down $62.9 million from the balance at the fiscal 2022 year-end due principally to $58.9 million increase in inventory.

During the nine-month period, we used cash collected from accounts receivable to pay $9.4 million in share repurchases, $7.8 million for capital expenditures and development of our new cloud-based ERP system, and $7.1 million in cash dividends to our shareholders.

During the fiscal 2023 second quarter, we received $25 million in term loan proceeds to replenish cash used to make the Sunset West Acquisition.

We also paid $4.8 million in cash dividends to our shareholders and spent $3 million for development of our new cloud-based ERP system.

In addition to our cash balance, we had $27.9 million available under our existing revolver to fund working capital needs.

With strategic inventory management and cautious capital expenditures, we believe we have the financial resources to support our business operations for the foreseeable future.

In addition to our cash balance, at fiscal 2023 third quarter end, we had $26.4 million available under our existing revolver to fund working capital needs.

To improve liquidity, we have also implemented targeted promotions on certain products.

With strategic inventory management, reasonable capital expenditures, and prudent expense management, we believe we have the financial resources to support our business operations for the foreseeable future.

Results of Operations

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Cost of sales

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Intangible asset amortization

Operating income

Other (expense)/income, net

Income before income taxes

Operating income/(loss)

Other income, net

Interest expense

Income/(Loss) before income taxes

Income tax expense

Fiscal 2023 Second Quarter and First-Half Compared to Fiscal 2022 Second Quarter and First-Half

Net income/(Loss)

Fiscal 2023 Third Quarter and Nine Months Compared to Fiscal 2022 Third Quarter and Nine Months

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Hooker Branded

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*Sunset West is excluded from the Domestic Upholstery segment in the Unit Volume and ASP portions of the table above since it was not a part of our fiscal 2022 results.

Consequently, we believe including their fiscal 2023 results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table.

Consolidated net sales decreased in the fiscal 2023 second quarter due to sales declines in the Home Meridian segment, partially offset by increased net sales in the Domestic Upholstery and Hooker Branded segments.

Consolidated net sales decreased in the fiscal 2023 first half due to sales declines in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment.

The Hooker Branded segment’s net sales increased in the fiscal 2023 second quarter compared to the prior year quarter as both Hooker Casegoods and Hooker Upholstery divisions reported higher net sales.

Unit volume was lower than prior year second quarter, but significantly improved from the fourth quarter of previous year and the first quarter of this year.

Consequently, we believe including its fiscal 2023 results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table.

Consolidated net sales increased in the fiscal 2023 third quarter and decreased in the nine-month period, both versus corresponding prior year periods.

The Hooker Branded segment’s net sales decreased in the fiscal 2023 third quarter and nine months as compared to the corresponding periods in the prior year.

During the third quarter, this segment experienced a temporary inventory mix issue.

Some inventories were received as incomplete collections missing some pieces.

Retailers delayed receipt of orders until collections could ship complete, which resulted in lower shipments in spite of the large amount of incoming inventory.

For the nine-month period, sales volume decreased due to inventory unavailability, mostly in the first quarter.

In addition, net sales in the prior year periods increased significantly due to a demand surge after the initial COVID crisis.

ASP increased due to price increases we implemented in response to higher freight costs and product cost inflation.

For the fiscal 2023 first half, net sales decreased driven by lower shipments at the Hooker Casegoods division in the first quarter due to inventory unavailability.

The decrease was partially offset by continued higher sales at Hooker Upholstery due to quicker inventory turns at this division.

However, it was not sufficient to offset the sales decreases driven by unit volume loss.

The Home Meridian segment’s net sales decreased in the fiscal 2023 second quarter and first half compared to the prior year periods due to lower sales in the mass merchants and furniture chains as customers rationalize their inventory levels, the absence of sales from the unprofitable Clubs channel, and lower sales in the e-commerce channel.

These declines were partially offset by the recovery of hospitality business and the addition of Pulaski Upholstery division.

In addition, the prior year quarter’s sales were up over 20% as compared to the fiscal 2021 second quarter due to a demand surge after the initial COVID crisis.

However, it was insufficient to offset the sales decreases driven by unit volume loss.

The Home Meridian segment’s net sales increased as compared to the prior year third quarter when its container direct business was severely impacted by the temporary COVID-related lockdowns in Vietnam and Malaysia which resulted in significant sales volume loss.

For the nine-month period, the sales decrease was attributable to the absence of sales from the unprofitable Clubs channel and lower sales in the e-commerce channel, and to a lesser extent lower sales with the mass merchants.

