Hooker Furniture Reports Preliminary Results for First Quarter During February-April COVID Crisis

  •    Author: Mike Jasfer

Hooker Furniture Corporation reported its preliminary financial results for its fiscal 2021 first quarter.
 
“COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on the market valuations, discount rates and other inputs used in our intangibles valuation analysis,” said Paul B. Toms, Jr. Chairman and CEO. “Consequently and despite having completed a similar intangible asset valuation during our fiscal 2020 fourth quarter, we determined that another intangible asset valuation was appropriate given our performance and changing market dynamics.  Given the effort and complexity involved in this project, we need additional time to complete this analysis,” he concluded. 
 
The Company’s preliminary unaudited financial results do not include any impairment charges on its intangibles assets as of the end of its fiscal 2021 first quarter. Due to the complexity of the impairment analysis resulting from economic uncertainty of COVID-19, the Company is still in the process of finalizing its impairment assessment, including the design and operation of internal controls, so actual results may differ materially from the preliminary unaudited results provided herein. The Company expects to complete the impairment analysis and finalize the amount of the impairment charges, if any, in connection with the filing of the Company’s Form 10-Q for the fiscal quarter ended May 3, 2020, which is currently expected to be filed on or before the extended due date of July 27, 2020. The Company is relying on Release No. 34-88465 (the “Order”) issued by the Securities and Exchange Commission (the “SEC”) on March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act), which provides conditional relief to public companies unable to timely comply with their filing obligations as a result of the COVID-19 pandemic. 
 
Impairment charges, if any, will not affect the Company’s cash position, but would adversely impact operating loss, net loss, loss per share on the Company’s condensed consolidated statement of operations, total comprehensive loss on the statement of comprehensive loss, and deferred income taxes, intangible assets and retained earnings on the condensed consolidated statement of financial position. The Company does not plan to update this press release when its impairment analysis is completed, but instead intends to reflect final results in its quarterly report on Form 10-Q expected to be filed with the SEC on or before the extended due date of July 27, 2020.
 
Preliminary Results
The unaudited preliminary financial results for the fiscal 2021 first quarter represent the most current information available to the Company and are based on calculations or figures prepared internally and they have not been reviewed or audited by the Company’s independent registered public accounting firm. The Company’s actual results may differ materially from these preliminary financial results due to the completion of its financial closing procedures, including its intangible asset valuation, final adjustments, and other developments that may arise between the date of this announcement and when results for the fiscal 2021 first quarter are finalized and reported in its Form 10-Q.
The Company reported consolidated net sales of $104.6 million and a preliminary net loss of $1.1 million, or $0.09 per share, for its fiscal 2021 first quarter that began February 3 and ended May 3, 2020.
 
Net sales decreased 22.8%, or $30.9 million, compared to $135.5 million in last year’s first quarter. Preliminary net earnings decreased $3.1 million, compared to net income of $2.0 million, or $0.17 per share a year ago.
 
Gross profit decreased $6.9 million from $25.5 million, or 18.8% of net sales in the prior year first quarter to $18.7 million, or 17.8% of net sales in the most recent first quarter.
The double-digit sales decline and the Company’s first quarterly operating and net income losses in over a decade were driven by the COVID-19 pandemic, economic shutdown and stay-at-home orders throughout the U.S. from mid-March to early May. Also contributing to the quarterly loss and operating margin reduction was the temporary shutdown of production at five of Hooker’s six domestic upholstery plants in Virginia and North Carolina, which resulted in unabsorbed fixed costs and operating inefficiencies. 
 
For the quarter, preliminary operating margins decreased to a loss of $1.1 million or -1.1% of net sales, compared to an operating income of $2.9 million or 2.1% of net sales in the prior year first quarter, due to lower net sales, and unabsorbed costs and operating expenses in the Home Meridian segment and Domestic Upholstery segment.
 
“The COVID-19 crisis drove the most significant downturn in our business in over 50 years,” said Paul B. Toms Jr., chairman and chief executive officer. “However, the disruption has not been as severe as we initially projected. We are proud of how our team responded and weathered the storm during this unparalleled time of challenge. Based on the uptick in orders and retail sales we’ve seen in recent weeks as stores and the economy reopen, we are cautiously optimistic that the worst is behind us and that business will steadily improve through the summer and fall.”
 
After beginning the current fiscal year on an upturn with a 8.3% year-over-year increase in consolidated incoming orders in February, orders plummeted over 70% year-over-year in March and approximately 65% in April, Toms said. He added that cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown partially drove the steep declines. Orders declined significantly during the first few weeks of May but then recovered resulting in about a 7% overall reduction for the full month compared to the prior year.  June orders have continued this positive trend. “What we’ve seen recently is that orders are actually at a higher rate than a year ago,” Toms said. “Retailers in some regions of the country have positive reports about their business the last few weeks, including strong Memorial Day holiday weekend sales. We believe there are several positive factors in play such as pent-up demand, more focus on home environments and less competition for discretionary consumer spending from travel, eating out and other activities.”
 
In addition, Hooker’s domestic upholstery manufacturing facilities for Bradington-Young, Sam Moore and Shenandoah began ramping up production in early May and “are currently operating at approximately three-fourths capacity on a consolidated basis, which is a significant increase over the fiscal 2021 first quarter, which will improve efficiencies and cost absorption,” Toms said.
 
Reflecting on the Company’s response to the international health and economic crisis, Toms believes that “The Company performed extremely well in a very difficult environment. First and foremost, we are grateful that none of our 1,000 employees, at any location, have tested positive for the virus to date. That’s quite an accomplishment, and a testament to the diligence with which Human Resources implemented best-practice safety protocols at all locations. Our employees also followed best practices at home and work, and adapted to working remotely while staying productive, positive and engaged. We believe we responded with appropriate mitigation measures to reduce operating expenses and preserve cash with difficult but necessary decisions such as furloughing approximately 600 manufacturing, warehouse and administrative employees; closing five of six upholstery manufacturing facilities for the month of April, temporarily reducing officer and manager salaries and Board of Directors’ fees and delaying all non-critical capital spending. Unfortunately, we had to reduce our workforce by 35 employees but were able to keep 97% of our U.S. employees on board.”
 
The Company’s ongoing strategy to sell through multiple distribution channels “proved itself during the crisis,” Toms said. While most traditional furniture retailers were closed for two months, “Other channels such as e-commerce, hospitality and clubs flourished and provided a source of revenues.”
 
Segment Reporting: Hooker Branded
 
Net sales for the Hooker Branded segment decreased $12.4 million, or 31.4% in the fiscal 2021 first quarter, driven by COVID-19 related reduced demand. Because the majority of traditional furniture stores and small or regional chains closed during the economic shutdown and comprise the most significant share of the segment’s distribution base, incoming order rates dropped dramatically during the quarter. Despite the sales decline, the segment’s low-fixed-cost and high-variable-cost model enabled it to maintain a 29.5% gross margin and a 4.9% operating income margin during the quarter.
 
During the quarter, the Spring High Point Furniture Market originally scheduled for late April was cancelled, and High Point showrooms were closed. Despite that, Hooker Casegoods has been able to sell new collections, originally set for spring introductions, through a “virtual showroom” presentation on a password-protected area of the Company’s website. “Before the showroom closed, we prioritized upscale, environmental and detailed photography of four new collections that are already in production,” said Jeremy Hoff, president of Hooker Legacy Brands. “We have done very well selling through the first cuttings via this online presentation to our retail customers, which is very encouraging. Our next step is to produce a 360-degree-style video tour of the collections in our showroom this month.”
 
Segment Reporting: Home Meridian
 
Net sales of $57.7 million in the Home Meridian (HMI) segment decreased $10.0 million, or 14.7% in the fiscal 2021 first quarter versus the prior year quarter. Despite a sales decline, HMI’s gross profit improved in absolute terms and as a percentage of net sales, as the issues negatively impacting the segment in the prior year, including excess tariff and quality-related chargebacks, are mostly resolved. Although Home Meridian reported a preliminary operating loss of $2.4 million, it improved from a $5.0 million operating loss from prior year first quarter.
 
“While the global economic slowdown from COVID-19 significantly reduced Q1 orders, sales and profits, the HMI bottom-line improvement over prior-year results is attributable to the segment’s fundamental turnaround strategy,” said Doug Townsend, co-president of HMI.
 
“Some of the indicators of improvement include: First quarter product and quality allowances were 21% below the prior year; contribution margin, as a percent of net sales, improved 350 basis points over last year, and fixed expenses were $1.5 million below last year. These are all areas of concentrated management focus, among many others,” Townsend said.
 
“While the economic impact of the coronavirus will continue to impact us in the next quarter and likely the balance of the year, we are encouraged that April and May results were much better than we forecasted at the beginning of the crisis. Specifically, our e-commerce business has significantly outperformed all expectations, and accounted for 35% of our total sales in the quarter. Additionally, business with several of our Mega and Mass accounts has held up much better than originally projected. We’re cautiously optimistic that the worst of the retail slowdown is behind us, and we’re starting to see stronger demand for shipments as we move into the summer.”
 
Segment Reporting: Domestic Upholstery
 
Net sales decreased $8.5 million or 33.7% in the fiscal first quarter in the Domestic Upholstery Segment as incoming orders fell 40%. During the month of April, manufacturing plants at Bradington-Young and Shenandoah, were temporarily closed for most of April, while Sam Moore operated at about 50% capacity. Employees returned to the factories and production re-started the week of May 4, and currently the segment is operating at approximately three-fourths capacity. Sales declines and operating inefficiencies from the temporary shutdown resulted in significantly decreased gross margins and an operating loss and we expect some negative impacts to gross margins and operating income as we ramp production up to meet increasing demand during the fiscal 2021 second quarter.
 
Segment Reporting: All Other
 
All Other net sales stayed essentially flat and reported an operating income of $386,000 due to continued solid performance at H Contract, which achieved a 16% increase in incoming orders and 68% higher backlog compared to the prior year first quarter.  
 
Cash, Debt and Inventory
 
Despite disappointing operating results, the Company generated $18.9 million in cash from operations, received $673,000 life insurance proceeds, and finished the quarter with $51.2 million in cash and cash equivalents, an increase of $15.2 million compared to the balance at fiscal 2020 year-end. The Company also paid $2.2 million in principal and interest on its term loans and $1.9 million in cash dividends to the shareholders. To address the financial impact of the COVID-19 pandemic, the Company implemented measures to reduce operating expenses and preserve cash. Additionally, the Company had access to $25.6 million in cash surrender value of Company-owned life insurance policies. “Along with an aggregate $25.7 million available under our existing revolver to fund working capital, we are confident in our financial condition, and believe we have financial resources to weather the continued expected short-to-mid-term impacts of COVID-19,” said Paul Huckfeldt, CFO. The Company has $28.2 million in acquisition-related debt. Consolidated inventories stood at $82.1 million, compared to $92.8 million at the end of last year’s fourth quarter on February 2, 2020.
 
Outlook
 
“While we have limited visibility of how the economic and health crisis may fluctuate in the coming months, and still face headwinds of significant levels of unemployment, our business is improving, and we are in a better position than we expected just two months ago to be at this time,” said Toms. “We believe the Company remains in exceptional financial condition with a strong balance sheet.  We are grateful for the adaptability and resilience of our employees, and look forward to bringing our administrative and management team members back into the offices when the states say we can, and when we feel it is safe based on the status of  COVID-19 in the communities around our corporate locations. We expect the second quarter to be significantly better than the first.  Barring a second wave of infections, we expect business each quarter to improve as we go through the year. We’re confident we will emerge from this crisis a stronger company.”
 
Dividends
 
On June 2, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.16 per share, payable on June 30, 2020, to shareholders of record at June 16, 2020. 
 
 
About Hooker Furniture: Founded by the Hooker family in 1924, Hooker Furniture Corp. is a designer, marketer, manufacturer and importer of case goods, leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. The company also domestically manufactures premium residential custom leather and custom fabric-upholstered furniture through its Bradington-Young, MARQ and Sam Moore Furniture brands. It is ranked among the nation’s largest publicly traded furniture sources, based on 2016 shipments to U.S. retailers, according to a 2017 survey by a leading trade publication. Hooker Furniture’s corporate offices and upholstery manufacturing facilities are located in Virginia and North Carolina, with showrooms in High Point, N.C., and Ho Chi Minh City, Vietnam. The company operates eight distribution centers in North Carolina, Virginia, California and Vietnam. For more information, visit hookerfurniture.com.
 

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