HOOKER FURNISHINGS Corp 10-K

ITEM 1. BUSINESS 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 and outdoor furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather, custom fabric-upholstered furniture and outdoor furniture. We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace, and we continue to change to meet these demands. 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”). Sunset West is a leading West Coast-based manufacturer of outdoor furniture with its headquarters in Vista, California. The acquisition enables us to immediately gain market share in the growing outdoor furniture segment of the industry. For more information regarding the Sunset Acquisition, please see Item 7 and Note 4 to our Consolidated Financial Statements on page F-15. Reportable Segments Furniture sales account for all of our net sales. For financial reporting purposes and as described further below, we are organized into three reportable segments, Hooker Branded, Home Meridian and Domestic Upholstery. Our other businesses are aggregated into “All Other”. See Note 18 -Segment Information to our Consolidated Financial Statements for additional financial information regarding our operating segments. Products Our product lines cover the design spectrum of residential furniture: traditional, contemporary and transitional. Further, our product lines are in the “good”, “better” and “best” product categories, which carry medium and upper price points. Hooker Furnishings Corporation consists of the following three operating segments and “All Other”: ■ The Hooker Branded segment which includes two businesses: □ Hooker Casegoods, which covers a wide range of design categories and includes home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand; and □ Hooker Upholstery, imported upholstered furniture targeted at the upper-medium price-range. ■ The Home Meridian segment which includes the following brands/marketing units: □ Pulaski Furniture, casegoods covering the complete design spectrum in a wide range of bedroom, dining room, accent and display cabinets at medium price points; □ Samuel Lawrence Furniture, value-conscious offerings in bedroom, dining room, home office and youth furnishings; □ Prime Resources International, value-conscious imported leather motion upholstery; □ Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings targeted toward four and five-star hotels; and □ Accentrics Home (“ACH”), home furnishings centered around an eclectic mix of unique pieces and materials that focused on e-commerce customers. Due to low profitability, management decided to exit this channel at the end of fiscal 2023. ■ The Domestic Upholstery segment which includes the following operations: □ Bradington-Young, a seating specialist in upscale motion and stationary leather furniture; □ HF Custom (formerly Sam Moore Furniture), a specialist in fashion forward custom upholstery offering a selection of chairs , sofas, sectionals, recliners and a variety of accent upholstery pieces; □ Shenandoah Furniture, an upscale upholstered furniture business specializing in private label sectionals, modulars, sofas, chairs, ottomans, benches, beds and dining chairs in the upper-medium price points for lifestyle specialty retailers; and □ Sunset West, a designer and manufacturer of comfortable, stylish and high-quality outdoor furniture. 7 Table of Contents ■ All Other consisting of: □ The H Contract product line which supplies upholstered seating and casegoods to upscale senior living and assisted living facilities through designers, design firms, industry dealers and distributors that service that market; and □ Lifestyle Brands, a business started in fiscal 2019 targeted at the interior designer channel. Sourcing Imported Products We have sourced products from foreign manufacturers for over thirty years, predominantly from Asia. Imported casegoods and upholstered furniture together accounted for approximately 72% of our net sales in fiscal 2023, 82% of our net sales in fiscal 2022 and 83% of our net sales in fiscal 2021. Our imported furniture business is subject to inherent risks in importing products manufactured abroad, including, but not limited to, supply disruptions and delays due to a variety of reasons, including our foreign suppliers’ factory capacities, factory shutdowns, and delays including those caused by the COVID-19 pandemic and possible similar health-related issues, much higher ocean freight costs, container and vessel space availability, currency exchange rate fluctuations, economic and political developments and instability, as well as the laws, policies and actions of foreign governments and the United States. These laws, policies and actions may include regulations affecting trade or the application of tariffs, much like the 25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China since fiscal 2019. In response to these tariffs, we began re-sourcing products from non-tariff countries, primarily Vietnam and reduced our Chinese imports to less than 10% of total imports by the end of fiscal 2023. Additionally, we are beginning to further diversify our sourcing footprint to include other countries, including Malaysia, Mexico and India. Because of the large number and diverse nature of