These declines were partially offset by the recovery of hospitality business and the addition of Pulaski Upholstery category.

We implemented price increases to mitigate higher freight costs;

however, ASP was negatively impacted by deeply discounted Ready-To-Assemble category sales, the category we determined to exit last year.

The Domestic Upholstery segment reported strong net sales in the fiscal 2023 second quarter and first half due to double-digit sales growth at all three divisions as well as the addition of Sunset West’s sales.

however, ASP was negatively impacted by discounts offered on e-commerce sales and discounted Ready-To-Assemble category sales, the category we determined to exit last year.

The Domestic Upholstery segment’s net sales increased significantly in the fiscal 2023 third quarter and nine-month period due to the addition of Sunset West’s sales as well as strong sales at all three divisions.

Prior-year sales were negatively affected by a foam shortage which is no longer a significant issue.

Although we experienced some disruptions of the delivery of raw materials for production, all three divisions were operating near full capacity with shipments exceeding prior year periods and our internal goals.

Although we experienced some disruptions of the delivery of raw materials for production earlier this year, all divisions were operating at full capacity and working through backlog.

Additionally, ASP increased at three divisions due to price increases we implemented in response to the inflation of raw material costs.

All Other’s net sales increased in the fiscal 2023 second quarter and first half due to increased unit volume at H Contract, as this division is gradually recovering from the impact of reduced capital spending by the senior living industry during the COVID pandemic.

Gross Profit and Margin

All Other’s net sales increased in the fiscal 2023 third quarter and nine months driven by increased unit volume at H Contract due to the recovery of senior living industry after the COVID pandemic.

Gross Profit/(Loss) and Margin

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Domestic Upholstery

Consolidated gross profit decreased while margin increased in the fiscal 2023 second quarter.

For the fiscal 2023 first half, consolidated gross profit decreased and margin stayed about the same as compared to prior year period.

The Hooker Branded segment’s gross profit and margin both decreased in the fiscal 2023 second quarter, despite increased net sales, due primarily to higher freight and product costs, and to a lesser extent higher warehousing labor costs due to increased shipping and receiving activity, higher wage levels, and higher demurrage and drayage expenses as more containers were delivered to the U.S and continued to experience supply chain interruptions.

Hooker Branded gross profit and margin decreased in the fiscal 2023 first half also due to sales declines in the first quarter and increased costs.

The Home Meridian segment’s gross profit decreased in the fiscal 2023 second quarter and first half driven by sales volume loss, higher product costs, higher warehousing labor costs, transition and start-up costs at the new Georgia warehouse, and margin loss on a quality-related issue.

Gross margin increased in the fiscal 2023 second quarter but decreased slightly in the first half.

Freight costs still negatively impacted margin in this segment but improved as compared to prior year periods due to price increases and surcharges to offset the increased freight and product costs.

The Domestic Upholstery segment’s gross profit increased in the fiscal 2023 second quarter and first half due to strong sales across all divisions and the addition of Sunset West gross profit.

Despite significant sales increases, gross margin decreased in the fiscal 2023 second quarter and stayed the same in the first half due to increased raw material costs, partially offset by overhead absorption which benefitted from higher sales volume and production efficiencies.

Prior-year gross profit was negatively affected by production inefficiencies from a foam shortage which is no longer a significant issue.

All Other’s gross profit and margin both increased in the fiscal 2023 second quarter and first half driven by stronger net sales.

Consolidated gross profit and margin both increased in the fiscal 2023 third quarter and nine months.

The Hooker Branded segment’s gross profit and margin increased in the fiscal 2023 third quarter despite a slight net sales decrease.

A large percentage of shipments carried the price increases we implemented last year and earlier this year to mitigate higher freight and product costs.

However, gross profit was negatively impacted by higher warehousing labor costs as well as higher demurrage and drayage expenses due to large volume of inventory receipts and supply chain constraints.

Hooker Branded gross profit and margin decreased in the fiscal 2023 nine-month period driven by a sales decline in the first quarter due to inventory unavailability and to a lesser extent higher freight and product costs.

The Home Meridian segment’s gross profit and margin improved significantly in the fiscal 2023 third quarter as compared to a margin loss in the prior year quarter due to increased net sales as well as the absences of excess customer chargebacks from the Clubs channel and order cancellation costs incurred when we exited the Ready-To-Assemble furniture category.

For the fiscal 2023 nine-month period, gross profit was negatively impacted by sales volume losses, higher product costs, higher-than-expected labor rates and transition costs at the new Georgia warehouse, and margin loss on a quality-related issue, but improved over the prior-year period due to the absence of the aforementioned Clubs channel chargebacks and order cancellation costs in the current period.

