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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Hooker Furniture Corporation    HOFT

HOOKER FURNITURE CORPORATION

(HOFT)
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HOOKER FURNITURE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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09/12/2019 | 12:28pm EDT
All references to the "Company," "we," "us" and "our" in this document refer to
Hooker Furniture Corporation and its consolidated subsidiaries, unless
specifically referring to segment information. All references to the "Hooker,"
"Hooker Division," "Hooker Brands" or "traditional Hooker" divisions or
companies refer to the current components of our Hooker Branded segment and All
Other which includes Bradington-Young, Sam Moore, Shenandoah Furniture and H
Contract.



References to the "Shenandoah acquisition" refer to the acquisition of
substantially all of the assets of Shenandoah Furniture, Inc. on September 29,
2017. References to the "HMI acquisition" refer to the acquisition of
substantially all of the assets of Home Meridian International, Inc. on February
1, 2016.



Forward-Looking Statements



Certain statements made in this report, including statements under Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the notes to the consolidated financial statements included
in this report, are not based on historical facts, but are forward-looking
statements.  These statements reflect our reasonable judgment with respect to
future events and typically can be identified by the use of forward-looking
terminology such as "believes," "expects," "projects," "intends," "plans,"
"may," "will," "should," "would," "could" or "anticipates," or the negatives
thereof, or other variations thereof, or comparable terminology, or by
discussions of strategy.  Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements.  Those risks and uncertainties include but are
not limited to:



  ? general economic or business conditions, both domestically and
    internationally, and instability in the financial and credit markets,

including their potential impact on our (i) sales and operating costs and

access to financing or (ii) customers and suppliers and their ability to

obtain financing or generate the cash necessary to conduct their respective

    businesses;



? adverse political acts or developments in, or affecting, the international

markets from which we import products, including duties or tariffs imposed on

those products by foreign governments or the U.S. government, such as the

current U.S. administration imposing a 25% tariff on certain goods imported

into the United States from China, including almost all furniture and

furniture components manufactured in China, with the potential for additional

    or increased tariffs in the future;




  ? sourcing transitions away from China, including the lack of adequate
    manufacturing capacity and skilled labor and longer lead times, due to
    competition and increased demand for resources in those countries;



? 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;



? the risks specifically related to the concentrations of a material part of our

    sales and accounts receivable in only a few customers;



? 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;




  ? our inability to collect amounts owed to us;




  ? disruptions involving our vendors or the transportation and handling

industries, particularly those affecting imported products from Vietnam and

China, including customs issues, labor stoppages, strikes or slowdowns and the

    availability of shipping containers and cargo ships;



? the interruption, inadequacy, security breaches or integration failure of our

information systems or information technology infrastructure, related service

providers or the internet or other related issues including unauthorized

    disclosures of confidential information or inadequate levels of
    cyber-insurance or risks not covered by cyber insurance;



? disruptions and damage (including due to weather) affecting our Virginia,

North Carolina or California warehouses, our Virginia or North Carolina

administrative facilities or our representative offices or warehouses in

    Vietnam and China;



? achieving and managing growth and change, and the risks associated with new

    business lines, acquisitions, restructurings, strategic alliances and
    international operations;




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  ? risks associated with our reliance on offshore sourcing and the cost of

imported goods, including fluctuation in the prices of purchased finished

goods, ocean freight costs and warehousing costs and the risk that a

disruption in our offshore suppliers could adversely affect our ability to

    timely fill customer orders;



? higher than expected employee medical and workers' compensation costs that may

increase the cost of our high-deductible healthcare and workers compensation

    plans;



? our ability to successfully implement our business plan to increase sales and

    improve financial performance;




  ? risks related to our other defined benefit plans;



? the possible impairment of our long-lived assets, which can result in reduced

    earnings and net worth;



? the cost and difficulty of marketing and selling our products in foreign

    markets;




  ? price competition in the furniture industry;




  ? difficulties in forecasting demand for our imported products;



? changes in domestic and international monetary policies and fluctuations in

foreign currency exchange rates affecting the price of our imported products

    and raw materials;



? the cyclical nature of the furniture industry, which is particularly sensitive

to changes in consumer confidence, the amount of consumers' income available

    for discretionary purchases, and the availability and terms of consumer
    credit;




