Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks.
The risk factors discussed below should be considered in conjunction with the other information contained in this annual report on Form
10-K. If any of these risks actually materialize, our business, results of operations, financial condition or future prospects could be
negatively impacted. These risks are not the only ones we face. There may be additional risks that are presently unknown to us or that
we currently believe to be immaterial that could affect us.
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Economic downturns could result in decreased
sales, earnings and liquidity.
The furniture industry is particularly sensitive
to cyclical variations in the general economy and the current macro-economic conditions that affect consumer spending. Economic uncertainty,
including persistent inflationary pressures, elevated interest rates, and the slow housing market, may negatively impact consumer confidence
and discretionary spending. Home furnishings purchases are generally considered discretionary and may be postponed by consumers during
periods of economic downturns or reduced household purchasing power.
Demand for our products is influenced by a number
of macroeconomic factors, including changes in interest rates, consumer confidence, new housing starts, existing home sales, the availability
of consumer credit and broader national or geopolitical factors. In recent years, the housing market has experienced periods of slowdown
due in part to higher mortgage rates and affordability challenges, which have adversely affected demand of home furnishings. In addition,
higher interest rates and tighter credit conditions reduce discretionary consumer spending, which in turn may reduce demand for home furnishings.
A recovery in our sales could lag significantly
behind a general recovery in the economy after an economic downturn, due to, among other things, the nature and relatively significant
cost of home furnishings purchases resulting in a temporary shift in consumer discretionary spending away from home furnishings, or scarcity
of transportation and Asian manufacturing capacity during times of increased demand. Additionally, most of our sales are of wooden or
metal Casegoods products, which have a slower replacement cycle than our upholstered home furnishings products.
These factors also impact retailers, who are our
primary customers. If our retail customers experience reduced consumer demand, increased financial pressure, or inventory adjustments
in response to economic conditions, our sales, earnings, financial condition and liquidity could be adversely affected.
We rely on offshore sourcing from Vietnam for
most of our sales and source other products internationally as well. Consequently:
◾ Potential future increases in tariffs or new
tariffs imposed on other countries from which we source, including Vietnam, China, or Mexico, could adversely affect our business.
Changes in U.S. trade policies, including
the imposition of new tariffs, increases in existing tariffs, or other trade restrictions, could adversely affect our business. A significant
portion of our products is sourced from foreign manufacturers, including Vietnam and China, which accounted for 87% and 5% of our total
imports in fiscal 2026, respectively. As a result, our cost of goods sold and supply chain could be significantly affected by changes
in tariffs or other trade measures imposed by the U.S. or other countries. Inability to mitigate the tariff impact and reduce product
costs, pass through price increases or find other suitable manufacturing sources may have a material adverse impact on sales volume, earnings
and liquidity. In addition, the tariffs, and our responses to the tariffs, may cause our products to become less competitive due to price
increases or less profitable due to lower margins.
Changes in trade policies could also
disrupt established sourcing strategies, require us to shift production to alternative countries or suppliers, and increase supply chain
complexity. In response to evolving trade policies, we have taken steps in recent years to diversify our sourcing base and reduce reliance
on certain countries, including shifting a portion of our sourcing from China to other countries such as Vietnam and Mexico. However,
these efforts may not fully mitigate the impact of tariffs or other trade restrictions. Alternative sourcing locations may have higher
production costs, limited manufacturing capacity, or logistical challenges that could increase costs or disrupt supply. The scope, timing,
and duration of tariffs and other trade restrictions remain uncertain. Further increases in tariffs or expansion of countries and products
subject to tariffs could materially increase the cost of goods sold and adversely affect our operating results, financial condition, and
cash flows.
◾ Our inability to accurately forecast demand
for our imported products could cause us to purchase too much, too little or the wrong mix of inventory.
Manufacturing and delivery lead times
for our imported products necessitate that we make forecasts and assumptions regarding current and future demand for these products. If
our forecasts and assumptions are inaccurate, we may purchase excess or insufficient amounts of inventory. If we purchase too much or
the wrong mix of inventory, we may be forced to sell it at lower margins, which could adversely affect our sales, earnings, financial
condition and liquidity. These risks may be even more pronounced with new product launches, like our current Margaritaville product launch.
If we purchase too little or the wrong mix of inventory, we may not be able to fill customer orders and may lose market share and weaken
or damage customer relationships, which also could adversely affect our sales, earnings, financial condition and liquidity.
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◾ A disruption in supply from Vietnam or from
our most significant suppliers in Asia could adversely affect our ability to timely fill customer orders for these products and decrease
our sales, earnings and liquidity.
In fiscal 2026, imported products sourced
from Vietnam accounted for 87% of our import purchases and our top five suppliers in Vietnam accounted for 69% of our fiscal 2026 import
purchases. Our supply chain could be adversely impacted by the uncertainties of health concerns such as COVID-19 or similar pandemics
and governmental restrictions. A disruption in our supply chain, or from Vietnam in general, such as the COVID-19 related lockdown in
certain parts of Asia in the Summer of calendar 2021, could significantly impact our ability to fill customer orders for products manufactured
in those countries. In some cases, we believe we would have sufficient inventory on hand and in-transit or be able to provide substitutions
from our domestic warehouses but may not be 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.
◾ Increased transportation costs, including
freight costs on imported products, could decrease earnings and liquidity.
Transportation costs on our imported
products are affected by a myriad of factors including the global economy, petroleum prices and ocean freight carrier capacity. Ongoing
geopolitical conflicts and instability, including disruptions to key shipping routes, have increased volatility in global shipping markets
and have resulted in higher ocean freight rates, longer transit times, and reduced carrier capacity. In the recent past, especially after
the COVID-19 pandemic, transportation costs, including ocean freight costs and domestic trucking costs, on imported products represented
a significant portion of the cost of those products. We saw a significant spike in these costs during that time and our profitability
was materially impacted. To mitigate the increased costs, we implemented price increases and surcharges; however, there can be no assurance
that we will be successful in increasing prices or receiving freight surcharges in the future or that we can do it quickly enough to offset
increased costs. Increased transportation costs, both domestically and internationally, in the future would likely adversely affect our
earnings, financial condition and liquidity.
◾ Our dependence on suppliers could, over time,
adversely affect our ability to service customers.
We rely heavily on suppliers we do not
own or control, including a large number of non-U.S. suppliers. All of our suppliers may not provide goods that meet our quality, design
or other specifications in a timely manner and at a competitive price. If our suppliers do not meet our specifications, we may need to
find alternative suppliers, potentially at a higher cost, or may be forced to discontinue products. Also, delivery of goods from non-U.S.
suppliers may be delayed for reasons not typically encountered for domestically manufactured furniture, such as shipment delays caused
by customs issues, labor issues, port-related issues such as weather, congestion or port equipment, decreased availability of shipping
containers and/or the inability to secure space aboard shipping vessels to transport our products. Our failure to timely fill customer
orders due to an extended business interruption for a major supplier, or due to transportation issues, could negatively impact existing
customer relationships and adversely affect our sales, earnings, financial condition and liquidity.
◾ We are subject to changes in U.S. and foreign
government regulations and in the political, social and economic climates of the countries from which we source our products.
Changes in political, economic and social
conditions, including geopolitical conflicts or instability affecting key global shipping routes and our suppliers, as well as in the
laws and regulations in the foreign countries from which we source our products could adversely affect our sales, earnings, financial
condition and liquidity. These changes could make it more difficult to provide products and service to our customers or could increase
the cost of those products. International trade regulations and policies of the United States and the countries from which we source finished
products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports
affecting our products could increase our costs and decrease our earnings.
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◾ Changes in the value of the U.S. Dollar compared
to the currencies for the countries from which we obtain our imported products could adversely affect our sales, earnings, financial condition
and liquidity.
For imported products, we generally
negotiate firm pricing with our foreign suppliers in U.S. Dollars, typically for periods of at least one year. We accept the exposure
to exchange rate movements during these negotiated periods. We do not use derivative financial instruments to manage this risk but could
choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the
U.S. Dollar could increase the price we must pay for imported products beyond the negotiated periods. These price changes could decrease
our sales, earnings, financial condition and liquidity during the periods affected.
◾ Supplier transitions, including cost or quality
issues, could result in longer lead times and shipping delays.
In the past, inflation concerns, and
to a lesser extent quality and supplier viability concerns, affecting some of our imported product suppliers located in China prompted
us to source more of our products from lower cost suppliers located in other countries, such as Vietnam. Additionally, in the past we
transitioned a significant portion of our imported product purchases from China to Vietnam due to the imposition of tariffs in 2018 on
most furniture and component parts imported from China. As conditions dictate, we could be forced to make similar transitions in the future.
When undertaken, transitions of this type involve significant planning and coordination by and between us and our new suppliers in these
countries. Despite our best efforts and those of our new sourcing partners, these transition efforts are likely to result in longer lead
times and shipping delays over the short term. Risks associated with product defects, including higher than expected costs associated
with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective
or non-compliant products, including product liability claims and costs to recall defective products. One or a combination of these issues
could adversely affect our sales, earnings, financial condition and liquidity.
We may engage in acquisitions and investments
in companies, form strategic alliances and pursue new business lines. These activities could disrupt our business, divert management attention
from our current business, pose integration concerns or difficulties, dilute our earnings per share, decrease the value of our common
stock and decrease our earnings and liquidity.
Growth by acquisition is highly dependent upon
finding attractive targets and there can be no assurance those targets will be found. We may acquire or invest in businesses such as those
that offer complementary products or that we believe offer competitive advantages. However, we may fail to identify significant liabilities
or risks that could negatively affect us or result in our paying more for the acquired company or assets than they are worth. We may also
have difficulty assimilating and integrating the operations and personnel of an acquired business into our current operations. Acquisitions
or strategic alliances may disrupt or distract management from our ongoing business. We may pay for future acquisitions using cash, stock,
the assumption of debt or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings
per share and decrease the value of our common stock. Outside of the acquisition framework, there are risks involved with new business
lines and product line launches. We may pursue new business lines in which we have limited or no prior experience or expertise. Further,
new product line launches always have inherent risks regarding attracting customers without an established track record or defined market
expectations. Like with our current launch of the new Margaritaville product line, these pursuits may require substantial investment of
capital, personnel and management attention. New business initiatives may fail outright or fail to produce an adequate return, which could
adversely affect our earnings, financial condition and liquidity.
If demand for our domestically manufactured
upholstered furniture declines, we may respond by realigning manufacturing or implementing cost-saving measures.
Our domestic manufacturing operations make only
upholstered furniture. A decline in demand for our domestically produced upholstered furniture could result in the realignment of our
domestic manufacturing operations and capabilities and the implementation of cost-saving measures. These programs could include the consolidation
and integration of facilities, functions, systems and procedures. We may decide to source certain products from other suppliers instead
of continuing to manufacture them. These realignments and cost-saving measures typically involve initial upfront costs and could result
in decreases in our near-term earnings before the expected cost savings are realized, if they are realized at all. We may not always accomplish
these actions as quickly as anticipated and may not achieve the expected cost savings, which could adversely affect our sales, earnings,
financial condition and liquidity.
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A disruption affecting our domestic facilities
could disrupt our business.
The facilities in which we store our inventory
in Virginia, North Carolina and California are critical to our success. Our corporate and divisional headquarters, which house our administration,
sourcing, sales, finance, merchandising, customer service and logistics functions for our imported and domestic products are located in
Virginia, North Carolina and California. Additionally, our primary showrooms are located in North Carolina.
Our domestic upholstery manufacturing facilities
are located in Virginia, North Carolina and California. Furniture manufacturing creates large amounts of highly flammable wood dust and
may utilize other highly flammable materials such as foam, varnishes and solvents in its manufacturing processes and is therefore subject
to the risk of losses arising from explosions and fires. Additionally, our domestic operations could be negatively affected by natural
disasters such as hurricanes and floods, and public health events. Any disruption affecting our domestic facilities, even for a relatively
short period of time, could adversely affect our ability to ship our furniture products and disrupt our business, which could adversely
affect our sales, earnings, financial condition and liquidity.
Fluctuations in the price (including tariffs),
availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely
affect our ability to provide goods to our customers or increase our costs.
We use various types of wood, leather, fabric,
foam and other filling material, high-carbon spring steel, bar and wire stock and other raw materials in manufacturing upholstered furniture.
We depend on outside suppliers for raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at
acceptable prices and in a timely manner. We do not have long-term supply contracts with our suppliers. Unfavorable fluctuations in the
price (including those due to the potential implementation of additional reciprocal tariffs), quality or availability of required raw
materials could negatively affect our ability to meet the demands of our customers. We may not always be able to pass price increases
on raw materials through to our customers due to competition and other market pressures. In addition, the price increases are frequently
implemented on future orders instead of existing order backlogs. Considering our lead times during periods of high demand, the benefits
of new pricing could be offset by continued price increases from our suppliers, which could impact us before we realize the benefit from
our price increases. The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings,
financial condition and liquidity.
We may not be able to maintain, raise prices, or raise prices in
a timely manner in response to inflation and increasing costs.
Competitive and market forces could prohibit or
delay future successful price increases for our products in order to offset increased costs of labor, finished goods, raw materials, freight
and other product-related costs on a timely basis, which could adversely affect our sales, earnings, financial condition and liquidity.
We may experience impairment of our long-lived
assets, which would decrease our earnings and net worth.
At February 1, 2026, we had $38.8 million in net
long-lived assets, consisting primarily of property, plant and equipment, trademarks, trade names and goodwill. Our goodwill, some trademarks
and trade names have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but
are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Our definite-lived
assets consist of property, plant and equipment and certain intangible assets related to our recent acquisitions and are tested for impairment
whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. The outcome of impairment testing
could result in the write-down of all or a portion of the value of these assets. A write-down of our assets would, in turn, reduce our
earnings and net worth.
During fiscal 2026, we reviewed triggering events
under ASU 2021-03, Intangibles – Goodwill and Other (Topic 350). Due to adverse economic conditions, including declines in our market
value, as well as other changes in market dynamics, we identified triggering events that necessitated a valuation of our goodwill and
intangible assets. We engaged an independent third-party valuation firm to assist in performing the assessment. Based on this analysis,
we recorded non-cash impairment charges of $14.5 million related to the impairment of Sunset West goodwill within the Domestic Upholstery
segment, $558,000 for the trade name in the remaining HMI business classified in All Other, and $556,000 for the Bradington-Young trade
name in the Domestic Upholstery segment. See Note 9 to our Consolidated Financial Statements for additional information.
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Our sales and operating results could be adversely
affected by product safety concerns.
If our product offerings do not meet applicable
safety standards or consumers’ expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to
legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to regulatory
enforcement action and/or private litigation. While we carry general and umbrella liability insurance for such events, settlements or
jury awards could exceed our policy limits. Reputational damage caused by real or perceived product safety concerns or failure to prevail
in private litigation against us could adversely affect our business, sales, earnings, financial condition and liquidity.
A material part of our sales and accounts receivable
are concentrated in a few customers. The loss of several large customers through business consolidations or otherwise, the loss of a major
customer or significant sales programs with major customers, failures or other reasons, including economic downturn and the adverse economic
effects of a future pandemic or similar events, could adversely affect our business.
One customer accounted for approximately 9% of
our consolidated sales in fiscal 2026, and our top five customers accounted for about 26% of our fiscal 2026 consolidated sales. Approximately
23% of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible,
it would have an immediate and material adverse impact on our financial condition and liquidity. The loss of any one or more of these
customers could adversely affect our sales, earnings, financial condition and liquidity. The loss of several of our major customers through
business consolidations, the loss of major product placements, failures or otherwise, could adversely affect our sales, earnings, financial
condition and liquidity and the resulting loss in sales may be difficult or impossible to replace. Amounts owed to us by a customer whose
business fails, or is failing, may become uncollectible (in whole or in part), and we could lose future sales, any of which could adversely
affect our sales, earnings, financial condition and liquidity.
We may not be able to collect amounts owed
to us.
We grant payment terms to most customers ranging
from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. We purchase credit
insurance on certain customers’ receivables and factor certain other customer accounts. Some of our customers have experienced,
and may in the future experience, credit-related issues. Were an economic downturn, pandemic or another major, unexpected event with negative
economic effects to occur, we may not be able to collect amounts owed to us or such payment may only occur after significant delay. While
we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations
involve significant management diligence and judgment, especially in the current environment. We may be unable to obtain sufficient credit
insurance on certain customers’ receivable balances. Should more customers than we anticipate experience liquidity issues, if payment
is not received on a timely basis, or if a customer declares bankruptcy or closes stores, we may have difficulty collecting amounts owed
to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity. In fiscal 2026 and 2025,
we recorded approximately $1 million and $3.1 million in bad debt expense due to bankruptcies of two large customers.
Our existing and future debt obligations could impair our liquidity
and financial condition.
Our Amended and Restated Loan Agreement, consisting
of an asset-based lending facility of up to $70 million from Bank of America, is secured by substantially all of our assets
and contains provisions that limit the amount of our future borrowings under that facility. Moreover, the terms of our Amended and Restated
Loan Agreement also include financial and negative covenants that, among other things, may limit our ability to incur additional indebtedness.
If we violate any loan covenants and do not obtain a waiver from our lender, our indebtedness under this arrangement would become immediately
due and payable, and the lender could foreclose on its security, which could materially adversely affect our business and future financial
condition and could require us to curtail or otherwise cease our existing operations.
Labor shortages and rising labor costs could
disrupt operations at our domestic warehousing and manufacturing facilities.
At times, especially during the post COVID-19
demand surge, we have experienced difficulties in recruiting skilled labor into our domestic upholstery plants and warehouses and in some
skilled or professional positions. Lack of qualified workers and high turnover in a variety of positions caused increased training costs
and adversely affected our production schedules and our ability to ship our furniture products. Furthermore, we experienced higher labor
costs and persistent inflationary pressure. Should these issues re-occur or increase due to future pandemics or for other reasons, our
sales, earnings, financial condition and liquidity could again be adversely affected.
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We may lose market share due to furniture retailers
by-passing us and sourcing directly from non-U.S. furnishings sources.
Some large furniture retailers are sourcing directly
from non-U.S. furniture factories. Over time, this practice may expand to smaller retailers. As a result, we are continually subject to
the risk of losing market share to these non-U.S. furnishings sources, which could adversely affect our sales, earnings, financial condition
and liquidity.
Failure to anticipate or timely respond to changes in fashion and
consumer tastes could adversely impact our business.
Furniture is a styled product and is subject to
rapidly changing fashion trends and consumer tastes, as well as to increasingly shorter product life cycles. If we fail to anticipate
or promptly respond to these changes, we may lose market share or be faced with the decision of whether to sell excess inventory at reduced
prices. This could adversely affect our sales, earnings, financial condition and liquidity.
Our results of operations for any quarter are not necessarily indicative
of our results of operations for a full year.
Home furnishings sales fluctuate from quarter
to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions, availability of raw
materials and finished inventory and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience,
volatility with respect to availability of and demand for our home furnishing products. Accordingly, our results of operations for any
quarter are not necessarily indicative of the results of operations to be expected for a full year or the next quarter.
The interruption, inadequacy or security failure
of our information systems or information technology infrastructure or the internet or inadequate levels of cyber insurance could adversely
impact our business, sales, earnings, financial condition and liquidity.
Our information systems (software) and information
technology (hardware) infrastructure platforms and those of third parties who provide these services to us, including internet service
providers and third parties who store data for us on their servers (“the cloud”), facilitate and support every facet of our
business, including the sourcing of raw materials and finished goods, planning, manufacturing, warehousing, customer service, shipping,
accounting, payroll and human resources. Our systems, and those of third parties who provide services to us, are vulnerable to disruption
or damage caused by a variety of factors including, but not limited to: power disruptions or outages; natural disasters or other so-called
“Acts of God”; computer system or network failures; viruses or malware; physical or electronic break-ins; the theft of computers,
tablets and smart phones utilized by our employees or contractors; unauthorized access, phishing and cyber-attacks. The risk of cyberattacks
also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a cybersecurity program designed
to protect and preserve the integrity of our information systems. Additionally, we implemented a multi-factor authentication process in
order to enhance the security of our remote work environment. We have experienced and expect to continue to experience actual or attempted
cyberattacks of our information systems or networks; however, none of these actual or attempted cyberattacks had a material impact on
our operations or financial condition. Additionally, while we carry cyber insurance, including insurance for social engineering fraud,
the amounts of insurance we carry may be inadequate due either to inadequate limits available from the insurance markets or inadequate
coverage purchased. Because cyberthreat scenarios are inherently difficult to predict and can take many forms, cyber insurance may not
cover certain risks. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our information
systems or to manage the information systems of third parties to accommodate these changes. If these information systems or technologies
are interrupted or fail, or we are unable to adapt our systems or those of third parties as a result of legislative or regulatory actions,
our operations and reputation may be adversely affected, we may be subject to legal proceedings, including regulatory investigations and
actions, which could diminish investor and customer confidence which could adversely affect our sales, earnings, financial condition and
liquidity.
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Unauthorized disclosure of confidential information
provided to us by our customers, employees, or third parties could harm our business.
We rely on the internet and other electronic methods
to transmit confidential information, and we store confidential information on our networks. If there was a disclosure of confidential
information by our employees or contractors, including accidental loss, inadvertent disclosure or unapproved dissemination of information,
or if a third party were to gain access to the confidential information we possess, our reputation could be harmed, and we could be subject
to civil or criminal liability and regulatory actions. A claim that is brought against us, successful or unsuccessful, that is uninsured,
or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings,
financial condition and liquidity.
We may fail to realize the benefits of the
sale of Pulaski Furniture and Samuel Lawrence casegoods brands
We evaluate and may pursue the divestiture of
businesses or product lines that we determine are underperforming or no longer align with our strategic priorities. During fiscal 2026,
we determined that the two largest businesses in the Home Meridian segment no longer aligned with our long-term strategy to streamline
our portfolio and enhance profitability by focusing on brands that generate consistent earnings, and we completed the sale of the Pulaski
Furniture (“PFC”) and Samuel Lawrence Furniture (“SLF”) casegoods brands within this segment.
Divesting involves a number of risks and uncertainties.
We may incur significant costs associated with such transactions, including transaction costs, employee-related costs, and costs associated
with exiting facilities or other contractual obligations. Divestitures may also disrupt relationships with customers, suppliers, and employees,
particularly where the divested business had operational or customer relationships that overlap with our remaining operations. In addition,
we may retain certain liabilities associated with the divested business, including obligations related to the legacy PFC pension plan.
Furthermore, the anticipated benefits of a divestiture,
including improved profitability, reduced complexity, or greater strategic focus, may not be realized within the expected timeframe or
at all. If we are unable to successfully execute divestitures or achieve the expected benefits from such transactions, our business, financial
condition, and results of operations could be adversely affected.