Ocean freight costs continued to negatively impact margins but improved as compared to prior year periods due to price increases and freight surcharges.

The Domestic Upholstery segment’s gross profit and margin increased in the fiscal 2023 third quarter and nine-month period due to the addition of Sunset West results and sales increases across all divisions, which also benefitted overhead absorption and production efficiencies.

Gross profit and margin were negatively impacted by increased raw material costs and warehousing costs including freight costs.

All Other’s gross profit and margin both increased in the fiscal 2023 third quarter and nine months driven by strong net sales at H Contract.

Selling and Administrative Expenses (S&A)

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Domestic Upholstery

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half.

The Hooker Branded segment’s S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half driven by increased salaries and wages due to salary inflation, higher professional service fees, higher commissions on undiscounted sales, higher bonus accruals due to the reversal of unearned executive bonuses in the prior year first quarter, and higher travel expenses and other operating expenditures as business continued to resume to normal.

The Home Meridian segment’s S&A expenses decreased in absolute terms in the fiscal 2023 second quarter and first half due to decreased salaries and wages because of personnel changes and lower selling costs on decreased net sales, partially offset by higher depreciation expenses on additions of property and equipment at the new Georgia warehouse, higher designing fees on a new licensing arrangement, and higher international travel expenses as normal travel schedules resumed.

S&A expenses increased as a percentage of net sales in the fiscal 2023 second quarter and first half due to decreased net sales.

The Domestic Upholstery segment’s S&A expenses increased in absolute terms in the fiscal 2023 second quarter and first half driven by the addition of Sunset West’s S&A expenses, higher selling costs on increased net sales across all divisions, and higher salaries and wages.

Domestic Upholstery S&A expenses decreased as a percentage of net sales in the fiscal 2023 second quarter and first half due principally to higher net sales.

All Other S&A expenses increased in absolute terms while decreased as a percentage of net sales in the fiscal 2023 second quarter and first half.

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 third quarter and nine months.

The Hooker Branded segment’s S&A expenses increased both in absolute terms and as a percentage of net sales in the fiscal 2023 third quarter and nine months driven by increased headcounts and wage rates, higher bonus accruals due to abnormally low prior year expense because of the reversal of unearned executive bonuses, higher commissions, and increased operating expenditures including professional services and training expenses to support the Company’s growth strategies.

The Home Meridian segment’s S&A expenses largely stayed flat in absolute terms in the fiscal 2023 third quarter.

Higher selling costs on higher net sales were nearly offset by decreased compensation expense due to personnel changes as well as decreased bad debt expense on lower accounts receivable.

For the fiscal 2023 nine-month period, S&A expenses decreased in absolute terms also due to lower commissions on decreased net sales, partially offset by higher designing fees on a new licensing arrangement, higher international travel expenses as normal travel schedules resumed, and higher depreciation expenses on additions of property and equipment at the Georgia warehouse.

The Domestic Upholstery segment’s S&A expenses increased in absolute terms in the fiscal 2023 third quarter and nine months due principally to the addition of Sunset West’s S&A expenses, as well as higher selling costs and higher salaries across all divisions.

Domestic Upholstery S&A expenses decreased as a percentage of net sales in the fiscal 2023 third quarter and nine months due to higher net sales.

All Other S&A expenses increased in absolute terms while they decreased as a percentage of net sales in the fiscal 2023 third quarter and nine months due to higher selling costs on strong net sales.

Intangible Asset Amortization

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Intangible asset amortization

Intangible asset amortization expense was higher in fiscal 2023 second quarter and first half due to Acquisition-related amortization expense.

Intangible asset amortization expense was higher in fiscal 2023 third quarter and nine-month period due to Acquisition-related amortization expense.

Operating Profit/(Loss) and Margin

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Domestic Upholstery

Operating profit and margin decreased as compared to the prior year quarter due to the factors discussed above.

Sunset West operating profit of $150,000 and $1.0 million for the fiscal 2023 second quarter and first half, respectively, net of $282,000 and $564,000 in intangible asset amortization expense on Acquisition-related intangibles, is included in the Domestic Upholstery segment’s results.

Operating profit and margin increased as compared to the prior year quarter due to the factors discussed above.

Sunset West operating profit of $1.4 million and $2.4 million for the fiscal 2023 third quarter and nine-month period, respectively, net of $282,000 and $846,000 in intangible asset amortization expense on Acquisition-related intangibles, were included in the Domestic Upholstery segment’s results.