  ? risks associated with domestic manufacturing operations, including

fluctuations in capacity utilization and the prices and availability of key

raw materials, as well as changes in transportation, warehousing and domestic

labor costs, availability of skilled labor, and environmental compliance and

    remediation costs;



? risks associated with distribution through third-party retailers, such as

    non-binding dealership arrangements;



? capital requirements and costs, including the servicing of our floating-rate

    term loans;




  ? competition from non-traditional outlets, such as internet and catalog
    retailers; and



? changes in consumer preferences, including increased demand for lower-quality,

lower-priced furniture due to, among other things, fluctuating consumer

confidence, amounts of discretionary income available for furniture purchases

    and the availability of consumer credit.




Our forward-looking statements could be wrong in light of these and other risks,
uncertainties and assumptions. The future events, developments or results
described in this report could turn out to be materially different. Any
forward-looking statement we make speaks only as of the date of that statement,
and we undertake no obligation, except as required by law, to update any
forward-looking statements whether as a result of new information, future events
or otherwise and you should not expect us to do so.



Also, our business is subject to a number of significant risks and uncertainties
any of which can adversely affect our business, results of operations, financial
condition or future prospects. For a discussion of risks and uncertainties that
we face, see the Forward-Looking Statements detailed above and Item 1A, "Risk
Factors" in our 2019 annual report on Form 10-K (the "2019 Annual Report").



Investors should also be aware that while we occasionally communicate with
securities analysts and others, it is against our policy to selectively disclose
to them any material nonpublic information or other confidential commercial
information. Accordingly, investors should not assume that we agree with any
projection, forecast or report issued by any analyst regardless of the content
of the statement or report, as we have a policy against confirming information
issued by others.



This quarterly report on Form 10-Q includes our unaudited condensed consolidated
financial statements for the thirteen-week period (also referred to as "three
months," "three-month period," "quarter," "second quarter" or "quarterly
period") that began May 6, 2019, and the twenty-six week period (also referred
to as "six months," "six-month period" or "first half") that began February 4,
2019, which both ended August 4, 2019. This report discusses our results of
operations for this period compared to the 2019 fiscal year thirteen-week period
that began April 30, 2018 and the twenty-six week period that began January 29,
2018, which both ended July 29, 2018; and our financial condition as of August
4, 2019 compared to February 3, 2019.



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References in this report to:


? the 2020 fiscal year and comparable terminology mean the fiscal year that

    began February 4, 2019 and will end February 2, 2020; and



? the 2019 fiscal year and comparable terminology mean the fiscal year that

    began January 29, 2018 and ended February 3, 2019.



Dollar amounts presented in the tables below are in thousands except for per share data.




The following discussion should be read in conjunction with the condensed
consolidated financial statements, including the related notes, contained
elsewhere in this quarterly report. We also encourage users of this report to
familiarize themselves with all of our recent public filings made with the
Securities and Exchange Commission ("SEC"), especially our 2019 Annual Report.
Our 2019 Annual Report contains critical information regarding known risks and
uncertainties that we face, critical accounting policies and information on
commitments and contractual obligations that are not reflected in our condensed
consolidated financial statements, as well as a more thorough and detailed
discussion of our corporate strategy and new business initiatives.



Our 2019 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.



Overview



Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer,
marketer and importer of casegoods (wooden and metal furniture), leather
furniture and fabric-upholstered furniture for the residential, hospitality and
contract markets. We also domestically manufacture premium residential custom
leather and custom fabric-upholstered furniture. We are ranked among the
nation's top five largest publicly traded furniture sources, based on 2018
shipments to U.S. retailers, according to a 2019 survey by a leading trade
publication.



We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.




Our strategy is to leverage the financial strength afforded us by Hooker's
slower-growing but highly profitable traditional businesses in order to boost
revenues and earnings both organically and by acquiring companies selling in
faster-growing channels of distribution in which our traditional businesses are
under-represented. Consequently, Hooker acquired Home Meridian on February 1,
2016 and Shenandoah Furniture on September 29, 2017.



We believe our acquisition of Home Meridian has better positioned us in some of
the fastest growing and advantaged channels of distribution, including
e-commerce, warehouse membership clubs and contract furniture. While growing
faster than industry average, these channels tend to operate at lower margins.
This acquisition has provided the Home Meridian segment's leadership with
greater financial flexibility by virtue of Hooker's strong balance sheet and,
consequently, has afforded it greater operational focus.



We also believe our acquisition of Shenandoah Furniture, a North Carolina-based
domestic upholsterer has better positioned us in the "lifestyle specialty"
retail distribution channel. For that channel, domestically- produced,
customizable upholstery is extremely viable and preferred by the end consumers
who shop at retailers in that channel.



Executive Summary-Results of Operations




Consolidated net sales for fiscal 2020 second quarter decreased $16.4 million or
9.7% as compared to the prior year period, from $168.7 million to $152.2 million
due primarily to $13.8 million or 13.7% net sales decrease in the Home Meridian
segment. The Hooker Branded segment and All Other net sales decreased $1.1
million and $1.4 million respectively in the second quarter.



For the fiscal 2020 first half, consolidated net sales decreased $23.8 million
or 7.6% from $311.6 million to $287.8 million as compared to the prior year
period due to sales decreases in both of our reportable segments as well as All
Other. Home Meridian segment net sales declined by $16.8 million or 9.8%, the
Hooker Branded segment net sales decreased $4.3 million or 5.2% and All Other
net sales decreased $2.7 million or 4.7%, all as compared to the fiscal 2019
six-month period.


Consolidated net income decreased $4.5 million or 52.1% and $9.7 million or 61.2%, as compared to the prior year second quarter and first half, respectively.




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As discussed in greater detail under "Results of Operations" below, the following are the primary factors that affected our consolidated fiscal 2020 second quarter and first half results of operations:

? Gross profit. Fiscal 2020 second quarter consolidated gross profit decreased

both in absolute terms and as a percentage of net sales, due primarily to

decreased gross profit in the Home Meridian segment and to a lesser extent in

the Hooker Branded segment, partially offset by the absence of $500,000

casualty loss recorded in the fiscal 2019 second quarter. Despite a sales

decrease in the second quarter, All Other continued to improve its gross

profit as a percentage of net sales and in absolute terms. For the fiscal 2020

first half, consolidated gross profit decreased both in absolute terms and as

a percentage of net sales principally due to decreased gross profit in the

Home Meridian segment, as a result of sales declines, higher returns and

    allowances and increased product-related costs.



? Selling and administrative expenses. Consolidated selling and administrative

("S&A") expenses decreased in absolute terms but increased as a percentage of

net sales in the fiscal 2020 second quarter and first half. S&A expense

increased as a percentage of net sales due to lower sales. S&A expenses

decreased in absolute terms due to decreased selling expenses and bonus

accruals due to lower net sales and profitability, partially offset by the

absence of a $1.0 million one-time life insurance gain recorded in fiscal 2019

    first quarter.



? Intangible asset amortization expense. Intangible amortization expense on the

    Home Meridian and Shenandoah acquisition-related intangible assets was
    unchanged compared to the prior year periods.



? Operating income. Consolidated operating income decreased $6.1 million to $5.8

million and from 7.0% to 3.8% as a percentage of net sales in the fiscal 2020

second quarter. For the fiscal 2020 first half, consolidated operating income

decreased $12.6 million to $8.7 million and from 6.8% to 3.0% as a percentage

of net sales, due to the factors discussed above and in greater detail in the

    analysis below.




Review



The net sales decline which began in the first quarter of fiscal 2020 continued
in the second quarter, driven primarily by reduced retail demand and the
lingering effects of several quality-related issues in our Home Meridian
segment. Reduced demand and soft retail conditions continued to impact the home
furnishing industry and affected all operating segments. The Hooker Branded
segment and All Other net sales decreased $1.1 million and $1.4 million
respectively compared to prior year second quarter, which we believe to be
reasonable performance following our fiscal 2020 first quarter results and given
current market conditions. In addition to lower sales, gross margins in our Home
Meridian segment were negatively affected by tariffs as that segment continues
the process of resourcing products away from China.



The Hooker Branded segment's net sales decreased $1.1 million or 2.8% in the
fiscal 2020 second quarter, due primarily to a decrease in incoming orders in
the Hooker Casegoods division. Hooker Upholstery continued to grow net sales and
gross profit, both in the mid-upper single digits, due to broader product
offerings and favorable product mix with more higher- priced sofas and
sectionals sold. Hooker Upholstery's incoming orders increased over 20% compared
to fiscal 2019 second quarter. Net sales decreased by lower single digits in
Hooker Casegoods, driven by lower consumer demand and softness in the home
furnishings industry. Tariffs and higher freight costs also negatively affected
the profitability in this segment to some degree. Despite the sales decline and
increased product costs, the segment was still highly profitable with over 30%
gross margin and 10% operating income margin during the quarter and for the
first half. We continue to analyze the tariff's impacts on our supply chain and
are working on resourcing certain products and product lines and increasing
prices where appropriate.



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The Home Meridian segment's net sales decreased $13.8 million or 13.7% in the
fiscal 2020 second quarter due primarily to sales decreases in major furniture
chains and club accounts, partially offset by steady sales growth in e-commerce
and hospitality business. Weak demand in the home furnishings industry and
inventory re-balancing due to higher inventory receipts in advance of a tariff
increase expected to take effect on January 1, 2019 by our major furniture chain
customers led to sales declines in these channels.



The Home Meridian segment experienced quality challenges and higher than
expected quality allowances in the fiscal 2019 fourth quarter and fiscal 2020
first quarter, which negatively impacted shipping in the fiscal 2020 first half.
Home Meridian's margins were more affected by the tariffs than our other
business units due to the nature of its customer base. Large retailers have been
less willing to accept price increases, especially on previously placed orders
and since much of Home Meridian's sales volume is container-direct sales from
Asia, rather than from US warehouses, tariffs have had a more immediate impact
on margins. Segment management are working aggressively on re-sourcing away from
China and are working to overcome labor constraints in those countries. We
continue to adjust pricing to improve margins and offset excess tariff and
freight costs. Warehousing and distribution costs were up due to the costs of
storing and handling increased inventory related to decreased orders due to soft
retail conditions, quality issues and the shift to more inventory dependent
e-commerce business. We expect to begin reducing our warehouse footprint late in
the third quarter and into fiscal 2021.



On a more positive note, Accentrics Home and e-commerce sales in the other
divisions grew sales by 12.3% in the second quarter and 15.8% in the first half.
We saw orders begin to pick up in July, with Pulaski, Samuel Lawrence Furniture
and PRI reporting over 20% increases in incoming orders in the month. Pulaski
and Samuel Lawrence Furniture both ended the quarter with double-digit increases
in order backlog as compared to the prior year. Samuel Lawrence Hospitality net
sales grew over 40% in the second quarter and 60% in the first half,
respectively as compared to prior year periods, with increasing projects and
bids. Samuel Lawrence Hospitality ended the quarter with backlog 44.5% higher
than prior year period. Home Meridian is also in the process of launching a new
division, HMidea, which will offer better-quality ready-to-assemble furniture to
mass marketers and e-commerce customers. HMidea will begin showing its products
at the October High Point Furniture Market.



Net sales in All Other decreased $1.4 million or 5.3% in the fiscal 2020 second
quarter driven by decreased incoming orders in our domestic upholstery
manufacturing divisions, partially offset by continued strong sales in the H
Contract division. However, with targeted sales efforts, mid-year product
introductions, and increased orders on several best-selling items, three out of
four divisions under All Other reported double-digit order increases in July.
Despite net sales declines, all divisions improved gross margin in the second
quarter, benefitting from lower material costs and better cost containment in
our domestic manufacturing divisions, partially offset by operating
inefficiencies and higher direct labor in Bradington-Young and Shenandoah
divisions due to reduced order volume in the second quarter, which was also
negatively affected by the typical one-week plant shutdowns at our six domestic
manufacturing facilities for the Independence Day holiday. Under a new division
president, Sam Moore's sales have started to grow again, with incoming orders up
15.6% and a 2.5% increase in backlogs in July. H Contract incoming orders
increased over 40% and finished the second quarter with backlog over 50% higher
than the prior year quarter end. Broader product offerings and favorable product
mix with heavier weighting of imported casegoods significantly improved H
Contract net sales and profitability. All Other reported a solid operating
income margin of 6.8% and 8.3% for the fiscal 2020 second quarter and first
half, respectively.



Cash and cash equivalents increased $1.9 million to $13.3 million compared to
$11.4 million at fiscal 2019 year-end. Despite disappointing operating results
for the first half and higher than planned inventories, we generated $11.0
million in cash from operating activities and $1.4 million from proceeds
received on a note receivable from the sale of a former distribution facility.
In addition, we paid $3.7 million for capital expenditures to expand our
manufacturing facilities at Bradington-Young, $3.5 million in cash dividends to
our shareholders, and $2.9 million towards our term loans. Our total assets and
liabilities as of August 4, 2019 each increased approximately $43 million due to
the adoption of Topic 842, Leases on the first day of the current fiscal year.
The Home Meridian segment is working to reduce excess inventory within the next
90-120 days. With strategic inventory management and cautious capital
expenditures, along with an aggregate $27.8 million available under our existing
revolving credit facility to fund working capital, we are confident in our
financial condition.



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Results of Operations



The following table sets forth the percentage relationship to net sales of
certain items included in the condensed consolidated statements of income
included in this report.





                                           Thirteen Weeks Ended               Twenty-Six Weeks Ended
                                       August 4,           July 29,        August 4,           July 29,
                                          2019               2018             2019               2018
Net sales                                    100.0 %            100.0 %          100.0 %            100.0 %
Cost of sales                                 81.1               78.6             81.1               78.1
Casualty loss                                    -                0.3                -                0.2
Total cost of sales                           81.1               78.9             81.1               78.3
Gross profit                                  18.9               21.1             18.9               21.7
Selling and administrative expenses           14.8               13.7             15.5               14.5
Intangible asset amortization                  0.4                0.4              0.4                0.4
Operating income                               3.8                7.1              3.0                6.8
Other income, net                                -                  -                -                  -
Interest expense, net                          0.2                0.2              0.2                0.2
Income before income taxes                     3.6                6.9              2.7                6.6
Income tax expense                             0.8                1.7              0.6                1.5
Net income                                     2.7                5.2              2.1                5.1



Fiscal 2020 Second Quarter Compared to Fiscal 2019 Second Quarter



                                                                   Net Sales
                                                             Thirteen Weeks Ended
                        August 4,
                           2019                           July 29, 2018                        $ Change       % Change
                                        % Net Sales                           % Net Sales
Hooker Branded          $   39,405              25.9 %   $        40,551              24.0 %   $  (1,146 )         -2.8 %
Home Meridian               87,188              57.3 %           101,022              59.9 %     (13,834 )        -13.7 %
All Other                   25,655              16.8 %            27,088              16.1 %      (1,433 )         -5.3 %
Consolidated            $  152,248               100 %   $       168,661               100 %   $ (16,413 )         -9.7 %




Unit Volume        FY20 Q2 %      Average Selling Price (ASP)     FY20 Q2 %
                    Increase                                      Increase
                  vs. FY19 Q2                                    vs. FY19 Q2

Hooker Branded         -8.8 %     Hooker Branded                          6.8 %
Home Meridian         -14.6 %     Home Meridian                           0.7 %
All Other              -8.2 %     All Other                               2.9 %
Consolidated          -13.6 %     Consolidated                            4.1 %




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Consolidated net sales decreased primarily due to reduced sales volume in the
Home Meridian segment and to lesser extents in the Hooker Branded segment and
All Other.


? The net sales decrease in the Hooker Branded segment was attributable to

decreased unit volume, partially offset by increased ASP, which was due to

price increases necessitated by the imposition last year of a 10% tariff on

goods imported from China and higher freight costs, as well as increased sales

    of higher-priced products by Hooker Upholstery.



? Net sales decreased in Home Meridian segment due to sales volume loss with

major furniture chains and club accounts, partially offset by increased volume

in the Samuel Lawrence Hospitality business. ASP increased slightly due to

    favorable customer mix at Accentrics Home, which focuses on e-commerce
    channels.



? All Other net sales decreased due to sales declines at Bradington Young and

Sam Moore which experienced reduced order volume, partially offset by

continued net sales growth at H Contract. Shenandoah's net sales stayed

essentially flat for the second quarter. All Other ASP increased due primarily

to increased mix of higher-priced leather products at Bradington-Young.

© Edgar Online, source Glimpses

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