Item 5. Market for Registrant’s Common Equity
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 28, 2024, we had approximately 7,500 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.
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 February 3, 2019 to January 28, 2024.
(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 28, 2024, 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., IDP Holdings (USA) Corp., 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.
22
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 28,
January 29,
January 30,
January 31,
February 2,
2024
2023
2022
2021
2020
(In thousands, except per share data)
Statement of Operations Data:
Net sales
$
433,226
$
583,102
$
593,612
$
540,081
$
610,824
Cost of sales
322,705
461,056
488,508
426,810
494,365
Inventory valuation expense
1,829
28,752
(2)
3,402
523
2,501
Gross profit
108,692
93,294
101,702
112,748
113,958
Selling and administrative expenses
92,678
95,815
84,475
80,410
88,867
Goodwill impairment (3)
-
-
-
39,568
-
Trade names impairment (3)
-
13
-
4,750
-
Intangible asset amortization (3)
3,656
3,512
2,384
2,384
2,384
Operating income/(loss)
12,358
(6,046
)
14,843
(14,364
)
22,707
Other income, net
1,653
416
373
336
458
Interest Expense, net
1,573
519
110
540
1,238
Income/(loss) before income taxes
12,438
(6,149
)
15,106
(14,568
)
21,927
Income tax expense/(benefit)
2,573
(1,837
)
3,388
(4,142
)
4,844
Net income/(loss)
9,865
(4,312
)
11,718
(10,426
)
17,083
Per Share Data:
Basic earnings/(loss) per share
$
0.91
$
(0.37
)
$
0.99
$
(0.88
)
$
1.44
Diluted earnings/(loss) per share
0.91
(0.37
)
0.97
(0.88
)
1.44
Cash dividends per share
0.89
0.82
0.74
0.66
0.61
Net book value per share (4)
21.54
21.33
22.01
21.76
23.25
Weighted average number of shares outstanding (basic)
10,838
11,593
11,852
11,822
11,784
Balance Sheet Data:
Cash and cash equivalents
$
43,159
$
19,002
$
69,366
$
65,841
$
36,031
Trade accounts receivable
51,280
62,129
73,727
83,290
87,653
Inventories
61,815
96,675
75,023
70,159
92,813
Working capital
123,389
137,265
170,777
169,612
171,838
Total assets
343,586
381,716
374,559
352,273
393,708
Long-term debt (including current maturities) (5)
22,874
24,266
-
-
30,138
Shareholders' equity
225,975
236,021
261,128
257,503
274,121
(1)
Our fiscal years end on the Sunday closest to January 31, with fiscal 2024 ending on January 28, 2024. The fiscal years presented above all had 52 weeks.
(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 impairment charges and amortization expense on acquisition-related intangibles. See Note 10 to our Consolidated Financial Statements for additional information on our intangible assets.
(4)
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.
(5)
Long-term debt (including current maturities): Fiscal 2024 and 2023 amounts consist of acquisition related term loans to fund the Sunset Acquisition. Fiscal 2020 amounts consisted of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions, which were paid off in January 2021.
23
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 32 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 2024 compared to fiscal 2023. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2023 compared to fiscal 2022 results are in our 2023 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, Lifestyle Brands and BOBO Intriguing Objects.
Furnishings 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 2024 third quarter, H Contract’s results included sales of products sourced from the Hooker Branded and Domestic Upholstery segments. Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2024 third quarter, Hooker Branded and Domestic Upholstery segments’ results now include sales of products formerly included in H Contract’s results. Fiscal 2024 and fiscal 2023 results discussed below have been recast to reflect this change. The Home Meridian segment is unchanged. Additionally, based on our analysis and the requirements of ASC 280: Segment Reporting, the operational results of the newly acquired BOBO Intriguing Objects division are included in All Other starting in the second quarter of fiscal 2024 on a prospective basis. See Note 18 to our consolidated financial statements for additional financial information regarding our segments.
Overview
Executive Summary- Fiscal 2024 Results of Operations
Fiscal 2024 consolidated net sales were $433.2 million, a decrease of $149.9 million or 25.7%, compared to the previous fiscal year. This decline was attributed to industry-wide soft demand and the exit of unprofitable product lines in the Home Meridian segment, the latter of which resulted in an approximate $21 million reduction in revenue. All three segments experienced sales declines with Home Meridian’s net sales down by $72.8 million or 33.7%, Hooker Branded’s net sales down by $49.3 million or 24.0%, and Domestic Upholstery’s net sales down by $29.9 million or 19.1%, all compared to each respective segment’s prior fiscal year sales. Despite the sales decrease, consolidated gross profit increased by $15.4 million and gross margin improved by 910 bps, compared to the prior fiscal year, due primarily to the one-time $24.4 million inventory write-down in fiscal 2023 at Home Meridian, as well as increased gross margin at Hooker Branded in fiscal 2024. The Company recorded a consolidated operating income of $12.4 million compared to an operating loss of $6.0 million in the prior fiscal year. Consolidated net income was $9.9 million, or $0.91 per diluted share, compared to a net loss of $4.3 million or ($0.37) per diluted share in the prior fiscal year.
Our fiscal 2024 performance is discussed in greater detail below under “Review” and “Results of Operations”.
24
Table of Contents
Review
Fiscal 2024 marked the third full fiscal year since the initial COVID crisis and was a pivotal year for us. Since 2020, we have navigated through some of the most challenging years of our 100-year history: the economic downturn of the pandemic, a demand surge for home furnishings, supply chain disruptions, inventory unavailability, historical high ocean freight costs, significant, persistent inflation and higher interest rates, a slow housing market, and a temporary shift in consumer discretionary spending away from home furnishings. Against the backdrop of these historical disruptions and anemic industry demand, we were able to leverage the strength of our balance sheet and make necessary strategic investments in our business in fiscal 2024 while improving profitability, strengthening our balance sheet and continuing our over 50-year history of dividend payments, including our eighth consecutive annual dividend increase. On top of that, we completed a $25 million share re-purchase program during fiscal 2024. Among other investments in fiscal 2024 were: (1) a new cloud-based Enterprise Resource Planning system, which went live in our Legacy Hooker divisions in early September 2023, (2) expanding our showroom footprints by investing in the much larger and better-located showroom in High Point and new showrooms in Atlanta and Las Vegas, (3) acquiring BOBO Intriguing Objects, an accessories and home décor resource (4) adding east coast distribution to the Sunset West outdoor product line, including leveraging our existing facilities at both HF Custom and our Savannah distribution facility by adding assembly operations at each to support east coast distribution. In addition to these investments, we made substantial progress at Home Meridian by liquidating the inventory from its exited low-margin e-commerce division and setting it on an expected path of sustainable profitability. We believe these investments and improvements will act as a springboard to much improved profitability once demand improves. We were pleased to report a consolidated profit for fiscal 2024 despite a challenging and difficult environment for home furnishings.
The Hooker Branded segment ’ s net sales decreased by $49.3 million or 24.0% compared to the prior fiscal year due to soft demand for home furnishings. This decrease was further amplified by the strong sales in the prior year, driven by a surge in demand after the COVID crisis and fulfillment of historically high order backlog carried over from fiscal 2022. Hooker Branded’s fiscal 2024 net sales were at 97% of the pre-pandemic level in fiscal 2020. The sales decline resulted in a decrease of $3.2 million in gross profit; however, gross margin increased by 720 bps due to the combination of reduced ocean freight costs and the lingering effect of price increases implemented in the prior year. We implemented price decreases and promotions on orders effective from August 2023 onward to align with lower ocean freight costs and the current discounting levels within the home furnishings market. Warehousing and distribution costs decreased due to lower demurrage expenses and lower labor costs attributed to decreased inventory volume resulting from adjusted inventory planning, as inventory levels decreased by $20.7 million compared to the previous year-end. The easing of port and warehouse congestion was the primary reason for lower demurrage expenses. Sales and administrative expenses increased due to investments in new showrooms and High Point Market, higher salary expenses due to increased headcount and wage inflation, as well as increased professional service expenses supporting other growth initiatives. Despite decreased sales, this segment delivered a solid operating income of $16.8 million and operating margin of 10.8%, compared to $22 million and 10.7% in the prior year. Incoming orders remained flat compared to the prior year and the backlog was 25% lower than the previous year-end but remained 40% higher than the fiscal 2020 year-end.
The Home Meridian segment ’ s net sales decreased by $72.8 million, or 33.7% compared to the prior fiscal year due to sales declines across our major customers including traditional furniture chains, mass merchants and e-commerce. Additionally, closeout sales of exited product lines accounted for 26% of total sales decrease. On a more positive note, SLH achieved robust sales growth with a 38% increase, attributed to the ongoing recovery in the hospitality industry. Despite reduced revenue, we were encouraged by the progress made from the business restructuring and re-organization decisions made in the segment in the prior year such as: (1) returns and allowances decreased by 150 bps compared to the prior year, reaching the lowest level in five years; (2) gross margin reached a five-year high, due to the absence of inventory write-downs as well as improved profitability in four existing divisions, as all four existing divisions exceeded their pre-pandemic gross margins from fiscal 2020; (3) with inventory levels decreased by over 60% in this segment, reduced footprints in the Georgia warehouse and the exit of California and North Carolina warehouses yielded a $3.7 million savings in fiscal 2024; and (4) personnel changes and other cost cutting initiatives contributed to a $3.5 million savings in operating expenses in fiscal 2024. However, these positive developments were not sufficient to offset substantial sales volume loss. While the segment still reported an operating loss of $5.5 million (3.9%), this represented the lowest loss since fiscal 2020. Incoming orders increased by $74.4 million, more than doubling compared to the prior year, due primarily to our efforts to broaden product offerings and to a lesser extent the absence of order cancellations from exited businesses in the current year. The year-end backlog was 16% lower than the previous year-end but increased by 30% compared to fiscal 2024 third quarter end.
25
Table of Contents
The Domestic Upholstery segment ’ s net sales decreased by $29.9 million, or 19.1% compared to the all-time record sales this segment achieved in the prior fiscal year due to fulfillment of historical high order backlog. Net sales at Bradington Young, HF Custom and Shenandoah exceeded the pre-pandemic levels in fiscal 2020. Early in the year, we adjusted production levels at select factories to align with current demand and backlog levels. Sales decreases led to factories operating below full capacity, which resulted in under-absorbed indirect costs, which were 360 bps higher than the prior year. Material costs decreased by 270 bps due to more stable raw materials costs and reduced freight-in costs. Sunset West’s operating income increased over 30% mostly due to decreased material costs, reduced operating expenses, and the absence of disruptions experienced during the prior year due to the implementation of the new ERP system. Bradington Young also recorded increased operating income and margin compared to the prior year. Profitability declined at HF Custom and Shenandoah driven by double-digit sales decreases. Incoming orders increased across all four divisions in fiscal 2024. The year-end order backlog was 36% lower than the prior year-end. Excluding Sunset West, year-end order backlog was 7% higher than the fiscal 2020 year-end.
Financial strength: We continued to improve our balance sheet, with cash increasing by $24.2 million to $43.2 million at year end. Additionally, we adjusted inventory levels to better align with our current business structure and demand, resulting in a reduction of $34.9 million or 36% compared to the previous year-end. During fiscal 2024, we used $55.5 million generated from operating activities to fund $11.7 million repurchase of 620,634 shares, $9.7 million cash dividends to our shareholders, $6.8 million capital expenditures including investments in our new High Point, Atlanta and Vegas showrooms, $5.1 million for continued implementation of our new ERP system, $2.8 million principal and interests payments on term loans, and $2.4 million for the BOBO acquisition. In addition to our cash balance, we had $28.3 million available under our $35 million revolving credit facility with BofA (the “Existing Revolver”) to fund working capital needs and have access to $28.5 million in cash surrender value of Company-owned life insurance policies. 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.
Commitment to shareholders: Our $25 million share repurchase program was completed during fiscal 2024. We purchased and retired approximately 1.4 million shares of our common stock since the share repurchase program began in the second quarter of fiscal 2023. In the third quarter of fiscal 2024, the Board of Directors approved the increase of the quarterly dividend to $0.23 per share, an increase of 4.5% over the previous quarterly dividend, representing the eighth consecutive annual dividend increase. In fiscal 2024, dividends totaled $0.89 per share or $9.7 million in the aggregate, an increase of 8.5% or $0.07 per share compared to the prior year. Notably, we have continuously paid annual dividends since 1969.
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 operations:
Fifty-two weeks ended
January 28,
January 29,
2024
2023
Net sales
100.0
%
100.0
%
Cost of sales
74.5
79.1
Inventory valuation expense
0.4
4.9
Gross profit
25.1
16.0
Selling and administrative expenses
21.4
16.4
Intangible asset amortization
0.8
0.6
Operating income / (loss)
2.9
(1.0
)
Other income, net
0.4
0.1
Interest expense, net
0.4
0.1
Income / (Loss) before income taxes
2.9
(1.0
)
Income tax expense / (benefit)
0.6
(0.3
)
Net income / (loss)
2.3
(0.7
)
26
Table of Contents
Fiscal 2024 Compared to Fiscal 2023
Net Sales
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Net Sales
% Net Sales
Hooker Branded
$
156,590
36.2
%
$
205,935
35.3
%
$
(49,345
)
-24.0
%
Home Meridian
143,538
33.1
%
216,338
37.1
%
(72,800
)
-33.7
%
Domestic Upholstery
126,827
29.3
%
156,717
26.9
%
(29,890
)
-19.1
%
All Other
6,271
1.4
%
4,112
0.7
%
2,159
52.5
%
Consolidated
$
433,226
100
%
$
583,102
100
%
$
(149,876
)
-25.7
%
Unit Volume and Average Selling Price ( “ ASP ” )
Unit Volume
FY24 % Increase / (Decrease)
vs. FY23
Average Selling Price
FY24 % Increase / (Decrease)
vs. FY23
Hooker Branded
-21.6
%
Hooker Branded
-0.1
%
Home Meridian
-23.0
%
Home Meridian
-13.2
%
Domestic Upholstery
-24.2
%
Domestic Upholstery
7.7
%
All Other
0.2
%
All Other
-6.9
%
Consolidated
-22.7
%
Consolidated
-2.6
%
Consolidated net sales decreased compared to prior year due to sales decreases in all segments.
■
Hooker Branded segment’s net sales decreased by 24.0% compared to the prior fiscal year, primarily due to decreased unit volume resulting from soft demand for home furnishings. Net sales in the prior year represented the second highest in history, driven by the demand surge and the fulfillment of a historically high order backlog. ASP remained essentially unchanged. In the prior year, we implemented price increases to mitigate higher freight and product costs. We refrained from further increasing prices in the current year and implemented price decreases and promotions on orders effective from August onward to correspond with reduced ocean freight costs and industry-wide discounting trends.
■
Home Meridian segment’s net sales decreased by 33.7% compared to the prior fiscal year, attributed to both decreased unit volume and ASP. The current soft demand for home furnishings led to reduced sales across all channels, including traditional furniture chains, mass merchants, and e-commerce. Additionally, the exit of unprofitable businesses accounted for approximately 26% of the sales decrease within the segment. ASP decreased primarily due to the liquidation sales of previously written down ACH inventories, which accounted for approximately 23% of total units sold, as well as the sales of obsolete inventories at PRI and SLF. On a more positive note, SLH net sales increased by 38% due to the ongoing rebound in the hospitality business.
■
Domestic Upholstery’s net sales decreased by 19.1% compared to the prior year, during which net sales had achieved an all-time high. All four divisions experienced sales decreases driven by reduced unit volume, while benefitting from increased ASP due to price increases implemented in the prior year to mitigate increased raw material costs. However, the favorable price variances were not sufficient to offset the sales volume loss.
27
Table of Contents
Gross Profit/(Loss) and Margin
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Hooker Branded
$
57,671
36.8
%
$
60,871
29.6
%
$
(3,200
)
-5.3
%
Home Meridian
24,367
17.0
%
(2,620
)
-1.2
%
26,987
1030.0
%
Domestic Upholstery
24,048
19.0
%
32,633
20.8
%
(8,585
)
-26.3
%
All Other
2,606
41.5
%
2,410
58.6
%
196
8.1
%
Consolidated
$
108,692
25.1
%
$
93,294
16.0
%
$
15,398
16.5
%
Despite sales decreases across segments, consolidated gross profit and margin both increased as compared to the prior year, primarily attributable to the absence of the inventory write-down at the Home Meridian segment in the current period.
■
The Hooker Branded segment’s gross profit decreased in fiscal 2024 due to a decline in net sales, while gross margin significantly increased due to lower product costs driven by reduced ocean freight expenses. Additionally, warehousing costs also decreased, primarily due to lower demurrage and drayage expenses resulting from eased supply chain constraints and adjusted inventory planning based on current demand forecast, as well as lower labor costs due to reduced shipping activities attributable to lower sales and inventory receipts.
■
The Home Meridian segment’s gross profit was $24.4 million, compared to a gross loss of $2.6 million in the prior year. This significant improvement was primarily due to the absence of the $24 million write-down of ACH inventories and other excess inventories. Additionally, warehousing costs decreased because of reduced footprint in the Georgia warehouse, as well as the exit of the North Carolina and California warehouses. Furthermore, SLH contributed a $2 million increase in gross profit through its strong sales. The sales of previously written-down or written-off inventory had an immaterial impact on gross profit in fiscal year 2024.
■
Domestic Upholstery segment experienced a decrease in both gross profit and margin in fiscal 2024, driven by a combination of decreased net sales and under-absorbed overhead. The indirect costs were 360 bps above the prior year, primarily due to increased medical claims and workers’ compensation expenses. On a more positive note, all four divisions benefited from more stable raw material costs, leading to a 270 bps decrease in direct material costs. Direct labor costs decreased as a result of reduced production during the year to align with current demand and backlog levels.
Selling and Administrative Expenses ( “ S&A ” )
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Hooker Branded
$
40,829
26.1
%
$
38,840
18.9
%
$
1,989
5.1
%
Home Meridian
28,575
19.9
%
33,215
15.4
%
(4,640
)
-14.0
%
Domestic Upholstery
20,582
16.2
%
21,584
13.8
%
(1,002
)
-4.6
%
All Other
2,692
42.9
%
2,176
52.9
%
516
23.7
%
Consolidated
$
92,678
21.4
%
$
95,815
16.4
%
$
(3,137
)
-3.3
%
28
Table of Contents
Consolidated selling and administrative expenses decreased in absolute terms due to reduced costs at Home Meridian and Domestic Upholstery segments, though partially offset by increased expenses in the Hooker Branded segment. Consolidated S&A expenses increased as a percentage of net sales due to a decrease in net sales.
■
Hooker Branded segment’s S&A expenses increased both in absolute terms and as a percentage of net sales. This segment assumes the majority of expenses associated with the Company’s growth and strategic initiatives including investment in the larger and better-located High Point showroom and new showrooms in Atlanta and Las Vegas, implementation of the new ERP system, as well as other professional services expenses. S&A expenses also increased due to increased compensation expenses as a result of increased headcount and wage inflation. Due to decreased sales because of current anemic demand, this spending appears disproportionate than it would in a normal demand environment. These increases were partially offset by decreased commissions due to lower sales, decreased bad debt reserves on lower AR balances, and lower executive officers’ bonus as budgeted profit goals were unmet.
■
Home Meridian segment’s S&A expenses decreased in absolute terms due to various factors, including decreased compensation expenses resulting from organizational restructuring and personnel changes within the segment, decreased commissions due to lower sales, cost savings achieved through business repositioning, such as lower insurance costs associated with decreased inventory levels, lower depreciation expenses resulting from a reduced footprint and less equipment at warehouses, and other cost-cutting initiatives. S&A expenses increased as a percentage of net sales due to lower net sales.
■
Domestic Upholstery segment’s S&A expenses decreased in absolute terms due to decreased commissions due to lower sales, decreased wage expenses resulting from personnel changes, and decreased bonus expenses due to missed profit targets. These decreases were partially offset by higher spending on advertising supplies, samples and product development for the new M brand. S&A expenses increased as a percentage of net sales due to lower net sales.
Intangible Asset Amortization
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Net Sales
% Net Sales
Intangible asset amortization
$
3,656
0.8
%
$
3,512
0.6
%
$
144
4.1
%
Intangible asset amortization expense was higher in fiscal 2024 due to the reassessment and amortization of Sam Moore trade name. See Note 10 Intangible Assets and Goodwill to our Consolidated Financial Statements for additional information about our amortizable intangible assets.
Operating Profit / (Loss) and Margin
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
%Segment Net Sales
%Segment Net Sales
Hooker Branded
$
16,844
10.8
%
$
22,030
10.7
%
$
(5,186
)
-23.5
%
Home Meridian
(5,530
)
-3.9
%
(37,181
)
-17.2
%
31,651
85.1
%
Domestic Upholstery
1,131
0.9
%
8,871
5.7
%
(7,740
)
-87.3
%
All Other
(87
)
-1.4
%
234
5.7
%
(321
)
-137.2
%
Consolidated
$
12,358
2.9
%
$
(6,046
)
-1.0
%
$
18,404
304.4
%
Consolidated operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2024 compared to the prior-year period due to the factors discussed above.
29
Table of Contents
Interest Expense, net
Fifty-two Weeks Ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Net Sales
% Net Sales
Interest expense, net
$
1,573
0.4
%
$
519
0.1
%
$
1,054
203.1
%
Consolidated interest expense increased in fiscal 2024 due to interest incurred for the entire year on the term loans, which we entered in July of 2022 as well as higher interest rates.
Income Taxes
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
% Net Sales
% Net Sales
Consolidated income tax expense / (benefit)
$
2,573
0.6
%
$
(1,837
)
-0.3
%
$
4,410
240.1
%
Effective Tax Rate
20.7
%
29.9
%
We recorded income tax expense of $2.6 million for fiscal 2024, compared to income tax benefit of $1.8 million for fiscal 2023. The effective tax rates for fiscal 2024 and fiscal 2023 were 20.7% and 29.9%, respectively. The effective tax rate was higher in fiscal 2023 due to the impact of state tax benefits and the cash surrender value of company-owned life insurance which were added to the favorable tax impact of the pretax loss, versus a subtraction from tax expense in the case of a pretax profit in the current year. See Note 17 Income Taxes to our Consolidated Financial Statements for additional information about our income taxes.
Net Income / (Loss) and Earnings (Loss) Per Share
Fifty-two weeks ended
January 28, 2024
January 29, 2023
$ Change
% Change
Net income / (loss)
% Net Sales
% Net Sales
Consolidated
$
9,865
2.3
%
$
(4,312
)
-0.7
%
$
14,177
328.8
%
Diluted earnings / (loss) per share
$
0.91
$
(0.37
)
The analysis and discussion of fiscal 2023 compared to fiscal 2022 results are available in Item 7 of our 2023 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 28,
January 29,
January 30,
2024
2023
2022
Net cash provided by/(used in) operating activities
$
55,471
$
(21,718
)
$
19,209
Net cash used in investing activities
(8,558
)
(29,965
)
(6,862
)
Net cash (used in)/provided by financing activities
(22,756
)
1,319
(8,822
)
Net increase/(decrease) in cash and cash equivalents
$
24,157
$
(50,364
)
$
3,525
30
Table of Contents
During fiscal 2024, we used a portion of the $55.5 million cash generated from operations and $1.0 million life insurance proceeds to fund $11.7 million share repurchases, $9.7 million in cash dividends to our shareholders, $6.8 million capital expenditures including investments in our new showrooms, $5.1 million for development of our cloud-based ERP system, $2.4 million on the BOBO acquisition, and $406,000 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 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 Sunset Acquisition, pay $13.3 million in purchases and retirement of common stock, build up inventory levels by $19 million, $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.
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.
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 repayment of long-term debt and funding lease payments.
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;
31
Table of Contents
■
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.
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 28, 2024, $4.9 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 28, 2024, unamortized loan costs of $26,250 were netted against the carrying value of our term loans on our 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
2.25:1.0 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 28, 2024 and expect to remain in compliance with existing covenants for the foreseeable future.
Revolving Credit Facility Availability
As of January 28, 2024, we had $28.3 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $6.7 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of January 28, 2024. There were no additional borrowings outstanding under the Existing Revolver as of January 28, 2024.
Share Repurchase Authorization
In fiscal 2023, our Board of Directors authorized the repurchase of up to $20 million of the Company’s common shares. The authorization did not obligate us to acquire a specific number of shares during any period and did not have an expiration date, but it could be modified, suspended, or discontinued at any time at the discretion of our Board of Directors. Repurchases could 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. In fiscal 2024 second quarter, our Board of Directors approved an additional $5 million for the repurchase of our common shares, adding to the $20 million authorization it approved in fiscal 2023.
32
Table of Contents
During fiscal 2024, we had used approximately $11.7 million of the authorization to purchase 620,634 of our common shares at an average price of $18.79 per share. The share repurchase program was completed during the fiscal 2024 third quarter.
Capital Expenditures
We expect to spend between $3 million to $4 million in capital expenditures in fiscal 2025 to maintain and enhance our operating systems and facilities.
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 in the legacy Hooker divisions in early September 2023. We expect it to go live in the Home Meridian segment in fiscal 2026. 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 2025, with a significant amount of time invested by our associates.
Material Capital Commitments
Our material capital commitments primarily consist of term loans and lease payments.
Contractual term-loan and interest payments assuming identical effective interest rates as of the end of fiscal 2024 are expected to be $2.8 million in fiscal 2025, $2.7 million in fiscal 2026, $2.6 million in fiscal 2027, and $19.3 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 $9.5 million in fiscal 2025, $9.6 million in fiscal 2026, $9.4 million in fiscal 2027, $7.8 million in fiscal 2028 and $7.3 in fiscal 2029.
Dividends
We declared and paid dividends of $0.89 per share or approximately $9.7 million in fiscal 2024, an increase of 8.5% or $0.07 per share compared to $0.82 per share in fiscal 2023.
On March 4, 2024, our Board of Directors declared a quarterly cash dividend of $0.23 per share, payable on March 29, 2024 to shareholders of record at March 18, 2024.
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
See the Accounting Standards to be Adopted section of Note 1 to our Consolidated Financial Statements for further details of recent accounting pronouncements.
33
Table of Contents
Outlook
Home furnishings industry demand is exceptionally soft and about two and a half months into the new fiscal year, year-to-date consolidated orders are down in the mid-single digits as compared to the same prior-year period.
Economic indicators are mixed, but somewhat encouraging. Over the last six months, US Consumer confidence has shown no real trend to the upside or downside, despite encouraging signs including the easing of inflation from 2023 highs and likely interest rate cuts later in the year. We are also encouraged by recent strong existing home sales, growth in building permits and in single-family housing starts and completions, an encouraging jobs report, and the stock market’s strong performance. We are cautiously optimistic for later this year and beyond and are confident we’ve made the right strategic investments in sales channels, people, systems, and products and that we are positioned to grow when demand returns.
We are looking forward to the Spring High Point Market that opens this week and expect strong attendance as we offer an exciting assortment of new products across divisions.
We believe the investments and improvements we made in the past year will be a springboard to higher profitability, especially once demand improves. Going forward, we intend to use the strength of our balance sheet and variable cost model to weather current economic volatility until consumer confidence improves and demand returns.
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 and inventory valuation. 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.
34
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.
Our other significant accounting policies are described in Note 1 – Summary of Significant Accounting Policies to our Consolidated Financial Statements beginning at page F-11 in this report.
Concentrations of Sourcing Risk
In fiscal 2024, imported products sourced from Vietnam accounted for 88% of our import purchases and our top five suppliers in Vietnam accounted for 60% of our fiscal 2024 import purchases. A disruption in our supply chain, or from Vietnam 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 in general, could adversely affect our sales, earnings, financial condition and liquidity.
35
Table of Contents