Interest Expense, net

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Consolidated interest expense, net

Consolidated interest expense was higher in fiscal 2023 second quarter and first half due to interest on the amounts drawn on the revolving credit facility in the second quarter.

Consolidated interest expense was higher in fiscal 2023 third quarter and nine-month period mostly due to interest on new term loans and the amounts drawn on the revolving credit facility.

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Effective Tax Rate

Consolidated income tax expense was $1.6 million for the fiscal 2023 second quarter compared to $2.2 million for the prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6% and 22.7%, respectively.

For the fiscal 2023 first half, consolidated income tax expense was $2.6 million, compared to $5.0 million for the prior year period.

The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0% and 22.7%, respectively.

Consolidated income tax expense was $1.3 million for the fiscal 2023 third quarter compared to income tax benefit of $403,000 for the prior year quarter.

The effective tax rates for the fiscal 2023 and 2022 third quarters were 21.6% and 24.8%, respectively.

For the fiscal 2023 nine-month period, consolidated income tax expense was $3.9 million, compared to $4.6 million for the prior year period.

The effective tax rates for the fiscal 2023 and 2022 nine-month periods were both 22.5%.

Net Income/(Loss)

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Consolidated Net Income

Diluted earnings per share

We continue to monitor information on COVID-19 from the CDC and believe we are adhering to their recommendations regarding the health and safety of our personnel.

We have adjusted social distancing and masking protocols to recently updated CDC guidelines.

Testing, treatment, and vaccinations for COVID-19 are covered 100% under our medical plan and counseling is available through our employee assistance plan to assist employees with financial, mental, and emotional stress related to the virus and other issues.

We are closely monitoring economic disrupters like inflation, rising interest rates, and a slowing housing market.

At the same time, we see many reasons for optimism as the U.S.

enjoys strong levels of employment, rising household incomes, continuing strength in consumer spending and watching as yet another sizeable generation enters into their prime furniture purchasing years.

While incoming orders are down from pandemic highs, we have substantial backlogs to ship and we believe the reduction of incoming orders from retailers may be temporary, and more a result of right-sizing their inventories than a significant decline in normalized consumer demand.

We expect that the fall and holiday season sales activity will align more closely with the pre-pandemic ordering environment that we have become accustomed to.

We are preparing for a strong second half of the year, and based on our backlogs and solid inventory position, we are on track to increase sales in all three segments as compared to the prior fiscal year.

We believe organic growth will be buoyed by several new strategic initiatives including our recent entry into outdoor furniture, expansion of our presence in the interior design channel in all segments along with the post pandemic recovery within the hospitality and contract businesses.

HMI’s portfolio program launches at the upcoming October High Point market which we believe will accelerate the expansion of HMI’s customer base.

Thirty-Nine Weeks Ended

Consolidated Net Income/(Loss)

Diluted earnings/(loss) per share

Current economic indicators are mixed and we are closely monitoring potential disrupters including rising interest rates, consumer confidence and a slowing housing market.

We are paying close attention to economic indicators and retail trends to ensure that our inventory planning and cost structure are appropriate to short-to-mid-term conditions, while continuing to invest in our longer-term strategies.

At the same time, we see reasons for optimism as the U.S.

enjoys strong levels of employment, rising household incomes, and continuing strength in consumer spending.

Hooker Legacy backlogs are still much higher than pre-pandemic levels and our recent entry into outdoor furniture with the acquisition of Sunset West earlier this year is performing above our expectations.

While HMI’s recovery is somewhat constrained by industry inventory conditions, we are optimistic about the longer-term, due to declining freight and product costs, positive feedback from the recent High Point Market and cost containment efforts.

We expect to begin to see the benefits of recent reductions in ocean freight costs beginning in the first quarter of calendar 2023.

We believe the environment in the home furnishings industry is shifting from a reliance on historic demand to a dependence on market share gains.

Strategically, we believe we are well positioned to capitalize on that change.

Financial Condition, Liquidity and Capital Resources

Cash Flows – Operating, Investing and Financing Activities

Twenty-Six Weeks Ended

Net cash used in operating activities

Thirty-Nine Weeks Ended

Net cash (used in)/provided by operating activities

Net cash used in investing activities

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Net decrease in cash and cash equivalents

During the six months ended July 31, 2022, we used a portion of the $25 million term-loan proceeds and existing cash and cash equivalents on hand to build up inventory levels, fund the Acquisition, pay $4.8 million in cash dividends, $1.9 million capital expenditures to enhance our business systems and facilities, $1.1 million in purchases and retirement of common stock, and $404,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the six months ended August 1, 2021, we used a portion of the existing cash and cash equivalent on hand to pay $3.5 million of capital expenditures to enhance our business systems and facilities, $4.3 million in cash dividends, and $473,000 in life insurance premiums on Company-owned life insurance policies.

