HOOKER FURNISHINGS Corp 10-K

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 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 describes 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 30 and in Note 17 to our Consolidated Financial Statements on page F-29 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 2025 compared to fiscal 2024. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2024 compared to fiscal 2023 results are in our 2024 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 BOBO. 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. See Note 16 to our consolidated financial statements for additional financial information regarding our segments. Executive Summary- Fiscal 2025 Results of Operations Fiscal 2025 consolidated net sales totaled $397.5 million, reflecting a decrease of $35.8 million, or 8.3%, compared to the previous fiscal year. All three reportable segments experienced sales decreases, driven by weak demand, a depressed housing market, and broader macroeconomic uncertainties impacting the broader home furnishings industry. The Company reported a consolidated operating loss of $18.1 million, primarily due to lower sales volumes, $4.9 million in restructuring costs related to its cost reduction plan, $3.1 million in bad debt expense from a major customer’s bankruptcy, and $2.8 million in a non-cash tradename impairment. Consolidated net loss amounted to $12.5 million, or $1.19 per diluted share. Despite the operating loss, the Company achieved significant milestones in fiscal 2025. These included the Margaritaville licensing agreement, the launch of Hooker Branded’s new merchandising strategy, Sunset West’s east coast expansion, key inventory investments, and market share gains amid a tough market. Additionally, the Company secured a new credit agreement, ensuring sufficient financial resources to sustain operations and pursue growth initiatives. Our fiscal 2025 performance is discussed in greater detail below under “Results of Operations”. 23 Table of Contents 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: 53 weeks ended 52 weeks ended February 2, January 28, 2025 2024 Net sales 100 % 100 % Cost of sales 77.7 74.9 Gross profit 22.3 25.1 Selling and administrative expenses 25.2 21.4 Trade name impairment charges 0.7 - Intangible asset amortization 0.9 0.8 Operating (loss) / income (4.6 ) 2.9 Other income, net 0.7 0.4 Interest expense, net 0.3 0.4 (Loss) / income before income taxes (4.1 ) 2.9 Income tax (benefit) / expense (1.0 ) 0.6 Net (loss) / income (3.1 ) 2.3 Fiscal 2025 Compared to Fiscal 2024 Net Sales 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Net Sales % Net Sales Hooker Branded $ 146,470 36.9 % $ 156,590 36.2 % $ (10,120 ) -6.5 % Home Meridian 130,816 32.9 % 143,538 33.1 % (12,722 ) -8.9 % Domestic Upholstery 114,216 28.7 % 126,827 29.3 % (12,611 ) -9.9 % All Other 5,963 1.5 % 6,271 1.4 % (308 ) -4.9 % Consolidated $ 397,465 100 % $ 433,226 100 % $ (35,761 ) -8.3 % Unit Volume and Average Selling Price (“ASP”) Unit Volume FY25 % Increase / (Decrease) vs. FY24 Average Selling Price FY25 % Increase / (Decrease) vs. FY24 Hooker Branded 2.9 % Hooker Branded -5.7 % Home Meridian -29.9 % Home Meridian 24.4 % Domestic Upholstery -8.0 % Domestic Upholstery -1.4 % All Other -32.8 % All Other -28.6 % Consolidated -21.8 % Consolidated 16.1 % Because we report on a fiscal year that ends on the Sunday closest to January 31 st of each year, the 2025 fiscal year was one week longer than the comparable 2024 fiscal year. The following table presents average net sales per shipping day in thousands for the 2025 and 2024 fiscal years: Average Net Sales Per Shipping Day 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change Hooker Branded $ 570 $ 621 $ (51 ) -8.3 % Home Meridian 509 570 (61 ) -10.6 % Domestic Upholstery 444 503 (59 ) -11.7 % All Other 23 25 (2 ) -6.8 % Consolidated $ 1,547 $ 1,719 $ (173 ) -10.0 % Shipping Days 257 252 24 Table of Contents Consolidated net sales decreased year-over-year due to the ongoing soft market conditions affecting all segments. ◾ Hooker Branded segment’s net sales decreased by $10.1 million, or 6.5%, compared to the prior fiscal year. This decrease was primarily driven by a 5.7% decrease in ASP, which was partially offset by a 2.9% increase in unit volume. Net sales decreased during the first three quarters but recovered with a 10% increase in the fourth quarter, partially due to one additional week, though this recovery was not enough to reverse the annual decrease. The lower ASP resulted from price reductions implemented to align with decreased freight costs compared to the historic high in the prior two years. In addition, discounts increased by 140 bps compared to the prior year due to the effort to rebalance our inventory mix and levels. While unit volume increased by 2.9% for the year, driven by a 14% surge in the fourth quarter, this increase was insufficient to fully offset the impact of the lower ASP. ◾ Home Meridian segment’s net sales decreased by $12.7 million, or 8.9%, compared to the prior fiscal year, primarily due to a 29.9% decrease in unit volume. The absence of sales from previously exited unprofitable product lines accounted for $11.5 million, representing 78% of the total unit volume decrease. Traditional channels, including mass merchants, independent furniture stores, and major furniture chains, all experienced sales decreases due to challenges in the home furnishings industry driven by the sustained industry downturn attributed to macroeconomic headwinds. The loss of a major customer due to its bankruptcy accounted for approximately 22% of the sales decrease in these channels. These channel decreases were partially offset by a 58% increase in hospitality sales, driven by double-digit growth in both unit volume and ASP, as a result of the continued growth in the hospitality industry. The segment’s ASP increased by 24.4%, as discounts decreased by 1,190 bps due to the absence of liquidation sales from the previously exited businesses. ◾ Domestic Upholstery’s net sales decreased by $12.6 million, or 9.9%, compared to the prior year. This decrease was driven by sales decreases at Bradington Young, Shenandoah, and HF Custom, partially offset by a 6.8% sales increase at Sunset West. Sunset West’s sales growth was driven by its expansion on the East Coast, which helped support a 15.6% increase in orders for the year. In addition, Sunset West also benefited from the stabilization of its ERP system. While the ASP remained relatively stable across all four divisions, unit volume decreased at Bradington Young, HF Custom and Shenandoah, but increased by 9.6% at Sunset West. Gross Profit and Margin 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 45,187 30.9 % $ 58,387 37.3 % $ (13,200 ) -22.6 % Home Meridian 25,386 19.4 % 24,367 17.0 % 1,019 4.2 % Domestic Upholstery 18,289 16.0 % 24,048 19.0 % (5,759 ) -23.9 % All Other (214 ) -3.6 % 1,890 30.1 % (2,104 ) -111.3 % Consolidated $ 88,648 22.3 % $ 108,692 25.1 % $ (20,044 ) -18.4 % Consolidated gross profit and margin decreased, primarily due to decreases in the Hooker Branded and Domestic Upholstery segments, as well as approximately $1.2 million inventory write-downs and restructuring costs at All Other related to the consolidation of the BOBO business. However, this decrease was partially offset by improved gross profit and margin at Home Meridian. ◾ The Hooker Branded segment’s gross profit decreased by $13.2 million compared to the previous fiscal year, primarily due to a $10.1 million decrease in net sales. Additionally, the cost of goods sold (COGS) increased by $3.1 million, or 570 bps, largely because the prior year’s COGS were unusually low, benefiting from the combination of higher selling prices and lower ocean freight costs. This made the year-over-year comparison more significant. To a lesser extent, reduced profit on discounted sales also contributed to the decrease in gross margin. While warehousing and distribution expenses remained unchanged in absolute terms, they increased by 70 bps due to the decrease in net sales. 25 Table of Contents ◾ The Home Meridian segment’s gross profit increased by $1.0 million, and its gross margin improved by 240 bps, despite a decrease in net sales. This progress reflected years of restructuring efforts aimed at achieving sustainable profitability in this segment. The improvement was primarily driven by a $3.0 million reduction in warehousing and distribution expenses, including $2.3 million in cost savings at the Georgia warehouse driven by a reduction in footprint and $800,000 from international operations, increasing gross margin by 180 bps. Additionally, COGS decreased by 60 bps, supported by strong performance in the hospitality business. However, this was partially offset by lower margins in traditional channels and $618,000 in inventory write-downs related to the planned exit of the Georgia warehouse. ◾ Domestic Upholstery segment gross profit decreased by $5.8 million, primarily due to lower net sales, while its gross margin decreased by 300 bps, due to the under-absorption of overhead caused by reduced net sales and higher warehousing and distribution expenses. Weak demand for home furnishings led to decreased incoming orders and reduced production schedules at Bradington Young, HF Custom and Shenandoah to align with backlog levels. As a result, direct labor costs decreased in absolute terms but remained flat as a percentage of net sales. Indirect costs also decreased in absolute terms, driven by lower headcount and other cost-saving measures, but increased by 120 bps due to the sales decrease. Direct material costs fluctuated across divisions but remained steady for the segment. Warehousing and distribution expenses increased by 160 bps primarily driven by higher rent expenses related to the redeploying of a portion of the Georgia warehouse to support Sunset West’s East Coast expansion. Selling and Administrative Expenses (“S&A”) 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Segment Net Sales % Segment Net Sales Hooker Branded $ 46,149 31.5 % $ 40,829 26.1 % $ 5,320 13.0 % Home Meridian 29,593 22.6 % 28,575 19.9 % 1,018 3.6 % Domestic Upholstery 21,287 18.6 % 20,582 16.2 % 705 3.4 % All Other 3,186 53.4 % 2,692 42.9 % 494 18.4 % Consolidated $ 100,215 25.2 % $ 92,678 21.4 % $ 7,537 8.1 % Consolidated S&A expenses increased by $7.5 million or 380 bps compared to the previous year due to increases in all three segments and All Other. Consolidated S&A expenses increased as a percentage of net sales also due to a decrease in net sales. ◾ Hooker Branded segment’s S&A expenses increased by $5.3 million, or 540 bps, compared to the previous year. This increase was driven by several key factors: approximately $1.4 million in severance costs associated with the Company’s cost reduction plan; additionally, this segment assumes a significant portion of the Company’s S&A expenses, which include compensation for corporate staff and executives, professional service fees such as consulting and compliance costs, and IT-related expenses. These costs totaled approximately $17 million for the current year, an increase of $1.6 million over the prior year, primarily due to wage inflation, investment in talent, IT maintenance, and investments to support strategic growth, including international expansion. Other factors contributing to the increase included higher bad debt provision, travel expenses, and banking fees. These increases were partially offset by lower variable compensation expense due to the Company not meeting its profit targets, as well as decreased rent and other expenses resulting from cost saving measures. ◾ Home Meridian segment’s S&A expenses increased by $1.0 million, or 270 bps, compared to the previous year. This increase was primarily due to a $3.1 million bad debt expense resulting from the bankruptcy of a major customer. Additionally, the segment incurred $233,000 in severance costs related to the company’s cost reduction plan. However, these increases were partially offset by several factors: a $1.2 million decrease in compensation expenses due to organizational restructuring and personnel changes, a $400,000 reduction in selling costs due to lower sales, a $300,000 decrease in insurance costs due to reduced inventory levels, and savings from other cost reduction initiatives. ◾ Domestic Upholstery segment’s S&A expenses increased by $705,000, or 240 bps, compared to the previous year. This increase included approximately $640,000 in severance costs, as well as higher compliance costs and showroom rent expenses. These increases were partially offset by reductions in variable compensation expense, medical claims, and selling costs. ◾ All Other’s S&A expenses increased by $494,000 compared to the previous year, primarily due to approximately $850,000 in restructuring costs associated with the consolidation of the BOBO business. 26 Table of Contents Intangible Asset Impairment and Amortization 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Net Sales % Net Sales Tradenames impairment $ 2,831 0.7 % $ - 0.0 % $ (2,831 ) -100 % Intangible asset amortization 3,687 0.9 % 3,656 0.8 % 31 0.8 % Intangible asset amortization expense stayed flat in fiscal 2025. The $2.8 million non-cash impairment charge was related to certain indefinite-lived trade names in the Home Meridian segment. See Note 10 Intangible Assets and Goodwill to our Consolidated Financial Statements for additional information about the impairment charges and our amortizable intangible assets. Operating (Loss) / Income and Margin 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change %Segment Net Sales %Segment Net Sales Hooker Branded $ (962 ) -0.7 % $ 17,560 11.2 % $ (18,522 ) -105.5 % Home Meridian (8,349 ) -6.4 % (5,530 ) -3.9 % (2,819 ) -51.0 % Domestic Upholstery (5,374 ) -4.7 % 1,131 0.9 % (6,505 ) -575.2 % All Other (3,400 ) -57.0 % (803 ) -12.8 % (2,597 ) -323.4 % Consolidated $ (18,085 ) -4.6 % $ 12,358 2.9 % $ (30,443 ) -246.3 % The Company reported an operating loss of $18.1 million in fiscal 2025 due to decreased sales volume, $4.9 million in restructuring costs, $3.1 million in bad debt, and $2.8 million in intangible asset impairment, as well as other factors discussed above. Interest Expense, net 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Net Sales % Net Sales Consolidated interest expense $ 1,274 0.3 % $ 1,573 0.4 % $ (300 ) -19.1 % Consolidated interest expense decreased slightly in fiscal 2025 due to decreased principal balance, as well as reduced interest rates in the second half of the year. Income Taxes 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change % Net Sales % Net Sales Consolidated income tax (benefit) / expense $ (3,919 ) -1.0 % $ 2,573 0.6 % $ (6,492 ) -252.3 % Effective Tax Rate 23.9 % 20.7 % We recorded income tax benefit of $3.9 million for fiscal 2025, compared to income tax expense of $2.6 million for fiscal 2024. The effective tax rates for fiscal 2025 and fiscal 2024 were 23.9% and 20.7%, respectively. The effective tax rate was higher in fiscal 2025 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 previous year. 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 53 weeks ended 52 weeks ended February 2, 2025 January 28, 2024 $ Change % Change Net (loss) / income % Net Sales % Net Sales Consolidated $ (12,507 ) -3.1 % $ 9,865 2.3 % $ (22,372 ) -226.8 % Diluted (loss) / earnings per share $ (1.19 ) $ 0.91 27 Table of Contents The analysis and discussion of fiscal 2024 compared to fiscal 2023 results are available in Item 7 of our 2024 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 53 Weeks Ended 52 Weeks Ended 52 Weeks Ended February 2, January 28, January 29, 2025 2024 2023 Net cash (used in) / provided by operating activities $ (23,016 ) $ 55,471 $ (21,718 ) Net cash used in investing activities (2,699 ) (8,558 ) (29,965 ) Net cash (used in) / provided by financing activities (11,149 ) (22,756 ) 1,319 Net (decrease) / increase in cash and cash equivalents $ (36,864 ) $ 24,157 $ (50,364 ) During fiscal 2025, we used cash on hand and $936,000 life insurance proceeds to fund $9.9 million in cash dividends to shareholders, $8.9 million increase in inventory levels, $3.2 million capital expenditures, $3.0 million toward the development of the ERP system, $480,000 debt issuance cost and $395,000 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 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. 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 $12 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. 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 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 December 5, 2024, the Company and its wholly owned subsidiaries, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (together with the Company, the “Borrowers”), entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Bank of America, N.A. (“BofA”), as lender. The Amended and Restated Loan Agreement amends, restates and replaces the Second Amended and Restated Loan Agreement, dated as of September 29, 2017, between the Borrowers and BofA, as amended (the “Existing Loan Agreement”). The outstanding principal amount of loans and letters of credit issued under the Existing Loan Agreement and used to collateralize certain insurance arrangements and for imported product purchases will remain outstanding as loans and letters of credit under the Amended and Restated Loan Agreement. 28 Table of Contents The Amended and Restated Loan Agreement provides for a revolving credit facility in a committed principal amount of up to $70,000,000 (the “Revolving Commitment”), including subline of $8,000,000 for letters of credit, and an option to increase the Revolving Commitment by up to $30,000,000 upon meeting certain conditions, including agreement by BofA to increase the Revolving Commitment by such amount. Proceeds of loans and letters of credit under the Amended and Restated Loan Agreement are available for general working capital and other corporate purposes of the Borrower. Availability of loans and letters of credit under the Revolving Commitment is capped by a borrowing base formula calculated as of any date as the sum for the Borrowers of (a) the value of their accounts receivable, (b) the value of their inventory, (c) the value of their in-transit inventory and (d) the life insurance cash surrender value of company-owned life insurance policies, in each case subject to eligibility requirements, advance rates, valuation metrics, reductions for write-offs and other dilutive items and reserves (the “Borrowing Base”). The lesser of the Revolving Commitment and the Borrowing Base, in each case net of the principal amount of outstanding loans and the face amount of letters of credit, constitutes “Availability” under the Amended and Restated Credit Agreement. Outstanding loans under the Amended and Restated Loan Agreement will bear interest at a rate per annum equal to the then-current Term SOFR Rate for a period of one month plus 0.10% plus a margin of 1.75%. The Term SOFR Rate will be adjusted on a monthly basis. Letters of credit are subject to a letter of credit fee equal to the actual daily amount of undrawn letters of credit multiplied by a per annum rate of 1.75% and a fronting fee equal to the actual daily amount of undrawn letters of credit multiplied by a per annum rate of 0.125%. We must also pay a monthly unused commitment fee that is based on the average daily unused amount of Revolving Commitment multiplied by a per annum rate of 0.25%. All accrued interest and fees are payable in cash monthly in arrears. We may prepay any outstanding principal amounts borrowed under the Amended and Restated Loan Agreement at any time, without penalty provided that any payment is accompanied by all accrued interest owed. Subject to the Borrowers having sufficient borrowing base capacity and customary conditions precedent to borrowing, amounts repaid may be reborrowed. The Revolving Commitment will terminate, and all amounts outstanding thereunder will be due and payable, on December 5, 2029. The obligations under the Amended and Restated Loan Agreement are secured by a first priority security interest in substantially all of the assets of the Borrowers, other than real estate, including all Company-owned life insurance policies, all accounts receivable, all inventory, all intellectual property, all equipment and all other personal property. The Amended and Restated Loan Agreement includes customary representations and warranties and requires the Borrowers to comply with customary affirmative and negative covenants, including, among other things, a financial covenant requiring the maintenance of a ratio of (x) EBITDA net of capital expenditures (to the extent not paid using Borrowed Money) to (y) the sum of debt service and dividends paid, in each case as of the last day of each month for the trailing twelve-month period ending on such day, of at least 1.0 to 1.0, if an event of default has occurred and is continuing or Availability has fallen below 10% of the Revolving Commitment at any time (until such time as both Availability is 10% or greater and no event of default exists, for the 30 consecutive days prior to such month end). The Amended and Restated Loan Agreement also limits the Borrowers’ right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Amended and Restated Loan Agreement does not restrict the Company’s ability to pay cash dividends on, or repurchase, shares of its common stock, subject to (a) no default existing prior to or resulting from such dividend or repurchase, (b) Availability is not less than 15% of the Revolving Commitment for each of the preceding 45 days prior to announcement of such dividend or repurchase and after giving pro forma effect to such dividend or repurchase and (c) if Availability is less than 20% of the Revolving Commitment on any day in such 45-day period, the Borrowers are in compliance with the financial covenant described above after giving effect to such dividend or repurchase. We incurred $480,000 in debt issuance costs in connection with our term loans. As of February 2, 2025, unamortized loan costs of $464,000 were netted against the carrying value of our term loans on our consolidated balance sheets. As of February 2, 2025, we had $22.1 million principal amount of outstanding loans and $6.7 million face amount of letters of credit. We had $41.2 million of Availability based on the current Borrowing Base. There were no additional borrowings outstanding under the Amended and Restated Loan Agreement as of February 2, 2025. 29 Table of Contents 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. 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 $2 million to $3 million in capital expenditures in fiscal 2026 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. Due to our cost reduction initiatives, we have temporarily paused the ERP project in the Home Meridian segment. Material Capital Commitments Our material capital commitments primarily consist of lease payments. We lease office space, warehousing facilities, showroom space and office equipment under leases expiring over the next five years. As of February 2, 2025, future minimum annual commitments under leases and operating agreements are $10.0 million in fiscal 2026, $10.1 million in fiscal 2027, $8.4 million in fiscal 2028, $7.7 million in fiscal 2029, and $7.3 million in fiscal 2030. In March 2025, we announced the decision to exit the Savannah, Georgia distribution center. This will reduce lease payments and our future commitments by approximately $10 million over the next five years, with a total of $14.5 million over the remaining lease term. See Note 22 Subsequent Events for additional information. Additionally, the Revolving Commitment will terminate, and all outstanding amounts thereunder will be due and payable, on December 5, 2029. Dividends We declared and paid dividends of $0.92 per share or approximately $9.9 million in fiscal 2025, an increase of 3.4% or $0.03 per share compared to $0.89 per share or approximately $9.7 million in fiscal 2024. On March 5, 2025, our Board of Directors declared a quarterly cash dividend of $0.23 per share, payable on March 31, 2025 to shareholders of record at March 17, 2025. 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 Recently Adopted Accounting Standards section of Note 1 to our Consolidated Financial Statements for further details of recent accounting pronouncements. Savannah warehouse exit On March 24, 2025, we announced our decision to exit its Savannah, Georgia distribution center and consolidate operations in the existing facilities. The Company commenced operations at the Savannah facility in October 2021 for its Home Meridian segment’s (“HMI”) Accentrics Home (“ACH”) brand. However, shortly after opening the facility, ACH’s competitive position was severely eroded by a sharp rise in post-COVID container freight rates from Asia. In 2024, we liquidated its inventory and closed ACH, part of a larger plan to exit unprofitable businesses at HMI. We began reducing our footprint in Savannah shortly after that through a series of sub-leases and lease amendments with our landlord, continued to utilize remaining space for other brands in our Home Meridian segment and for the Sunset West division of our Domestic Upholstery segment. We recorded net charges of between $1.3 million in fiscal 2025 and expect to record between $3.0 million to $4.0 million in fiscal 2026, related to the Savannah exit. We further expect preliminary savings of between $750,000-$1.0 million in net operating expenses in fiscal 2026. Also preliminarily, we expect to realize annualized savings of between $4.0 million to $5.7 million beginning in fiscal 2027. These costs and benefits are largely dependent on the timing of the completion of the exit and could differ from these preliminary estimates. 30 Table of Contents Outlook There is currently significant economic uncertainty and volatility. We are evaluating a range of strategies to mitigate the current economic environment, including a 50-year low in existing home sales, and the possible impact of additional reciprocal tariffs on our operations and profitability. Tariffs add tremendous complexity and uncertainty that require us to look at our cost structure more aggressively, particularly on the lower margin, direct container side of our business. We continue to identify additional opportunities to gain efficiency by consolidating operations. While evaluation of our cost footprint and implementation of further cuts are both ongoing, we continue to invest in the highest growth-potential areas of our business, as growing profitable sales remains an intense focus. On the positive side, the inflation cooled in February and March, falling to the levels experienced last summer and fall before it rose from November 2024 to January 2025. Additionally, according to the U.S. Census Bureau year-over-year monthly furniture sales have increased for 5 straight months, beginning in September 2024. However, the Index of Consumer Sentiment and existing home sales continue to be low, which reflects the uncertainty. While the current environment is challenging, we believe we have positioned the company to continue gaining market share and maximizing revenues through our merchandising efforts, speed-to-market initiatives and in-stock position on top-selling products. 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 customer’s 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. 31 Table of Contents Impairment of Long-Lived Assets Tangible and Definite Lived Intangible Assets We regularly review our property, plant and equipment and definite-lived intangible assets for indicators of impairment, as specified in the Accounting Standards Codification. When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of operations and consolidated balance sheets. When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less. Intangible Assets and Goodwill Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of our trademarks and trade names is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. During fiscal 2025, due to the decline in revenue driven by the downturn in the furniture industry, increased freight costs, changes in management’s strategy, and the bankruptcy of a key customer, we identified triggering events that necessitated a valuation of the indefinite-lived trade names and trademarks in the Home Meridian segment. Consequently, we performed a valuation using the discounted cash flow method. This methodology involved cash flow projections and growth rates for each trade name over the next five years, provided by management, along with a royalty rate benchmark for companies engaged in similar activities. Based on this analysis, we recorded non-cash impairment charges of $2.8 million for certain indefinite-lived trade names within the Home Meridian segment. At February 2, 2025, based on our internal valuation, the fair values of our Bradington-Young, remaining Home Meridian and BOBO non-amortizable trademarks and trade names exceeded their carrying values. Upon the adoption of ASU 2017-04, we perform our annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. Based on our internal goodwill impairment analysis as described above, we have concluded that Shenandoah and Sunset West goodwill in the Domestic Upholstery segment and BOBO goodwill in All Other is not impaired as of February 2, 2025. The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition. 32 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 historic 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 March 2025, we announced the planned exit of our Savannah, GA warehouse and the consolidation of warehouse operations at existing and temporary facilities. In fiscal 2025, we recorded $1.3 million in inventory reserves on end-of-life and near-end of life cycle products that we don’t plan to move to these existing or temporary facilities due to the moving costs involved. Our other significant accounting policies are described in Note 1 – Summary of Significant Accounting Policies to our Consolidated Financial Statements beginning at page F-10 in this report. Recently Issued Accounting Standards Not Yet Adopted In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The new guidance requires enhanced effective tax rate reconciliation and income taxes paid disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 (our fiscal 2026). We are currently evaluating the impact that the adoption of this new guidance will have on our Consolidated Financial Statements, if any, and will add necessary disclosures upon adoption. Concentrations of Sourcing Risk In fiscal 2025, imported products sourced from Vietnam accounted for 76% of our import purchases and our top five suppliers in Vietnam accounted for 62% of our fiscal 2025 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 may be 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. 33 Table of Contents