the foreign suppliers from which we source our imported products, we have flexibility in the sourcing of products among any particular supplier or country. However, a disruption in our supply chain from a major supplier or from Vietnam or China in general, could significantly compromise our ability to fill customer orders for products manufactured at that factory or in that country. Supply disruptions and delays on selected items could occur for six months or longer. If we were to be unsuccessful in obtaining those products from other sources or at a comparable cost, a disruption in our supply chain from a major furniture supplier, or from Vietnam or China in general, could decrease our sales, earnings and liquidity. For example, in calendar 2021, the COVID-19 related lockdown at our suppliers in Vietnam and Malaysia, along with constrained container and steamship availability as well as congestion at U.S. ports, negatively impacted our shipments and inventory levels in early calendar 2022. Given the sourcing capacity available in Vietnam, China and other low-cost producing countries, we currently believe the risks from these potential supply disruptions are manageable in the long-term; however, we have limited insight into the extent to which our business could be further impacted by COVID-19 or other possible pandemics, and there are many unknowns including, how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. See Item 1A, “Risk Factors” for additional information on our risks related to imported products. For imported products, we generally negotiate firm pricing with foreign suppliers in U.S. Dollars, typically for a term of at least one year. However, under certain circumstances, we may re-negotiate pricing during the year. Due to the global supply chain crisis and inflation pressure in Asia and the U.S., we were forced to re-negotiate prices multiple times during fiscal 2023 and 2022. We accept the exposure to exchange rate movements during these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effects of any price increases from suppliers in the prices we charge for imported products. However, these price changes could adversely impact sales volume and profit margin during the affected periods. Conversely, a relative increase in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could decrease the cost of imported products and favorably impact net sales and profit margins during the affected period. However, due to other factors, such as inflationary pressure in China and other countries, we may not fully realize savings when exchange rates fall. Therefore, lower exchange rates may only have a tempering effect on future price increases by merely delaying cost increases on imported products. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” 8 Table of Contents Raw Materials Significant materials used in manufacturing our domestic upholstered furniture products include leather, fabric, foam, wooden and metal frames and electronic mechanisms. Most of the leather is imported from Italy and South America, and is purchased as full hides and cut and sewn in our facilities or is purchased as pre-cut and sewn kits processed by our vendors to our pattern specifications. We believe our sources for raw materials are adequate and that we are not dependent on any one supplier. Our five largest domestic upholstery suppliers accounted for 33% of our raw materials purchases for domestic upholstered furniture manufacturing operations in fiscal 2023. Should disruptions with these suppliers occur, other than macro disruptions affecting all such suppliers, we believe we could successfully source these products from other suppliers without significant disruption to our operations. For example, due to the Russian invasion of Ukraine, there is a shortage of Russian Birch which was the third largest source of US hardwood plywood imports in calendar 2021. Prior to the invasion, a large portion of the plywood used at one division of our Domestic Upholstery segment was Russian Birch. We were able to find an alternative plywood source at a higher price during fiscal 2023 and this issue was mitigated as of early calendar 2023. Customers Our home furnishings products are sold through a variety of retailers including independent furniture stores, department stores, mass merchants, national chains, catalog merchants, interior designers, and e-commerce retailers. No single customer accounted for more than 6% of our consolidated sales in fiscal 2023. Our top five customers accounted for approximately 22% of our fiscal 2023 consolidated sales. The loss of any one or more of these customers would have a material adverse impact on our business. Less than 2% of our sales in fiscal 2023 were to international customers. We define sales to international customers as sales to customers outside of the United States and Canada since our independent domestic sales force services both countries. Competition The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers and importers, none of which dominates the market in our price points. While the markets in which we compete include a large number of relatively small and medium-sized manufacturers, certain competitors have substantially greater sales volumes and financial resources than we do. U.S. imports of furniture produced overseas, such as from Vietnam and China, have stabilized in recent years. The primary competitive factors for home furnishings in our price points include price, style, availability, service, quality and durability. Competitive factors in the hospitality and contract furniture markets include product value and utility, lead times, on-time delivery and the ability to respond to requests for special and non-standard products. We believe our design capabilities, ability to import and/or manufacture upholstered furniture, product value, longstanding customer and supplier relationships, significant sales, distribution and inventory capabilities, ease of ordering, financial strength, experienced management and customer support are significant competitive advantages. Warehousing and Distribution We distribute furniture to retailers directly from factories and warehouses in Asia via our container direct programs and from our facilities in Virginia, North Carolina, Georgia and California, and in limited cases, from customer operated warehouses in strategic locations. Due to our exit from the ACH business unit which demanded significant amounts of inventory to meet the quick shipping requirements of its e-commerce model, we anticipate a reduction in the physical footprint of the Georgia warehouse over the course of fiscal 2024. Working Capital Practices Inventory: We generally import casegoods inventory and certain upholstery items in amounts that enable us to meet the delivery requirements of our customers, our internal in-stock goals and minimum purchase requirements from our sourcing partners. Our domestic upholstery segment products are made to order and shipped shortly after they are produced; however, this segment carries significant amounts of raw materials for production. We do not carry significant amounts of hospitality products, as most of these products are built to order and are shipped shortly after their manufacture directly to the customer. The majority of products in the Hooker Branded segment are shipped from our U.S. warehouses. In calendar 2021, the COVID-19 related lockdowns at our suppliers in Vietnam and Malaysia, along with the supply chain disruptions, resulted in low inventory levels within the Hooker Branded segment in early fiscal 2023. These conditions improved throughout fiscal 2023, and inventory levels are now higher than usual, with plans to work them down over the course of the fiscal 2024 first half. 9 Table of Contents A large percentage of products sold at our Home Meridian segment are not warehoused by us but ship directly to our customers and thus are not included in our inventory. However, Home Meridian’s warehoused inventory increased significantly during fiscal 2023 due primarily to increased inventory in the ACH division, which is focused on the e-commerce channel. A slowing in the ecommerce business, coupled with an aggressive backlog reduction by our Asian suppliers after the end of COVID-19-related lockdowns in the late-summer of 2021, resulted in a substantial ACH inventory increase in fiscal 2023. Due to low profitability, low rates of sales and a general slowing of furniture sales in the e-commerce space, we decided to exit this division and recorded $24.4 million write-downs of ACH inventories and other excess inventories during the fourth quarter of fiscal 2023. We expect the exit of the ACH business and the inventory write down will lead to improvements in working capital, inventory turns and obsolescence reserves. Accounts receivable: Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, which consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. For qualified customers, we offer payment terms, generally requiring payment 30 days from shipment. However, we may offer extended payment terms in certain circumstances, including to promote sales of our product. We purchase accounts receivable insurance on certain customers if their risk profile warrants it and the insurance is available. Due to the highly customized nature of our hospitality products, we typically require a 50% deposit upon order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer. For our outdoor furnishings, most orders require a 50% deposit upon order and the balance when production is started. Accounts payable: Payment for our imported products warehoused first in Asia is due 10 to 14 days after our quality audit inspections are complete and the vendor invoice is presented. Payment for goods which are shipped to our US warehouses or container direct to our customers FOB Origin (free on board origin, which means the buyer is responsible for the costs and liability of the freight during transport) is generally due upon proof of lading onto a US-bound vessel and invoice presentation; however, payment terms, depending on the supplier, can stretch up to 45 days from invoice date. Payment terms for domestic raw materials and non-inventory related charges vary but are generally 30 days from invoice date. Order Backlog At January 29, 2023, our backlog of unshipped orders was as follows: Order Backlog (Dollars in 000s) January 29, 2023 January 30, 2022 Reporting Segment Dollars Weeks Dollars Weeks Hooker Branded $ 19,276 5.0 $ 68,925 17.9 Home Meridian 43,052 10.3 167,968 31.3 Domestic Upholstery 28,404 9.4 67,068 32.6 All Other 4,654 23.2 6,148 44.5 Consolidated $ 95,386 8.5 $ 310,109 27.2 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. Additionally, our hospitality products are highly customized and are generally not cancellable. 10 Table of Contents 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. 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 Meridien segment’s order backlog tends to be larger. There have been exceptions to the general predictive nature of our orders and backlogs noted in this 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. They are discussed in greater detail below and in Item 7 and are essential to understanding our prospects. In the prior fiscal year, 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. As a result, backlogs were significantly elevated and reached historical levels. At the end of fiscal 2023, order backlog decreased by $214.7 million or 69%, as compared to the prior year end. The decrease was largely attributable to more normalized levels of shipping, especially in the Hooker legacy divisions, lower incoming orders in the Home Meridian segment, and to a lesser degree at Hooker Branded and Domestic Upholstery segments, driven by a decrease in overall demand when compared to the prior year’s surge in demand after the initial COVID crisis, absence of Clubs channel orders and decreased orders from retailer customers with high inventory levels delaying shipments. Seasonality Generally, sales in our fiscal first quarter are lower than our other fiscal quarters due to the post-Lunar New Year shipping lag and sales in our fiscal fourth quarter are generally stronger due to the pre-Lunar New Year surge in shipments from Asia. Environmental Matters As a part of our business operations, our manufacturing sites generate both non-hazardous and hazardous wastes; the treatment, storage, transportation and disposal of which are subject to various local, state and federal laws relating to environmental protection. Our policy is to record monitoring commitments and environmental liabilities when expenses are probable and can be reasonably estimated. The costs associated with our environmental responsibilities, compliance with federal, state and local laws regulating the discharge of materials into the environment, or costs otherwise relating to the protection of the environment, have not had and are not expected to have a material effect on our financial position, results of operations, capital expenditures or competitive position. We are actively working to refine and align our environmental stewardship based on current best practices, shareholder expectations and regulatory developments through our ESG-focused committee called CARE (Community Action & Responsibility for our Environment). It regularly updates management and updates the Board at least quarterly on these initiatives. We note the following recent and ongoing activities and new developments: ■ we have put in place several initiatives focused on preserving natural resources and reducing our energy usage to lower our carbon footprint through optimizing our facilities including a multi-year project with the goal of switching to LED lighting and cleaner-operating electric forklifts in many locations including our new distribution center in Georgia, which is outfitted with energy-efficient lighting and electric vehicle charging stations; ■ by the end of fiscal 2023, all divisions were EFEC (“Enhancing Furniture’s Environmental Culture”) certified, except for the recently acquired Sunset West division; ■ we use FSC (“Forest Stewardship Council”) compliant paper products and replaced Styrofoam packing with recyclable material for repacking in all distribution centers; ■ we recycle, reuse or repurpose substantially all pallets; repurpose wood chips and sawdust from our Bradington-Young and the Shenandoah’s Valdese and Mount Airy facilities for use in the farming industry; repurpose leather for use in belts and boots, and in all divisions dispose of substantially all eWaste using an Environmental Protection Agency compliant eWaste recycling firm; ■ we provided monetary support by the Company and volunteer hours via employees to the Sustainable Furnishings Council, the Arbor Day Foundation, the Eco-Council of the Dan River basin, and Foothills Conservancy to support various projects including the cultivation of the Mayo River State Park in Henry County, Virginia, which opened for public use in 2022; and 11 Table of Contents ■ reached the following certifications for all wood products used within our Shenandoah production facilities: AHMI (Appalachian Hardwood Manufacturers, Inc.), CPA Certified (Composite Panel Association), ECO-Certified (Sustainable Use of Wood Fiber), FSC (Forest Stewardship Council), Rainforest Alliance Certified, and SFI (Sustainable Forestry Initiative). Human Capital Resources As of January 29, 2023, we had 1,259 full-time employees, of which 292 were employed in our Hooker Branded segment, 246 were employed in our Home Meridian segment, 715 were employed in our Domestic Upholstery segment and 6 were employed in All Other. 1,070 employees were located in the United States and 189 were located in Asia. None of our employees are represented by a labor union. We consider our relations with our employees to be good. We are committed to creating a diverse, equitable and inclusive space for all our employees, customers and retail partners. The core values of our Company include integrity, caring and inclusivity that affirms every individual. Our leadership team is committed to fostering an environment where everyone is welcomed, respected, listened to and valued for their unique contributions to the organization, and to providing a work environment that is free from all forms of harassment, discrimination and inequality. We recruit, employ, train, promote and compensate our employees without regard to race, ethnicity, age, gender, gender identity, religion, national origin, citizenship, marital status, veteran’s status or disability. All facilities have established human resource departments with formal hiring processes and controls in place to ensure ethical and fair hiring practices. The action steps we have taken recently or are working on currently include: ■ a Diversity, Equity, and Inclusion (“DEI”) leadership team with over 15 senior executives representing all divisions of the Company meeting on a regular basis to guide both short- and long-term goals in addition to creating the overall strategic direction of DEI at the Company; ■ an employee-led diversity council AIDE (Advancement of Inclusion, Diversity, and Equity) consisting of a diverse group of employees that meets monthly with the goal of increasing institutional awareness of issues relating to inclusivity and equality for a more diverse and welcoming workplace. The AIDE Council initiatives include: o DEI training for managers, new employee on-boarding, and all employees; o monthly recruiting meetings between HR and AIDE liaison to work on attracting and sourcing more diverse candidates, assist in making the interview process welcoming to all, and create metrics to measure organizational progress; o addition of two company-wide floating holidays allowing employees to have time-off for holidays of their choosing; o campaigns to educate employees on diverse holidays and heritage months; and o DEI-focused section added to annual performance review for all employees and the Company’s Corporate Social Responsibility report; ■ has a formal Vendor Code of Conduct that requires vendors to conduct business in a fair and ethical manner; and ■ formalized our Occupational Health and Safety Policy. We compensate employees competitively relative to the industry and local labor market, and in accordance with all applicable federal, state and local wage, work hour, overtime and benefit laws. In addition, we offer affordable and competitive benefits to support the well-being of all employees including health insurance, disability and life insurance, worker’s compensation, wellness credits, paid time off, a 401(k) savings plan with company-match, an employee assistance program, and training and educational opportunities for all employees, including educational stipends or renewable college scholarships to children and spouses of all employees, excluding family members of current and former officers and board directors of the Company. 12 Table of Contents Patents and Trademarks The Hooker Furnishings, Hooker Furniture, Bradington-Young, Sam Moore, Pulaski Furniture, Samuel Lawrence Furniture, Samuel Lawrence Hospitality, Room Gear, Right2Home, Home Meridian International, Prime Resources International, Accentrics Home, HMidea, Shenandoah, H Contract, Homeware, MARQ and Sunset West trade names represent many years of continued business. We believe these trade names are well-recognized and associated with quality and service in the furnishings industry. We also own a number of patents and trademarks, both domestically and internationally, none of which is considered to be material. Governmental Regulations Our company is subject to U.S. federal, state and local laws and regulations in the areas of safety, health, employment and environmental pollution controls, as well as U.S. and international trade laws and regulations. We are also subject to foreign laws and regulations. In the past, compliance with these laws and regulations has not had any material effect on our earnings, capital expenditures or competitive position in excess of those affecting others in our industry; however, the effect of compliance in the future cannot be predicted. We believe we are in material compliance with applicable U.S. and international laws and regulations. Additional Information You may visit us online at hookerfurnishings.com, hookerfurniture.com, bradington-young.com, sammoore.com, homemeridian.com, pulaskifurniture.com, slh-co.com, hcontractfurniture.com and sunsetwestusa.com. We make available, free of charge through our Hooker Furnishings website hookerfurnishings.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other documents as soon as practical after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). A free copy of our annual report on Form 10-K may also be obtained by contacting Earl Armstrong, Corporate Controller and Secretary at earmstrong@hookerfurnishings.com or by calling 276-632-2133.