During the nine months ended October 30, 2022, we used a portion of the $25 million term-loan proceeds and existing cash and cash equivalents on hand to build up inventory levels by $58.9 million, fund the $26 million Acquisition, pay $9.4 million in purchases and retirement of common stock, $7.1 million in cash dividends, $4.4 million for the development of our new cloud-based ERP system, $3.5 million capital expenditures to enhance our business systems and facilities, and $464,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the nine months ended October 31, 2021, we used a portion of the existing cash and cash equivalents on hand and $5 million generated from operations to pay $6.6 million of capital expenditures to enhance our business systems and facilities, including $4.4 million in our newly opened Georgia distribution center, $6.4 million in cash dividends, $2.6 million on our new common, cloud-based ERP platform and $533,000 in life insurance premiums on Company-owned life insurance policies.

Liquidity, Financial Resources and Capital Expenditures

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Unsecured Revolving Credit Facility.

Under this Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027.

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 BSBY (adjusted periodically) plus 1.00%.

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As of October 30, 2022, $6.6 million was outstanding under the Unsecured Term Loan, $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 31, 2022, unamortized loan costs of $37,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

As of October 30, 2022, unamortized loan costs of $35,625 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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We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

As of July 31, 2022, we had $27.9 million available under our $35 million Existing Revolver to fund working capital needs.

Standby letters of credit in the aggregate amount of $7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of July 31, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

We were in compliance with each of these financial covenants at October 30, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

As of October 30, 2022, we had $26.4 million available under our $35 million Existing Revolver to fund working capital needs.

Standby letters of credit in the aggregate amount of $8.6 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 30, 2022.

There were no additional borrowings outstanding under the Existing Revolver as of October 30, 2022.

Share Repurchase Authorization

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Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to our cash requirements for other purposes, compliance with the covenants under the loan agreement for our revolving credit facility and other factors we deem relevant.

During the second quarter of fiscal 2023, we had used approximately $1.1 million of the authorization to purchase 68,400 of our common shares (at an average price of $16.59 per share), with approximately $18.9 million remaining available for future purchases under the authorization as of the end of the fiscal 2023 second quarter.

Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $5.9 million.

Through the third quarter of fiscal 2023, we had used approximately $9.4 million of the authorization to purchase 598,165 of our common shares (at an average price of $15.63 per share), with approximately $10.6 million remaining available for future purchases under the authorization as of the end of the fiscal 2023 third quarter.

Capital Expenditures

We expect to spend approximately $1 million in capital expenditures over the remainder of fiscal 2023 to maintain and enhance our operating systems and facilities.

We expect about $2.5 million of this amount will be spent on the High Point showroom renovations for both legacy Hooker divisions and the Home Meridian segment.

The showroom for the Hooker legacy will be moved to a location to maximize interior design traffic and to showcase Sunset West products in an outdoor setting.

The Home Meridian renovation will support new initiatives including the new ‘Portfolio’ sales program aimed at retailers who prefer to buy from our warehouse rather than container direct.

The majority of current Home Meridian sales are container direct, proprietary products which are typically at lower margins than are warehouse sales, since sales from our warehouse require less inventory investment and risk by customers and, therefore, command higher margins.

The Portfolio program is designed to broaden and strengthen Home Meridian’s customer base and improve average margins over time.

Enterprise Resource Planning Project

During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts began shortly thereafter.

We expect to implement the ERP upgrade in our legacy Hooker divisions in the first quarter of fiscal 2024, with the Home Meridian segment following afterwards.

We expect to implement the ERP upgrade at Sunset West in late fiscal 2023 and in our legacy Hooker divisions in the first quarter of fiscal 2024, with the Home Meridian segment following afterwards.

To complete the ERP system implementation as anticipated, we will be required to expend significant financial and human resources.

In addition to the capital expenditures discussed in the section immediately above, we anticipate spending approximately $1 million over the remainder of the year, with a significant amount of time invested by our associates.

On September 7, 2022, our board of directors declared a quarterly cash dividend of $0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022.

On December 5, 2022, our board of directors declared a quarterly cash dividend of $0.22 per share which will be paid on December 30, 2022 to shareholders of record at December 16, 2022.

This represents a 10% increase over the previous quarterly dividend and the seventh consecutive annual dividend increase.

Critical Accounting Policies

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements