Hooker Furniture (HOFT) recently reported consolidated net sales of $136.2 million and net income of $5.3 million, or $0.46 per diluted share, for its fiscal 2017 second quarter ended July 31, 2016. Earnings per diluted share increased nearly 28% from $0.36 in the comparable prior year quarter.

For the fiscal 2017 first-half, consolidated net sales were $258 million, and net income was $7.8 million or $0.68 per diluted share. Earnings per diluted share decreased 1.4% from $0.69 in the comparable prior year first half.

Included in fiscal 2017 first half results is $2.5 million in acquisition-related intangible amortization expense, $813,000 of which came in the second quarter, and $1.1 million of non-recurring acquisition related costs.

This is the second quarter to include consolidated financial results reflecting Hooker’s acquisition of the business of Home Meridian International (“Home Meridian”), which positions Hooker Furniture to be ranked as one of the top casegoods sources for the U.S. furniture retail market. Because the acquisition was completed on February 1, 2016, the first day of the Company’s 2017 fiscal year, Home Meridian’s results are not included in the prior fiscal-year results.

For the quarter and first half, consolidated net sales more than doubled compared to a year ago, primarily due to the Home Meridian acquisition. The increase was partially offset by a 7% sales decrease in Hooker Furniture’s legacy business, driven by lower sales in the Hooker Casegoods Segment and some non-recurring events in the Upholstery Segment.

“Our results for the second quarter and first half were mixed,” said Paul B. Toms, chairman and chief executive officer. “In our legacy business, the industry-wide sluggishness at retail persisted during the first half, reducing demand and sales at Hooker Casegoods compared to a year ago. In our Upholstery Segment in our imported leather Hooker Upholstery line, the strong start to the year was disrupted by a quality issue with several months’ production we received from a vendor and had to return. This resulted in about a $1 million negative impact on sales for the quarter, and is expected to have a similar impact during the third quarter. However, our vendor is expediting the manufacture of replacement products and those products are starting to arrive at our facilities for shipment now.”

“In spite of these challenges, operating margins improved across all segments of our legacy business in the quarter and remained flat at Home Meridian despite the addition of amortization expense on acquisition related intangibles,” Toms said.

At Home Meridian, both sales and orders were up slightly during the quarter compared to a year ago. “Our core strategies are working and we are having tremendous growth in our emerging channels and product categories. Additionally, we ended the quarter with a sales order backlog near record levels due to improved orders,” said George Revington, Home Meridian Segment president and chief executive officer. “However, the double-digit growth in our emerging channels has been offset by weakness in our traditional customer base, with a large part of the sales decline concentrated in a few accounts stressed by the competitive environment.”

As the Company enters the second half of its first year with Hooker Furniture and Home Meridian combined, “Our strategy to diversify with the acquisition into faster-growing distribution channels, product lines and price points is being validated,” said Toms. “With the acquisition of Home Meridian, we are now large enough, diverse enough and distributed through a wide variety of distribution channels so that weakness in some channels is offset by growth in others.”

During the quarter, consolidated gross profit increased 77%, or $12.4 million, compared to the prior year quarter, primarily due to the addition of Home Meridian’s sales volume as a result of the acquisition. Also contributing to the increase were improved operating efficiencies in the Company’s Upholstery Segment, along with higher gross profit in the All Other segment due to increased net sales at H Contract. These improvements were partially offset by a decline in Hooker Casegoods segment profitability due to lower net sales. However, the Hooker Casegoods segment gross profit as a percentage of net sales increased primarily due to lower ocean freight costs.

Consolidated operating income increased $2.4 million, or 40.4% to $8.2 million during the quarter. The increase was driven primarily by the addition of Home Meridian’s sales volume as a result of the acquisition, partially offset by decreased Hooker Casegoods segment operating profit due to lower sales. Included in Hooker Casegoods Segment results are approximately $500,000 of gains on company-owned life insurance which were more than offset by $813,000 in amortization expense recorded on acquisition-related intangibles in the Home Meridian segment. Amortization expense in the Home Meridian Segment is expected to be $334,000 in each of the fiscal 2017 third and fourth quarters.

Segment Reporting: Hooker Casegoods

“The retail slowdown that began late last year persisted throughout the first half, and has hit high-ticket, deferrable product categories like casegoods particularly hard,” said Toms. “During the upcoming, traditionally strong fall and winter selling seasons, we have a number of strategies to stimulate demand and sales. First, we are fast-tracking our speed-to-market and shortening our product development, production and shipping time on top collections. For example, we are already shipping a couple of our best-selling new collections from the April market so that they will be on retail floors earlier in the fall than is typical, and will impact sales in the third quarter. In addition, we are pre-selling our major casegoods introduction for the October market, which is on order to be delivered to retail floors late this year and will be in stores for the winter season, impacting sales in our fiscal fourth quarter. We also have several national digital campaigns set for the fall, including a Labor Day promotion that just ended, and a major campaign planned for October on our top-selling casegoods collection.”

Segment Reporting: Home Meridian

“We’re enjoying momentum in our emerging channels of distribution business,” said Revington. “These channels, which include ecommerce, hospitality, international accounts and mass merchants, are up significantly year to date. We are adjusting the entire Home Meridian organization, from product development to warehousing, and sales operations to marketing, to support these channels and are making significant investments to grow them further. The growth in our emerging channels has been offset by weakness in our traditional customer base, leading to the overall modest sales increase for the quarter and half for the segment. “We are very pleased with the double-digit growth Home Meridian is having with up-and-coming, large retail accounts and feel good as we enter the second half of the year with a sales order backlog that is near record levels due to improved incoming orders, which we believe will drive strong sales results for the Home Meridian segment in the next two quarters relative to the first half,” Revington concluded.

Segment Reporting: Upholstery

The Upholstery Segment achieved continued improvements in operating efficiencies on a slight sales decrease for the quarter and essentially flat sales for the first half. The quality issue at Hooker Upholstery contributed to the subdued sales. “Despite these challenges, we are pleased to see Sam Moore continue its profitable performance with operating income improvements of over 80% and 60%, respectively, for the second quarter and first half,” said Toms, adding that Sam Moore achieved mid-single digit sales growth during the second quarter.

Segment Reporting: “All Other”

“Although it’s a small component of our overall results, our “All Other” Segment delivered encouraging results for the quarter,” Toms said. “H Contract, which provides upholstered seating and casegoods to upscale senior living facilities, is profitable and growing nicely, reporting a 45% increase in net sales for the first half. While Homeware’s net sales are down compared to last year due to sourcing delays for our new, repositioned product line, its operating loss decreased by over 65% from the prior year quarter. We’ll continue to assess Homeware’s operating performance as these new, better-value product offerings become available to ship.”

Cash, Debt and Inventory

“Our inventory position in Hooker Casegoods is excellent,” said Toms. “We have over 95% of the best-sellers that drive our business in stock. Our balance sheet and cash position is stable, which is particularly positive considering the large acquisition at the beginning of the year.”

The Company finished the fiscal 2017 second quarter with $39.1 million in cash and cash equivalents and $50.5 million in acquisition-related debt. Additionally, $28.9 million was available on its $30.0 million revolving credit facility, net of $1.1 million reserved for standby letters of credit. Consolidated inventories stood at $76.9 million.

Outlook

“Based on the strategies we have in place at Hooker Casegoods to stimulate business, and the strong backlog at Home Meridian, we have a cautiously optimistic outlook,” said Toms. “As we head into what is typically the best selling season of the year for furniture, the housing market is the strongest since the downturn eight years ago, and consumer confidence is trending well. Our ERP system conversion is complete for our legacy business, and we are in a strong inventory position to service our customers and flow best-selling products to retail. We believe the Hanjin Shipping bankruptcy announced last week will likely increase our short-to-medium term ocean freight costs which will increase product costs in all of our operating segments to varying degrees; however, inventory availability is good and we will take additional steps as necessary to mitigate as the situation develops,” Toms concluded.

Dividends

On August 31, 2016, the board of directors declared a quarterly cash dividend of $0.10 per share, payable on September 30, 2016 to shareholders of record at September 16, 2016.

(Source: Furniture World Magazine)