HOOKER FURNISHINGS Corp 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of January 29, 2023, we had approximately 11,500 beneficial shareholders. As we have done in the past, we currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors. Purchase of Equity Securities by the Issuer and Affiliated Purchasers On June 6, 2022, our Board of Directors authorized the repurchase of up to $20 million of the Company’s common shares. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of our Board of Directors. 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. The following table details the repurchase activities in the fourth quarter of fiscal 2023: Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased As Part of Publicly Announced Program Maximum Dollar Value of Shares That May Yet Be Purchased Under The Program $ 10,640,433 October 31, 2022 - December 4, 2022 88,975 17.34 88,975 9,095,935 December 5, 2022 - January 1, 2023 73,634 17.45 73,634 7,809,500 January 2, 2023 - January 29, 2023 58,858 19.75 58,858 6,646,127 Total 221,467 $ 18.02 221,467 Through fiscal 2023, we had used approximately $13.3 million of the authorization to purchase 819,632 of our common shares (at an average price of $16.27 per share), with approximately $6.6 million remaining available for future purchases under the authorization as of the end of fiscal 2023. 22 Table of Contents Performance Graph (1) The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index (2), and a published industry index, the Household Furniture Index (3), for the period from January 28, 2018 to January 29, 2023. (1) The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends. (2) The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization and includes the Company. (3) Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under Standard Industrial Classification (SIC) Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada. At January 29, 2023, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Bassett Furniture Industries, Inc., Compass Diversified Holdings, Dorel Industries, Ethan Allen Interiors, Inc., Flexsteel Industries, Inc., Hooker Furnishings Corporation, Horrison Resources Inc., Instadose Pharma Corp., Kimball International, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Luvu Brands, Inc., MasterBrand, Inc., Natuzzi Spa, Nova Lifestyle, Inc., Purple Innovation, Inc., The Rowe Companies, Sleep Number Corp. and Tempur Sealy International, Inc. 23 Table of Contents ITEM 6. SELECTED FINANCIAL DATA SEC disclosure rules no longer require the presentation of selected financial data; however, based on shareholder and internal feedback we continue to provide this information. The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations. Fiscal Year Ended (1) January 29, January 30, January 31, February 2, February 3, 2023 2022 2021 2020 2019 (In thousands, except per share data) Income Statement Data: Net sales $ 583,102 $ 593,612 $ 540,081 $ 610,824 $ 683,501 Cost of sales 461,056 488,508 426,810 494,365 535,172 Inventory valuation expense (2) 28,752 3,402 523 2,501 842 Casualty loss (3) - - - - 500 Gross profit 93,294 101,702 112,748 113,958 146,987 Selling and administrative expenses 95,815 84,475 80,410 88,867 91,928 Goodwill impairment (4) - - 39,568 - - Trade names impairment (4) 13 - 4,750 - - Intangible asset amortization (4) 3,512 2,384 2,384 2,384 2,384 Operating (loss)/income (6,046 ) 14,843 (14,364 ) 22,707 52,675 Other income, net 416 373 336 458 369 Interest Expense, net 519 110 540 1,238 1,454 (Loss)/income before income taxes (6,149 ) 15,106 (14,568 ) 21,927 51,590 Income tax (benefit)/expense (1,837 ) 3,388 (4,142 ) 4,844 11,717 Net (loss)/income (4,312 ) 11,718 (10,426 ) 17,083 39,873 Per Share Data: Basic (loss)/earnings per share $ (0.37 ) $ 0.99 $ (0.88 ) $ 1.44 $ 3.38 Diluted (loss)/earnings per share (0.37 ) 0.97 (0.88 ) 1.44 3.38 Cash dividends per share 0.82 0.74 0.66 0.61 0.57 Net book value per share (5) 21.33 22.01 21.76 23.25 22.37 Weighted average number of shares outstanding (basic) 11,593 11,852 11,822 11,784 11,759 Balance Sheet Data: Cash and cash equivalents $ 19,002 $ 69,366 $ 65,841 $ 36,031 $ 11,435 Trade accounts receivable 62,129 73,727 83,290 87,653 112,557 Inventories 96,675 75,023 70,159 92,813 105,204 Working capital 137,265 170,777 169,612 171,838 170,516 Total assets 381,716 374,559 352,273 393,708 369,716 Long-term debt (including current maturities) (6) 24,266 - - 30,138 35,508 Shareholders’ equity 236,021 261,128 257,503 274,121 263,176 (1) Our fiscal years end on the Sunday closest to January 31, with fiscal 2023 ending on January 29, 2023. The fiscal years presented above all had 52 weeks, except for the 2019 fiscal year that ended on February 3, 2019, was a 53-week fiscal year. (2) Represents the inventory write downs of ACH and other excess inventories related to the exit of ACH and repositioning of the PRI business in fiscal 2023. See Note 3 to our Consolidated Financial Statements for additional information. (3) Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019. (4) Represents impairment charges and amortization expense on acquisition-related intangibles. See Note 10 to our Consolidated Financial Statements for additional information on our intangible assets. (5) Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period. (6) Long-term debt (including current maturities): Fiscal 2023 amounts consist of acquisition related term loans to fund the Sunset Acquisition. Prior periods shown consisted of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions, which were paid off in January 2021. 24 Table of Contents ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As you read Management’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with: ■ All of our recent public filings made with the SEC which are available, without charge, at www.sec.gov and at http://investors.hookerfurnishings.com; ■ The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K; ■ The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and ■ Our commitments and contractual obligations and off-balance sheet arrangements described on page 34 and in Note 19 to our Consolidated Financial Statements on page F-34 of this report. This note describes commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements. In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2023 compared to fiscal 2022. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2022 compared to fiscal 2021 results are in our 2022 Form-10K available through Hooker Furnishings and SEC websites. Unless otherwise indicated, references to the “Company,” “we,” “our” or “us” refer to Hooker Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker,” “Hooker Division,” “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery segment including Bradington-Young, HF Custom, Shenandoah Furniture and Sunset West, and All Other which includes H Contract and Lifestyle Brands. Furniture sales account for all of our net sales. For financial reporting purposes, we are organized into three reportable segments- Hooker Branded, Home Meridian and Domestic Upholstery, with our other businesses included in All Other. We regularly monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. Before the fiscal 2023, H Contract’s results included sales of seating products sourced from HF Custom. Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2023 first quarter, HF Custom’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. The Hooker Branded and Home Meridian segments are unchanged. Additionally, based on our analysis and the requirements of ASC 280: Segment Reporting, the operational results of the newly acquired Sunset West division are included in the Domestic Upholstery segment starting in the first quarter of fiscal 2023 on a prospective basis. See Note 18 to our consolidated financial statements for additional financial information regarding our segments. Overview Executive Summary- Fiscal 2023 Results of Operations Consolidated net sales decreased by $10.5 million, or 1.8%, compared to the previous fiscal year. The decrease was driven by a $62.6 million, or 22.4% sales decline in the Home Meridian segment, which was largely offset by a significant increase of $49.9 million or 46.7% in the Domestic Upholstery segment. Hooker Branded segment net sales had a minor decrease of $1.1 million, or 0.5%. Despite being a small portion of the consolidated results, All Other revenue increased by 45.3% or $3.3 million. Consolidated gross profit and margin decreased by $8.4 million and 110 bps, respectively, primarily due to the gross loss in the Home Meridian segment resulting from the $24.4 million write down of ACH and other excess inventories, and to a lesser extent, a decrease in gross profit and margin in the Hooker Branded segment. The charge was initially expected to be $34 million, but estimates were refined during our year-end financial close and was ultimately less than originally estimated in part as sales of the inventory thus far in fiscal 2024 have been at less of a discount than originally expected. These decreases were partially offset by increased profitability in the Domestic Upholstery segment. The Company reported a consolidated operating loss of $6.0 million or (1.0%) operating margin, as compared to operating income of $14.8 million in the previous fiscal year. Consolidated net loss was $4.3 million or ($0.37) per diluted share, as compared to net income of $11.7 million or $0.97 per diluted share in the prior year period. 25 Table of Contents Our fiscal 2023 performance is discussed in greater detail below under “Review” and “Results of Operations”. Review Fiscal 2023 was a challenging year as we faced macro-economic uncertainties, ongoing inflation, volatile interest rates and a slowdown in the demand for home furnishings following the prior year’s demand surge after the initial COVID crisis. Despite these challenges, we were encouraged by the improvements in the global supply chain, a strong labor market, and our overseas vendors returning to normal production levels. As discussed below, we were pleased to report solid results in both Hooker Branded and Domestic Upholstery segments; however, we had to make difficult but necessary decisions aimed at optimizing our resources and improving profitability in the Home Meridian segment. The Hooker Branded segment ’ s net sales slightly decreased by $1.1 million, or 0.5%, as compared to the all-time record net sales this segment achieved in the prior fiscal year. At the beginning of the fiscal year, this segment experienced inventory unavailability due to the COVID-related lockdown at our suppliers in Vietnam and their slow re-openings in late 2021 and early 2022. Inventory levels increased throughout fiscal 2023, allowing us to fulfill a significant portion of the large order backlog carried over from the prior year. However, in the third quarter, there was a temporary delay in shipments due to inventory mix issues. Dealers delayed receipts of orders until collections could ship complete. This was resolved in the fourth quarter. By the end of fiscal year 2023, inventory had increased by $35 million in this segment compared to the previous year-end and more than doubled compared to fiscal 2020 and 2021 year-end. Meanwhile, gross profit and margin for the segment decreased by $3.8 million or 180 bps due to much higher-than-expected demurrage expenses and increased warehousing labor costs, driven by the large inventory volume as well as port and warehouse congestion in the U.S.. Operating income decreased to $20.5 million, with an operating margin of 10.3%, compared to $30.7 million and 15.3%, respectively, in the prior year. The decline was due to higher compensation expenses (due to increased headcount, wage inflation and favorable performance to budget which affected staff variable compensation), higher professional services and training expenses, higher lease expense at the new Hooker showroom in High Point, NC, which is expected to come online in April 2023, and other increased operating expenditures as business returned to the pre-pandemic environment. Despite a significant decrease in incoming orders compared to the strong rebound in the prior year, order backlog remained 76% higher than pre-pandemic levels at fiscal 2020 year end. The Home Meridian segment experienced a decline of $62.6 million, or 22.4% in net sales, compared to the prior year. Moreover, the segment recorded an operating loss of $37.2 million, driven by lower sales volume due to the demand environment and a $24.4 million inventory write down related to the exit of the ACH business unit and repositioning of PRI in the fourth quarter of fiscal 2023. ■ Nearly 60% of the decrease was driven by sales decreases at PRI and SLF, which service major furniture chains and mass merchants. These brands experienced decreased incoming orders as retail customers focused on reducing their own excess inventories by delaying incoming shipments. Pulaski’s fiscal 2023 net sales were essentially flat. ■ Over 30% of the net sales decrease was driven by HMidea, which was exited in fiscal 2022 and focused on Clubs channel sales. The Company made the decision to exit HMidea in the prior fiscal year due to continued losses driven by low margins and excessive chargebacks. While this led to a decrease in revenue, the exit resulted in significant improvement in returns and allowances costs. ■ E-commerce sales decreased due primarily to the normalization of post-COVID consumer demand. The ACH business unit, which focused on e-commerce business, contributed about 13% of Home Meridian’s overall revenue, but accounted for over 50% of the operating loss in this segment, primarily due to the write-down of its inventories to market. The e-commerce business model requires significant capital investment and high handling costs, as we carried significant amounts of inventory to meet quick shipping demands as compared to Home Meridian's other business units, which primarily use a container direct model. Additionally, these lower-priced and lower-margin inventories carried historically high freight costs we paid in the prior year. During the second half of fiscal 2023, we implemented targeted promotions to accelerate sales and reduced inventory by approximately $8 million. However, given the inventory levels, industry discounting levels and low demand, continuing to sell ACH inventory at or near cost would not reach the breakeven but incur additional lease, warehouse labor and other costs. As a result, we decided to exit the ACH business and recorded $24.4 million charge to write down the ACH and other excess inventories. With lower inventory levels, we also expect to reduce the physical footprints and related expenses at the Georgia warehouse and other facilities during fiscal 2024. 26 Table of Contents We believe the actions to eliminate these slow-moving and low-margin categories, reduce overhead, and focus our resources on more profitable products, sales channels and customer mix are essential for sustained performance and long-term profitability. The Domestic Upholstery segment ’ s net sales increased by $49.9 million, or 46.7% compared to the prior fiscal year. The sales increase was due primarily to the addition of Sunset West results, which accounted for approximately 54% of the increase, while the remainder was due to double-digit sales growth at Bradington-Young, HF Custom, and Shenandoah for the second consecutive year. Manufacturing constraints such as shortages and inconsistent deliveries of certain raw materials that we experienced in the prior year were no longer an issue. Gross margin was 20.8%, compared to 19.5% in the prior year. Higher sales volume and operating near full capacity significantly improved indirect and fixed costs absorption and direct labor efficiency; however, price inflation of raw materials and higher freight surcharges offset the favorable sales variances by approximately 300 bps and 220 bps, respectively. Additionally, Sunset West's shipping activities were disrupted by the conversion of the new ERP system in the fourth quarter due to longer than expected post-implementation stabilization, resulting in low shipments and unabsorbed costs. This issue was largely resolved in the first quarter of fiscal 2024. The segment reported an operating income of $8.9 million, with a 5.7% operating margin compared to $4.7 million and 4.4% in the prior year, respectively. Incoming orders decreased mostly due to current demand, while shipments were higher and aligned with internal goals, fulfilling and reducing the historically high order backlogs which was carried over from the prior year. At the end of fiscal 2023, order backlog, excluding Sunset West, remained 57% higher than pre-pandemic levels at fiscal 2020 year end. Cash and cash equivalents stood at $19 million at fiscal 2023 year-end, a decrease of $50.4 million from the prior year-end. During fiscal 2023, we used a portion of cash on hand and cash collected from accounts receivable to fund $19 million increase in inventory, $13.3 million share repurchases, $9.6 million in cash dividends to our shareholders, $5.4 million for development of our new cloud-based ERP system, and $4.2 million capital expenditure for enhancements of other systems and facilities. During fiscal 2023, we received $25 million in term loan proceeds to replenish cash used to make the Sunset Acquisition. In the third quarter of fiscal 2023, our Board of Directors approved the increase of our quarterly dividend to $0.22 per share, an increase of 10% or $0.02 per share, representing the seventh consecutive annual dividend increase. In fiscal 2023, dividends totaled $0.82 per share or $9.6 million in the aggregate, an increase of 10.8% or $0.08 per share, compared to the prior year. In addition to our cash balance, at fiscal 2023 third quarter end, we had $26.4 million available under our $35 million revolving credit facility with BofA (the “Existing Revolver”) to fund working capital needs and have access to $27.6 million in cash surrender value of Company-owned life insurance policies. We believe that our liquidity and capital requirements will be further improved through the write down of ACH inventories and other excess inventories, as discussed above. 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 The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income: Fifty-two weeks ended January 29, January 30, 2023 2022 Net sales 100.0 % 100.0 % Cost of sales 79.1 82.3 Inventory write downs 4.9 0.6 Gross profit 16.0 17.1 Selling and administrative expenses 16.4 14.2 Intangible asset amortization 0.6 0.4 Operating (loss)/income (1.0 ) 2.5 Other income (expense), net 0.1 0.1 Interest expense, net 0.1 - (Loss)/Income before income taxes (1.0 ) 2.6 Income tax (benefit)/expense (0.3 ) 0.6 Net (loss)/income (0.7 ) 2.0 27 Table of Contents Fiscal 2023 Compared to Fiscal 2022 Net Sales Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 199,602 34.2 % $ 200,692 33.8 % $ (1,090 ) -0.5 % Home Meridian 216,338 37.1 % 278,902 47.0 % (62,564 ) -22.4 % Domestic Upholstery 156,717 26.9 % 106,827 18.0 % 49,890 46.7 % All Other 10,445 1.8 % 7,191 1.2 % 3,254 45.3 % Consolidated $ 583,102 100 % $ 593,612 100 % $ (10,510 ) -1.8 % Unit Volume and Average Selling Price ( “ ASP ” ) Unit Volume FY23 % Increase / (Decrease) vs. FY22 Average Selling Price FY23 % Increase / (Decrease) vs. FY22 Hooker Branded -12.8 % Hooker Branded 14.2 % Home Meridian -26.7 % Home Meridian 3.7 % Domestic Upholstery * 3.1 % Domestic Upholstery * 17.5 % All Other 31.7 % All Other 7.3 % Consolidated -22.1 % Consolidated 19.3 % *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 its fiscal 2023 results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table. Consolidated net sales decreased primarily due to sales decline in the Home Meridian segment, partially offset by revenue growth at Domestic Upholstery segment and All Other. ■ Hooker Branded segment’s net sales remained essentially flat as compared to the prior year’s robust sales, which were driven by a surge in demand following the initial outbreak of COVID-19. The decrease in unit volume was attributable to shipment disruptions caused by inventory unavailability in the first quarter of fiscal 2023, and to a lesser extent, temporary inventory mix issues due to some inventories received as incomplete collections. ASP increased due to a large percentage of the shipments carrying price increases we implemented during the two most recent years to mitigate higher freight and product costs. ■ Home Meridian segment’s net sales decreased by 22.4% compared to the prior year period. The decline was attributable to the absence of sales in the Clubs channels which we decided to exit in the prior year, decreased sales volume with traditional furniture chains and mass merchants, as well as the e-commerce channel, partially offset by increased net sales in the hospitality business. ASP increased in all current divisions due to the freight surcharges and price increases we imposed to mitigate higher freight and product costs, while being negatively impacted by the Clubs channels closeout sales and heavy discounting at ACH in the second half of fiscal 2023. ■ Domestic Upholstery net sales increased by 46.7% compared to the prior year due to the addition of Sunset West’s results as well as double digit sales growth at each of Bradington Young, HF Custom and Shenandoah for the second consecutive year. ASP increased across all three divisions in response to the inflation of raw material costs. Unit volume increased as all divisions were operating near full capacity and working through backlog. ■ All Other net sales increased significantly in fiscal 2023 driven by increased sales volume at H Contract due to the recovery of the senior living industry after the COVID pandemic. 28 Table of Contents Gross Profit/(Loss) and Margin Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 59,344 29.7 % $ 63,146 31.5 % $ (3,802 ) -6.0 % Home Meridian (2,620 ) -1.2 % 15,213 5.5 % (17,833 ) -117.2 % Domestic Upholstery 32,633 20.8 % 20,860 19.5 % 11,773 56.4 % All Other 3,937 37.7 % 2,483 34.5 % 1,454 58.6 % Consolidated $ 93,294 16.0 % $ 101,702 17.1 % $ (8,408 ) -8.3 % Consolidated gross profit and margin both decreased as compared to the prior year, attributed primarily to a gross loss at the Home Meridian segment, while partially offset by an increase in gross profit and margin at Domestic Upholstery segment. ■ The Hooker Branded segment gross profit and margin decreased due to increased warehousing costs which exceeded such costs in the prior year by 160 bps. These costs included higher demurrage expenses due to large inventory receipts during the year and supply chain disruptions, increased warehouse labor costs, and increased fuel and trucking expenses due to inflation. ■ The Home Meridian segment recorded a gross loss, primarily due to its sales decline and the $24.4 million write-down of ACH inventories and other excess inventories, which more than offset a decrease in customer chargebacks after the exit from the Clubs channel as well as price increases and freight surcharges. Additionally, the savings generated from consolidating the California and North Carolina warehouses helped offset higher-than-expected labor and transition costs incurred at the Georgia warehouse. ■ Domestic Upholstery segment gross profit and margin both increased in fiscal 2023 due to the addition of Sunset West results and improved profitability at HF Custom and Shenandoah. Favorable sales variances and operating near full capacity benefited production efficiencies and overhead absorption. Despite a double-digit sales increase, Bradington-Young’s gross profit and margin both decreased due primarily to leather cost inflation and, to a lesser extent, increased direct labor costs. Additionally, higher freight surcharges negatively impacted profitability of each division. ■ All Other gross profit and margin both increased in fiscal 2023 due to strong net sales at H Contract. Selling and Administrative Expenses ( “ S&A ” ) Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 38,814 19.4 % $ 32,479 16.2 % $ 6,335 19.5 % Home Meridian 33,215 15.4 % 35,139 12.6 % (1,924 ) -5.5 % Domestic Upholstery 21,584 13.8 % 15,135 14.2 % 6,449 42.6 % All Other 2,202 21.1 % 1,722 23.9 % 480 27.9 % Consolidated $ 95,815 16.4 % $ 84,475 14.2 % $ 11,340 13.4 % Consolidated selling and administrative expenses increased in absolute terms and as a percentage of net sales driven by increased S&A expenses at Hooker Branded segment and the addition of Sunset West expenses. ■ Hooker Branded segment S&A expenses increased in absolute terms and as a percentage of net sales driven by general spending increases as business returned to more normal levels and because of inflation in multiple line items including wages and benefits. Compensation levels also increased due to increased headcount and higher levels of staff variable compensation driven by favorable performance compared to budget. Additionally, bad debt reserves increased due to higher AR balances. These increases were partially offset by the absence of executive bonuses due to missed budgeted profit goals in fiscal 2023. We recorded a much larger downward adjustment of executive bonus and long-term incentive accruals in fiscal 2022, which exacerbates the comparisons between the two years. 29 Table of Contents ■ Home Meridian segment S&A expenses decreased in absolute terms, attributable to decreased compensation expense resulting from personnel changes, decreased selling costs due to lower net sales, and decreased bad debt expense on lower AR balances. These decreases were partially offset by higher designing fees related to 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. S&A expenses increased as a percentage of net sales due to lower net sales. ■ Domestic Upholstery segment S&A expenses increased in absolute terms in fiscal 2023 due principally to the addition of Sunset West’s S&A expenses, as well as higher compensation expenses and higher selling costs resulting from higher net sales at each division. S&A expenses decreased as a percentage of net sales due to increased net sales. ■ All Other S&A expenses increased in absolute terms while decreased as a percentage of net sales due to higher selling costs on increased net sales. Intangible Asset Amortization Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Net Sales % Net Sales Intangible asset amortization $ 3,512 0.6 % $ 2,384 0.4 % $ 1,128 47.3 % Intangible asset amortization expense was higher in fiscal 2023 due to Sunset Acquisition-related amortization expense. See Note 10 Intangible Assets and Goodwill to our Consolidated Financial Statements for additional information about our amortizable intangible assets. Operating (Loss)/Profit and Margin Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 20,529 10.3 % $ 30,667 15.3 % $ (10,138 ) -33.1 % Home Meridian (37,181 ) -17.2 % (21,260 ) -7.6 % (15,921 ) -74.9 % Domestic Upholstery 8,871 5.7 % 4,675 4.4 % 4,196 89.8 % All Other 1,735 16.6 % 761 10.6 % 974 128.0 % Consolidated $ (6,046 ) -1.0 % $ 14,843 2.5 % $ (20,889 ) -140.7 % Operating profitability decreased both in absolute terms and as a percentage of net sales in fiscal 2023 compared to the prior-year period due to the factors discussed above. Sunset West operating profit of $683,000 for the fiscal 2023, net of $1.1 million in intangible asset amortization expense on Sunset Acquisition-related intangibles, was included in the Domestic Upholstery segment’s results. Interest Expense, net Fifty-two Weeks Ended January 29, 2023 January 30, 2022 $ Change % Change % Net Sales % Net Sales Interest expense, net $ 519 0.1 % $ 110 0.0 % $ 409 371.8 % Consolidated interest expense increased in fiscal 2023 due primarily to interest on new term loans and the amounts drawn on the revolving credit facility throughout the year. 30 Table of Contents Income Taxes Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change % Net Sales % Net Sales Consolidated income tax (benefit)/expense $ (1,837 ) -0.3 % $ 3,388 0.6 % $ (5,225 ) -154.2 % Effective Tax Rate 29.9 % 22.4 % We recorded income tax benefit of $1.8 million for fiscal 2023, compared to income tax expense of $3.4 million for fiscal 2022. The effective tax rates for fiscal 2023 and 2022 were 29.9% and 22.4%, respectively. The effective tax rate was higher in fiscal 2023 due to the impact of the cash surrender value of company-owned life insurance which was added to the favorable tax impact of the pretax loss in current year, versus a subtraction from tax expense in the case of a pretax profit. See Note 17 Income Taxes to our Consolidated Financial Statements for additional information about our income taxes. Net (Loss)/Income and (Loss)/Earnings Per Share Fifty-two weeks ended January 29, 2023 January 30, 2022 $ Change % Change Net (loss)/income % Net Sales % Net Sales Consolidated $ (4,312 ) -0.7 % $ 11,718 2.0 % $ (16,030 ) -136.8 % Diluted (loss)/earnings per share $ (0.37 ) $ 0.97 The analysis and discussion of fiscal 2022 compared to fiscal 2021 results are available in Item 7 of our 2022 Annual Report on Form-10K available through Hooker Furnishings and SEC websites. Financial Condition, Liquidity and Capital Resources Summary Cash Flow Information – Operating, Investing and Financing Activities Fifty-Two Weeks Ended January 29, January 30, January 31, 2023 2022 2021 Net cash (used in)/provided by operating activities $ (21,718 ) $ 19,209 $ 68,263 Net cash used in investing activities (29,965 ) (6,862 ) (476 ) Net cash provided by/(used in) financing activities 1,319 (8,822 ) (37,977 ) Net (decrease)/increase in cash and cash equivalents $ (50,364 ) $ 3,525 $ 29,810 During fiscal 2023, we used a portion of the $25 million term-loan proceeds and existing cash and cash equivalents on hand to fund the $25 million Acquisition, build up inventory levels by $19 million, pay $13.3 million in purchases and retirement of common stock, $9.6 million in cash dividends, $5.4 million for the development of our new cloud-based ERP system, $4.2 million capital expenditures to enhance our business systems and facilities, and $492,000 in life insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees and to facilitate business continuity. During fiscal 2022, we used a portion of the $19.2 million generated from operations and $372,000 in life insurance proceeds to pay $8.8 million in cash dividends, $6.7 million in capital expenditures to enhance our systems and facilities and $560,000 for insurance premiums on Company-owned life insurance policies. 31 Table of Contents During fiscal 2021, we used existing cash, a portion of the $68.3 million generated from operations and $1.3 million in life insurance proceeds to retire our $30.1 million in outstanding term loans related to the Home Meridian acquisition, pay $7.8 million in cash dividends, $1.2 million in capital expenditures to enhance our systems and facilities and to pay $555,000 for insurance premiums on Company-owned life insurance policies. Liquidity, Financial Resources and Capital Expenditures Our sources of liquidity are: ■ available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance; ■ expected cash flow from operations; ■ available lines of credit; and ■ cash surrender value of Company-owned life-insurance. The most significant components of our working capital are inventory, accounts receivable and cash and cash equivalents reduced by accounts payable and accrued expenses. Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for inventory, lease payments and payroll), quarterly dividend payments and capital expenditures related primarily to our ERP project, showroom renovations and upgrading systems, buildings and equipment. The timing of our working capital needs can vary greatly depending on demand for and availability of raw materials and imported finished goods but is generally the greatest in the mid-summer as a result of inventory build-up for the traditional fall selling season. Long-term cash requirements relate primarily to funding lease payments. While we generally fund short-term and long-term cash requirements with cash from operating activities, during fiscal 2023, at various times we borrowed and repaid amounts totaling $36.2 million on our revolving line of credit. We believe our primary sources of liquidity will satisfy our cash requirements over both the short-term (the next twelve months) and long-term. Loan Agreements and Revolving Credit Facility On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) to replenish cash used to make the Sunset Acquisition. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”). Details of the individual credit facilities provided for in the Amendment are as follows: ■ Unsecured Revolving Credit Facility. Under the Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00%. The interest rate will be adjusted on a monthly basis. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; ■ 2022 Secured Term Loan. The Amendment provided us with a $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and ■ 2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. 32 Table of Contents 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 January 29, 2023, $6.3 million was outstanding under the Unsecured Term Loan, and $18 million was outstanding under the Secured Term Loan. We incurred $37,500 in debt issuance costs in connection with our term loans. As of January 29, 2023, unamortized loan costs of $33,750 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: ● Maintain a ratio of funded debt to EBITDA not exceeding: o 2.50:1.0 through July 30, 2023; o 2.25:1.0 through July 30, 2024; and o 2.00:1.00 thereafter. ● A basic fixed charge coverage ratio of at least 1.25:1.00; and ● Limit capital expenditures to no more than $15.0 million during any fiscal year. The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Existing Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the Existing Loan Agreement. We were in compliance with each of these financial covenants at January 29, 2023 and expect to remain in compliance with existing covenants for the foreseeable future. Revolving Credit Facility Availability As of January 29, 2023, 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 January 29, 2023. There were no additional borrowings outstanding under the Existing Revolver as of January 29, 2023. Share Repurchase Authorization On June 6, 2022, our Board of Directors authorized the repurchase of up to $20 million of the Company’s common shares. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of our Board of Directors. 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. Through the end of fiscal 2023, we had used approximately $13.3 million of the authorization to purchase 819,632 of our common shares (at an average price of $16.27 per share), with approximately $6.7 million remaining available for future purchases under the authorization as of the end of the fiscal 2023. Capital Expenditures We expect to spend between $2.5-$3.5 million in capital expenditures in fiscal 2024 to maintain and enhance our operating systems and facilities. 33 Table of Contents Enterprise Resource Planning During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts began shortly thereafter. The ERP system went live at Sunset West in December 2022 and is expected to go-live in our legacy Hooker divisions in 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. We anticipate spending approximately $4.0 million in fiscal 2024, with a significant amount of time invested by our associates. Material Capital Commitments Our material capital commitments primarily consist of term loan and lease payments. Contractual term-loan and interest payments assuming identical effective interest rates as of the end of fiscal 2023 are expected to be $2.7 million in fiscal 2024, $2.6 million in fiscal 2025, $2.5 million in fiscal 2026, $2.5 million in fiscal 2027 and $19.2 million in fiscal 2028 including the payoff of $18 million Secured Term Loan. We lease office space, warehousing facilities, showroom space and office equipment under leases expiring over the next five years. Future minimum annual commitments under leases and operating agreements are $10 million in fiscal 2024, $10.1 million in fiscal 2025, $10.2 million in fiscal 2026, $10.3 million in fiscal 2027 and $8.9 in fiscal 2028. Dividends We declared and paid dividends of $0.82 per share or approximately $9.6 million in fiscal 2023, an increase of 10.8% or $0.08 per share compared to $0.74 per share in fiscal 2022. On March 3, 2023, our Board of Directors declared a quarterly cash dividend of $0.22 per share, payable on March 31, 2023 to shareholders of record at March 17, 2023. Our Board of Directors will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters. Recently Issued Accounting Pronouncements No new accounting pronouncements were adopted in fiscal 2023 and none are expected to be adopted in fiscal 2024. 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. Outlook Economic indicators remain mixed. We are encouraged by the stabilization of global supply chain dynamics, some moderation of inflation and continuing strength in employment levels, but concerned about possible instability in global banking, interest rates and the stock market. Other headwinds include retailers delaying shipments due to temporarily high inventory levels, and the regulatory uncertainty with respect to anti-tipping standards on bedroom storage furniture, which we believe negatively impacted incoming order rates in the fiscal 2024 first quarter, especially from larger customers of our Home Meridian segment. Based on recent developments, it appears the tip-over issue is near resolution and we do not expect it to have a long-term impact on demand or product costs. As the industry returns to more typical demand and supply chain constraints continue to improve, previously astronomical ocean freight rates have declined, and appear to have stabilized. We expect to begin realizing cost savings and improved margins as the year progresses as we sell though our existing, higher-cost inventory and replenish with goods carrying lower freight charges. There is significant momentum at Home Meridian with meaningful new placements with major customers. We expect the product commitments made by customers will positively affect the current fiscal year, helping put HMI on the path for solid and sustainable profitability. With the opening of our new Hooker Legacy Showroom and our first Spring High Point Market in the renovated HMI and Portfolio showrooms, we expect an exciting, well-attended furniture market next week. We believe our new High Point and Las Vegas showrooms and plans to show at the Atlanta Market this summer present an opportunity for us to get our brands in front of more customers and prospects in the next 12 months than at any time in our history. 34 Table of Contents Critical Accounting Policies and Estimates The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. Specific areas requiring the application of management’s estimates and judgments include, among others, revenue recognition, inventory valuation, assumptions pertaining to valuation of goodwill and intangible assets and useful lives of long-lived assets. Accordingly, a different financial presentation could result depending on the judgments, estimates or assumptions that are used. However, we do not believe that actual results will deviate materially from our estimates related to our accounting policies described below but because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results. Revenue Recognition We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container. The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery. Acquisition of Sunset West. The acquisition of Sunset West was accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations . The acquisition method of accounting involved the allocation of the $26.0 million purchase price to the estimated fair values of the assets acquired and liabilities assumed. The $26.0 million in assets acquired included a customer relationships intangible asset with an acquisition-date fair value of $10.4 million. The allocation process involved the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset including projected cash flows, the timing of such cash flows, the remaining useful life of assets, royalty rates and applicable discount rates. Inputs used are generally obtained from historical data supplemented by current and anticipated market conditions and growth rates. If the actual results differ from the estimates and judgements used in these fair values, the amounts recorded in the Consolidated Financial Statements could result in a possible impairment of these assets or require acceleration of the amortization expense of finite-lived intangible assets. 35 Table of Contents Inventory Inventories, consisting of finished furniture for sale, raw materials, manufacturing supplies and furniture in process, are stated at the lower of cost, or market value, with cost determined using the last-in, first-out (LIFO) method. Under this method, inventory is valued at cost, which is determined by applying a cumulative index to current year inventory dollars. We review inventories on hand and record an allowance for slow-moving and obsolete inventory based on historical experience, current sales trends and market conditions, expected sales and other factors. When we identify inventory that is unlikely to be sold or that has a cost basis in excess of its net realizable value, we record a write-down to reduce the carrying amount of inventory to its estimated net realizable value. In fiscal 2023, we recorded $24.4 million inventory write down on the ACH and other excess inventories related to the exit of ACH business unit and repositioning of PRI business unit as a direct-container only business model. These estimates and assumptions were based on then current inventory levels, industry discounting levels, current demand, and offers to purchase these inventories. Concentrations of Sourcing Risk In fiscal 2023, imported products sourced from Vietnam and China accounted for 91% of our import purchases and our top five suppliers in Vietnam and China accounted for 50% of our fiscal 2023 import purchases. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. Our supply chain could be adversely impacted by the uncertainties of health concerns and governmental restrictions. In some cases, we were able to provide substitutions using inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales. Supply disruptions and delays on selected items could occur for six months or longer before the impact of remedial measures would be reflected in our results. If we are unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity.