HOOKER FURNISHINGS Corp - Quarter Report: 2022 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2022

Commission file number 000-25349

HOOKER FURNISHINGS CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	54-0251350
(State or other jurisdiction of incorporation or organization)	(IRS employer identification no.)

440 East Commonwealth Boulevard, Martinsville, VA 24112

(Address of principal executive offices, zip code)

(276) 632-2133

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer ☐	Accelerated filer ☒
Non-accelerated Filer ☐	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	HOFT	NASDAQ Global Select Market

As of September 2, 2022, there were 11,689,052 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 6.	Exhibits	34

Signature		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

As of	July 31,			January 30,
	2022			2022
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	11,653		$	69,366
Trade accounts receivable, net		81,662			73,727
Inventories		131,088			75,023
Income tax recoverable		3,574			4,361
Prepaid expenses and other current assets		9,014			5,237
Total current assets		236,991			227,714
Property, plant and equipment, net		27,565			28,058
Cash surrender value of life insurance policies		27,332			26,479
Deferred taxes		9,763			11,612
Operating lease right-of-use assets		54,734			51,854
Intangible assets, net		33,547			23,853
Goodwill		15,591			490
Other assets		7,108			4,499
Total non-current assets		175,640			146,845
Total assets	$	412,631		$	374,559

Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	1,393		$	-
Trade accounts payable		36,628			30,916
Accrued salaries, wages and benefits		5,662			7,141
Customer deposits		10,448			7,145
Current portion of operating lease liabilities		7,254			7,471
Other accrued expenses		2,969			4,264
Total current liabilities		64,354			56,937
Long term debt		23,570			-
Deferred compensation		9,599			9,924
Operating lease liabilities		49,514			46,570
Other long-term liabilities		766			-
Total long-term liabilities		83,449			56,494
Total liabilities		147,803			113,431

Shareholders’ equity
Common stock, no par value, 20,000 shares authorized, 11,959 and 11,922 shares issued and outstanding on each date		53,853			53,295
Retained earnings		210,994			207,884
Accumulated other comprehensive loss		(19	)		(51	)
Total shareholders’ equity		264,828			261,128
Total liabilities and shareholders’ equity	$	412,631		$	374,559

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	For the
	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 31,			August 1,		July 31,		August 1,
	2022			2021		2022		2021

Net sales	$	152,908		$	162,519	$	300,223	$	325,379

Cost of sales		121,853			130,802		239,709		260,080

Gross profit		31,055			31,717		60,514		65,299

Selling and administrative expenses		22,886			21,460		47,543		42,204
Intangible asset amortization		878			596		1,756		1,192

Operating income		7,291			9,661		11,215		21,903

Other (expense)/income, net		(44	)		21		234		27
Interest expense, net		83			23		111		54

Income before income taxes		7,164			9,659		11,338		21,876

Income tax expense		1,621			2,192		2,612		4,966

Net income	$	5,543		$	7,467	$	8,726	$	16,910

Earnings per share
Basic	$	0.47		$	0.63	$	0.74	$	1.42
Diluted	$	0.46		$	0.62	$	0.73	$	1.40

Weighted average shares outstanding:
Basic		11,876			11,850		11,871		11,842
Diluted		11,935			11,993		11,960		11,985

Cash dividends declared per share	$	0.20		$	0.18	$	0.40	$	0.36

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	For the
	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 31,			August 1,			July 31,			August 1,
	2022			2021			2022			2021

Net income	$	5,543		$	7,467		$	8,726		$	16,910
Other comprehensive income:
Amortization of actuarial loss		60			100			42			201
Income tax effect on amortization		(14	)		(24	)		(10	)		(48	)
Adjustments to net periodic benefit cost		46			76			32			153

Total comprehensive income	$	5,589		$	7,543		$	8,758		$	17,063

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the
	Twenty-Six Weeks Ended
	July 31,			August 1,
	2022			2021
Operating Activities:
Net income	$	8,726		$	16,910
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		4,409			3,583
Deferred income tax expense		1,839			1,621
Noncash restricted stock and performance awards		873			150
Provision for doubtful accounts and sales allowances		(1,532	)		(340	)
Gain on life insurance policies		(587	)		(704	)
Changes in assets and liabilities:
Trade accounts receivable		(4,843	)		(14,663	)
Inventories		(53,489	)		(33,435	)
Income tax recoverable		787			-
Prepaid expenses and other assets		(6,175	)		(4,663	)
Trade accounts payable		4,691			8,362
Accrued salaries, wages, and benefits		(1,480	)		(158	)
Accrued income taxes		-			417
Customer deposits		27			3,302
Operating lease liabilities		(151	)		89
Other accrued expenses		(1,293	)		(507	)
Deferred compensation		(283	)		(171	)
Net cash used in operating activities	$	(48,481	)	$	(20,207	)

Investing Activities:
Acquisitions		(25,912	)		-
Purchases of property and equipment		(1,947	)		(3,465	)
Premiums paid on life insurance policies		(404	)		(473	)
Net cash used in investing activities		(28,263	)		(3,938	)

Financing Activities:
Proceeds from long-term loans		25,000			-
Proceeds from revolving credit facility		30,301			-
Payments for revolving credit facility		(30,301	)		-
Debt issuance cost		(38	)		-
Purchase and retirement of common stock		(1,137	)		-
Cash dividends paid		(4,794	)		(4,285	)
Cash provided by/(used in) financing activities		19,031			(4,285	)

Net decrease in cash and cash equivalents		(57,713	)		(28,430	)
Cash and cash equivalents - beginning of year		69,366			65,841
Cash and cash equivalents - end of quarter	$	11,653		$	37,411

Supplemental disclosure of cash flow information:
Cash paid/(refund) for income taxes	$	(14	)	$	2,929
Cash paid for interest, net		55			1

Non-cash transactions:
Increase/(Decrease) in lease liabilities arising from changes in right-of-use assets	$	7,680		$	(4,919	)
Increase in property and equipment through accrued purchases		207			111

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except per share data)

(Unaudited)

										Accumulated
										Other			Total
	Common Stock						Retained			Comprehensive			Shareholders'
	Shares			Amount			Earnings			Income (loss)			Equity
Balance at May 2, 2021		11,909		$	53,004		$	212,291		$	(732	)	$	264,563
Net income for the 13 weeks ended August 1, 2021								7,467						7,467
Unrealized loss on defined benefit plan, net of tax of $24											77			77
Cash dividends paid and accrued ($0.18 per share)								(2,145	)					(2,145	)
Restricted stock grants, net of forfeitures		15			-									-
Restricted stock compensation cost					323									323
Performance-based restricted stock units costs					146									146
PSU awards					-									-
Balance at August 1, 2021		11,924		$	53,473		$	217,613		$	(655	)	$	270,431




Balance at May 1, 2022		12,002		$	53,649		$	208,678		$	(65	)	$	262,262
Net income for the 13 weeks ended July 31, 2022								5,543						5,543
Unrealized loss on defined benefit plan, net of tax of $14											46			46
Cash dividends paid and accrued ($0.20 per share)								(2,405	)					(2,405	)
Purchase and retirement of common stock		(68	)		(315	)		(822	)					(1,137	)
Restricted stock grants, net of forfeitures		25			(6	)								(6	)
Restricted stock compensation cost					371									371
Performance-based restricted stock units costs					154									154
Balance at July 31, 2022		11,959		$	53,853		$	210,994		$	(19	)	$	264,828

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)

(In thousands, except per share data)

(Unaudited)

										Accumulated
										Other			Total
	Common Stock						Retained			Comprehensive			Shareholders'
	Shares			Amount			Earnings			Income (loss)			Equity
Balance at January 31, 2021		11,888		$	53,323		$	204,988		$	(808	)	$	257,503
Net income for the 26 weeks ended August 1, 2021								16,910						16,910
Unrealized loss on defined benefit plan, net of tax of $48											153			153
Cash dividends paid and accrued ($0.36 per share)								(4,285	)					(4,285	)
Restricted stock grants, net of forfeitures		36			-									-
Restricted stock compensation cost					597									597
Performance-based restricted stock units costs					293									293
PSU awards					(740	)								(740	)
Balance at August 1, 2021		11,924		$	53,473		$	217,613		$	(655	)	$	270,431




Balance at January 30, 2022		11,922		$	53,295		$	207,884		$	(51	)	$	261,128
Net income for the 26 weeks ended July 31, 2022								8,726						8,726
Unrealized loss on defined benefit plan, net of tax of $10											32			32
Cash dividends paid and accrued ($0.40 per share)								(4,794	)					(4,794	)
Purchase and retirement of common stock		(68	)		(315	)		(822	)					(1,137	)
Restricted stock grants, net of forfeitures		105			(102	)								(102	)
Restricted stock compensation cost					667									667
Performance-based restricted stock units costs					308									308
Balance at July 31, 2022		11,959		$	53,853		$	210,994		$	(19	)	$	264,828

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

(Unaudited)

For the Twenty-Six Weeks Ended July 31, 2022

1. Preparation of Interim Financial Statements

The condensed consolidated financial statements of Hooker Furnishings Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 30, 2022 (“2022 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022. This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began May 3, 2021, and the twenty-six-week period that began February 1, 2021, which both ended August 1, 2021; and our financial condition as of July 31, 2022 compared to January 30, 2022.

References in these notes to the condensed consolidated financial statements of the Company to:

■

the 2023 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began January 31, 2022 and will end January 29, 2023; and

■

the 2022 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 1, 2021 and ended January 30, 2022.

On January 31, 2022, the first day of our 2023 fiscal year, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sunset HWM, LLC (“Sunset West”) and its three members (the “Sunset West Members”) to acquire substantially all of the assets of Sunset West (the “Sunset Acquisition”). Simultaneously, we closed on the transaction by paying $23.9 million in cash and $2 million subject to an escrow arrangement and possible earn-out payments to the Sunset West Members up to an aggregate of $4 million with the closing cash consideration subject to adjustment for customary working capital estimates. Under the Asset Purchase Agreement, the Company also assumed specified liabilities of Sunset West.

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter. Consequently, comparable prior-year information for Sunset West is not included in the financial statements presented in this report. The acquisition is discussed in greater detail below in Note 3 Acquisition.

2. Recently Adopted Accounting Policies

No new accounting pronouncements have been adopted in the 2023 fiscal year. We reviewed newly issued accounting pronouncements and concluded they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.

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3. Acquisition

In accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Acquisition has been accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from Sunset West at their respective fair values at the date of completion of the Acquisition. The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of July 31, 2022. The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revision, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized. Normal post-closing contingencies remain to be resolved, including the final working capital adjustment and any changes due to deviations from the seller’s representations and warranties at closing.

Fair Value Estimates of Assets Acquired and Liabilities Assumed

The consideration and components of our initial fair value allocation of the purchase price paid at closing and in the subsequent net working capital adjustment consisted of the following:

Purchase price consideration

Fair value estimates of assets acquired and liabilities assumed
Purchase price consideration
Cash paid for assets acquired	$	23,909
Escrow		2,003
Fair value of earnout		766
Total purchase price	$	26,678

Accounts receivable	$	1,560
Inventory		2,577
Prepaid expenses and other current assets		90
Property		7
Intangible assets		11,451
Goodwill		15,101
Customer deposits		(3,276	)
Accounts payable		(816	)
Accrued expenses		(16	)
Total purchase price	$	26,678

Property was recorded at fair value and primarily consists of machinery and equipment. Property and equipment will be amortized over their estimated useful lives.

Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. All goodwill is expected to be deductible for income tax purposes.

Intangible assets, consist of two separately identified assets:

■

Sunset West customer relationships, which are definite-lived intangible assets with an aggregate fair value of $10.4 million. The customer relationships are amortizable and will be amortized over a period of 10 years; and

■

The Sunset West trade name, which is definite-lived intangible asset with fair value of $1.1 million. The trade name is amortizable and will be amortized over a period of 12 years.

■

The total weighted average amortization period for these assets is 10.2 years.

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We incurred Acquisition-related costs of $414,000 in fiscal 2022 and $63,000 in the first six months of fiscal 2023. These expenses were included in the “Selling and administrative expenses” line of our fiscal 2022 and fiscal 2023 condensed consolidated statements of operations. Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $6.9 million in net sales and $150,000 of operating income, including $282,000 in intangible amortization expense for the fiscal 2023 second quarter and $14.8 million in net sales and $1.0 million of operating income, including $564,000 in intangible amortization expense for the fiscal 2023 first half.

4. Accounts Receivable

	July 31,			January 30,
	2022			2022

Gross accounts receivable	$	89,316		$	83,027
Customer allowances		(5,902	)		(7,284	)
Allowance for doubtful accounts		(1,752	)		(2,016	)
Trade accounts receivable	$	81,662		$	73,727

5. Inventories

	July 31,			January 30,
	2022			2022
Finished furniture	$	145,092		$	89,066
Furniture in process		2,793			2,314
Materials and supplies		15,299			13,179
Inventories at FIFO		163,184			104,559
Reduction to LIFO basis		(32,096	)		(29,536	)
Inventories	$	131,088		$	75,023

6. Property, Plant and Equipment

	Depreciable Lives	July 31,			January 30,
	(In years)	2022			2022

Buildings and land improvements	15 - 30	$	32,262		$	32,030
Computer software and hardware	3 - 10		15,773			15,648
Machinery and equipment	10		10,900			10,390
Leasehold improvements	Term of lease		10,684			10,984
Furniture and fixtures	3 - 10		5,871			5,829
Other	5		694			676
Total depreciable property at cost			76,184			75,557
Less accumulated depreciation			(51,039	)		(49,077	)
Total depreciable property, net			25,145			26,480
Land			1,077			1,077
Construction-in-progress			1,343			501
Property, plant and equipment, net		$	27,565		$	28,058

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7. Cloud Computing Hosting Arrangement

We are in the process of implementing a common Enterprise Resource Planning (ERP) system across all divisions and expect to go-live with this system in Sunset West in the second half of fiscal 2023 and in our legacy Hooker divisions in fiscal 2024, with other segments and divisions following thereafter. Based on the provisions of ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software, we capitalize implementation costs incurred to develop internal-use software associated with hosting arrangements that are service contracts. These costs are recorded on “Other noncurrent assets” line of our condensed consolidated balance sheets. Amortization expense is expected to commence at system go-live in the second half of fiscal 2023. The capitalized implementation costs at July 31, 2022 and January 30, 2022 were as follows:

	Capitalized Implementation Costs

Balance at January 30, 2022	$	3,228
Costs capitalized during the period		3,045
Balance at July 31, 2022	$	6,273

8. Fair Value Measurements

Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

■

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;

■

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

■

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of July 31, 2022 and January 30, 2022, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.

Our assets measured at fair value on a recurring basis at July 31, 2022 and January 30, 2022, were as follows:

	Fair value at July 31, 2022								Fair value at January 30, 2022
Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Assets measured at fair value
Company-owned life insurance	$	-	$	27,332	$	-	$	27,332	$	-	$	26,479	$	-	$	26,479

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9. Intangible Assets

During the fiscal 2023 first half, we recorded both non-amortizable and amortizable intangible assets as a result of the Acquisition. Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Domestic Upholstery and Home Meridian segments, are shown in the following two tables:

		January 30, 2022				July 31, 2022
Non-amortizable Intangible Assets	Segment	Beginning Balance		Acquisition		Net Book Value
Goodwill - Shenandoah Furniture	Domestic Upholstery	$	490	$	-	$	490
Goodwill - Sunset West	Domestic Upholstery		-		15,101		15,101
Total Goodwill		$	490	$	15,101	$	15,591

Trademarks and trade names - Home Meridian	Home Meridian		6,650		-		6,650
Trademarks and trade names - Bradington-Young	Domestic Upholstery		861		-		861
Trademarks and trade names - Sam Moore	Domestic Upholstery		396		-		396
Total Trademarks and trade names		$	7,907	$	-	$	7,907

Total non-amortizable assets		$	8,397	$	15,101	$	23,498

Our amortizable intangible assets are recorded in our Home Meridian and Domestic Upholstery segments. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

	Amortizable Intangible Assets
	Customer
	Relationships			Trademarks			Totals

Balance at January 30, 2022	$	15,348		$	598		$	15,946
Acquisition		10,401			1,050			11,451
Amortization		(1,682	)		(74	)		(1,756	)
Balance at July 31, 2022	$	24,067		$	1,574		$	25,641

For the remainder of fiscal 2023, amortization expense is expected to be approximately $1.8 million.

10. Leases

We have operating leases for warehouses, showrooms, manufacturing facilities, offices and equipment. We recognized sub-lease income of $34,000 for the three-month period and $381,000 for the six-month period, both ended July 31, 2022. We recognized sub-lease income of $150,000 for the three-month period and $296,000 for the six-month period, both ended August 1, 2021.

The components of lease cost and supplemental cash flow information for leases for the three-months and six-months ended July 31, 2022 and August 1, 2021 were:

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31, 2022		August 1, 2021		July 31, 2022		August 1, 2021
Operating lease cost	$	2,270	$	1,906	$	4,797	$	3,919
Variable lease cost		56		65		111		109
Short-term lease cost		78		19		164		28
Total lease cost	$	2,404	$	1,990	$	5,072	$	4,056


Operating lease cash outflows	$	2,389	$	1,954	$	5,224	$	3,936

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The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of July 31, 2022 and January 30, 2022 were as follows:

	July 31, 2022		January 30, 2022
Real estate	$	53,787	$	50,749
Property and equipment		947		1,105
Total leases right-of-use assets	$	54,734	$	51,854

Current portion of operating lease liabilities	$	7,254	$	7,471
Long term operating lease liabilities		49,514		46,570
Total lease liabilities	$	56,768	$	54,041

For leases that commenced before July 2022, we used our incremental borrowing rate which was LIBOR plus 1.5%. When we entered into the new loan agreement our incremental borrowing rate for unsecured term loan became the current BSBY rate plus 1.40%. We use this rate as discount rate for leases commenced in July 2022 and thereafter. The weighted-average discount rate is 3.02%. The weighted-average remaining lease term is 7.9 years.

The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheets on July 31, 2022:

	Undiscounted Future Operating Lease Payments
Remainder of 2023	$	4,590
2024		8,523
2025		8,549
2026		8,516
2027		8,167
2028 and thereafter		26,217
Total lease payments	$	64,562
Less: impact of discounting		(7,794	)
Present value of lease payments	$	56,768

As of July 31, 2022, the Company had an additional lease for a showroom in High Point, North Carolina. This lease is expected to commence in the Fall of calendar 2022 with an initial lease term of 10 years and estimated future minimum rental commitments of approximately $23.7 million. Since the lease has not yet commenced, the undiscounted amounts are not included in our financial statements or in the table above.

11. Debt

On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) in order to replenish cash used to make the Acquisition. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”).

Details of the individual credit facilities provided for in the Amendment are as follows:

●

Unsecured Revolving Credit Facility. Under this Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00%. The interest rate will be adjusted on a monthly basis. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

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●

2022 Secured Term Loan. The Amendment provided us with a $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and

●

2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed.

We incurred $37,500 in debt issuance costs in connection with our term loans. As of July 31, 2022, unamortized loan costs of $37,500 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

●

Maintain a ratio of funded debt to EBITDA not exceeding:

2.50:1.0 through July 30, 2023;

2.25:1.0 through July 30, 2024; and

2.00:1.00 thereafter.

The other financial covenants under the Existing Loan Agreement continue to apply to us, including a basic fixed charge coverage ratio of at least 1.25:1.00 and limit capital expenditures to no more than $15.0 million during any fiscal year. The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Existing Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the Existing Loan Agreement.

We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

During the fiscal 2023 second quarter, we drew $30.3 million under our $35 million Existing Revolver to cover working capital needs driven by finished goods inventory purchases from our Asian suppliers but had repaid such amounts by the end of the quarter due in part to receiving the proceeds from the Secured Term Loan and Unsecured Term Loan. As of July 31, 2022, we had $27.9 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of July 31, 2022. There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

12. Earnings Per Share

We refer you to the discussion of Earnings Per Share in Note 2. Summary of Significant Accounting Policies, in the financial statements included in our 2022 Annual Report, for additional information concerning the calculation of earnings per share.

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All stock awards are designed to encourage retention and to provide an incentive for increasing shareholder value. We have issued restricted stock awards to non-employee members of the board of directors since 2006 and to certain non-executive employees since 2014. We have issued restricted stock units (“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. One target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. The payout or settlement of the PSUs will be made in shares of our common stock.

We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs and PSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

	July 31,		January 30,
	2022		2022

Restricted shares		143		60
RSUs and PSUs		139		78
		282		138

All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share.

During the fiscal 2023 second quarter, we purchased and retired 68,400 shares of our common stock (at an average price of $16.59 per share) under the $20 million share repurchase authorization approved by our board of directors earlier this quarter. These repurchases reduced our total outstanding shares and, consequently, reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2023 second quarter and year-to-date periods shown below. Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $5.9 million.

The following table sets forth the computation of basic and diluted earnings per share:

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 1,		July 31,		August 1,
	2022		2021		2022		2021

Net income	$	5,543	$	7,467	$	8,726	$	16,910
Less: Unvested participating restricted stock dividends		27		12		46		23
Net earnings allocated to unvested participating restricted stock		63		43		85		92
Earnings available for common shareholders		5,453		7,412		8,595		16,795

Weighted average shares outstanding for basic earnings per share		11,876		11,850		11,871		11,842
Dilutive effect of unvested restricted stock, RSU and PSU awards		59		143		89		143
Weighted average shares outstanding for diluted earnings per share		11,935		11,993		11,960		11,985

Basic earnings per share	$	0.47	$	0.63	$	0.74	$	1.42

Diluted earnings per share	$	0.46	$	0.62	$	0.73	$	1.40

13. Income Taxes

We recorded income tax expense of $1.6 million for the fiscal 2023 second quarter compared to $2.2 million for the comparable prior year quarter. The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6% and 22.7%, respectively. For the fiscal 2023 first half, we recorded income tax expense of $2.6 million, compared to $5.0 million for the comparable prior year period. The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0% and 22.7%, respectively.

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No material and non-routine positions have been identified that are uncertain tax positions.

Tax years ending February 3, 2019 through January 30, 2022 remain subject to examination by federal and state taxing authorities.

14. Segment Information

As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:

■

better understand our performance;

■

better assess our prospects for future net cash flows; and

■

make more informed judgments about us as a whole.

We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.

For financial reporting purposes, we are organized into three reportable segments and “All Other”, which includes the remainder of our businesses:

■

Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses;

■

Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins;

■

Domestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore, Shenandoah Furniture and newly acquired Sunset West; and

■

All Other, consisting of H Contract and Lifestyle Brands. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

Changes to segment reporting for fiscal 2023

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.

Before the fiscal 2023 first quarter, H Contract’s results included sales of seating products sourced from Sam Moore. Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2023 first quarter Sam Moore’s results now include sales of seating products formerly included in H Contract’s results. Fiscal 2022 results discussed below have been recast to reflect this change. The Hooker Branded and Home Meridian segments are unchanged.

As discussed in Note 3 above, we acquired substantially all the assets of Sunset West on the first day of the 2023 fiscal year. Based on our analysis and the requirements of ASC 280: Segment Reporting, Sunset West’s results are included in the Domestic Upholstery segment on a prospective basis.

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The following table presents segment information for the periods, and as of the dates, indicated. Prior-year information has been recast to reflect the change discussed above.

	Thirteen Weeks Ended											Twenty-Six Weeks Ended
	July 31,						August 1,					July 31,						August 1,
	2022						2021					2022						2021
				% Net					% Net						% Net					% Net
Net Sales				Sales					Sales						Sales					Sales
Hooker Branded	$	52,817			34.5	%	$	49,929		30.7	%	$	95,047			31.7	%	$	101,268		31.1	%
Home Meridian		59,048			38.6	%		87,323		53.7	%		121,133			40.3	%		171,732		52.8	%
Domestic Upholstery		38,326			25.1	%		23,665		14.6	%		79,546			26.5	%		49,086		15.1	%
All Other		2,717			1.8	%		1,602		1.0	%		4,497			1.5	%		3,293		1.0	%
Consolidated	$	152,908			100	%	$	162,519		100.0	%	$	300,223			100.0	%	$	325,379		100.0	%

Gross Profit
Hooker Branded	$	15,598			29.5	%	$	17,060		34.2	%	$	28,837			30.3	%	$	34,273		33.8	%
Home Meridian		7,321			12.4	%		9,607		11.0	%		13,626			11.2	%		19,742		11.5	%
Domestic Upholstery		7,128			18.6	%		4,517		19.1	%		16,483			20.7	%		10,154		20.7	%
All Other		1,008			37.1	%		533		33.3	%		1,568			34.9	%		1,130		34.3	%
Consolidated	$	31,055			20.3	%	$	31,717		19.5	%	$	60,514			20.2	%	$	65,299		20.1	%

Operating Income/(Loss)
Hooker Branded	$	6,072			11.5	%	$	8,929		17.9	%	$	10,214			10.7	%	$	18,371		18.1	%
Home Meridian		(991	)		-1.7	%		43		0.0	%		(4,085	)		-3.4	%		908		0.5	%
Domestic Upholstery		1,713			4.5	%		569		2.4	%		4,465			5.6	%		2,300		4.7	%
All Other		497			18.3	%		120		7.5	%		621			13.8	%		324		9.8	%
Consolidated	$	7,291			4.8	%	$	9,661		5.9	%	$	11,215			3.7	%	$	21,903		6.7	%

Capital Expenditures
Hooker Branded	$	239					$	38				$	706					$	121
Home Meridian		592						1,109					632						2,455
Domestic Upholstery		286						130					609						889
All Other		-						-					-						-
Consolidated	$	1,117					$	1,277				$	1,947					$	3,465

Depreciation & Amortization
Hooker Branded	$	437					$	750				$	1,122					$	1,200
Home Meridian		725						567					1,386						1,068
Domestic Upholstery		957						549					1,896						1,309
All Other		3						2					5						6
Consolidated	$	2,122					$	1,868				$	4,409					$	3,583

	As of July 31,					As of January 30,
	2022		%Total			2022		%Total
Identifiable Assets			Assets					Assets
Hooker Branded	$	151,444		41.7	%	$	170,968		48.8	%
Home Meridian		144,674		39.8	%		130,890		37.4	%
Domestic Upholstery		64,554		17.7	%		47,232		13.5	%
All Other		2,821		0.8	%		1,126		0.3	%
Consolidated	$	363,493		100	%	$	350,216		100	%
Consolidated Goodwill and Intangibles		49,138					24,343
Total Consolidated Assets	$	412,631				$	374,559

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Sales by product type are as follows:

	Net Sales (in thousands)
	Thirteen Weeks Ended										Twenty-Six Weeks Ended
	July 31, 2022		%Total			August 1, 2021		%Total			July 31, 2022		%Total			August 1, 2021		%Total
Casegoods	$	92,869		61	%	$	96,494		59	%	$	167,313		56	%	$	193,590		59	%
Upholstery		60,039		39	%		66,025		41	%		132,910		44	%		131,789		41	%
	$	152,908		100	%	$	162,519		100	%	$	300,223		100	%	$	325,379		100	%

15. Subsequent Events

Dividends

On September 7, 2022, our board of directors declared a quarterly cash dividend of $0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. References to the “Acquisition” refer to the recently completed acquisition of substantially all of the assets of Sunset West on January 31, 2022.

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:

■

risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, customs issues, freight costs, including the price and availability of shipping containers, ocean vessels, ocean and domestic trucking, and warehousing costs and the risk that a disruption in our offshore suppliers or the transportation and handling industries, including labor stoppages, strikes, or slowdowns, could adversely affect our ability to timely fill customer orders;

■

the effect and consequences of the coronavirus (COVID-19) pandemic or future pandemics on a wide range of matters including but not limited to U.S. and local economies; our business operations and continuity; the health and productivity of our employees; and the impact on our global supply chain, inflation, the retail environment and our customer base;

■

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 prior U.S. administration’s imposition of a 25% tariff on certain goods imported into the United States from China including almost all furniture and furniture components manufactured in China, which is still in effect, with the potential for additional or increased tariffs in the future;

■

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;

■

the risks related to the recent Acquisition including integration costs, costs related to Acquisition debt, maintaining Sunset West’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, the loss of key employees from Sunset West, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the business which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Acquisition;

■

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;

■

difficulties in forecasting demand for our imported products;

■

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 and the adverse effects of negative media coverage;

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■

disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia or North Carolina administrative facilities, our North Carolina and Las Vegas showrooms or our representative offices or warehouses in Vietnam and China;

■

risks associated with our newly leased warehouse space in Georgia including information systems, access to warehouse labor and the inability to realize anticipated cost savings;

■

the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers, including the loss of several large customers through business consolidations, failures or other reasons, or the loss of significant sales programs with major customers;

■

our inability to collect amounts owed to us or significant delays in collecting such amounts;

■

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;

■

the direct and indirect costs and time spent by our associates associated with the implementation of our Enterprise Resource Planning system (ERP), including costs resulting from unanticipated disruptions to our business;

■

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, including the selection of suitable acquisition targets, restructurings, strategic alliances and international operations;

■

the impairment of our long-lived assets, which can result in reduced earnings and net worth;

■

capital requirements and costs;

■

risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

■

the cost and difficulty of marketing and selling our products in foreign markets;

■

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;

■

price competition in the furniture industry;

■

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.

Our forward-looking statements could be wrong considering 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 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 2022 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.

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Quarterly Reporting

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 2, 2022, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began January 31, 2022, which both ended July 31, 2022. This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began May 3, 2021, and the twenty-six-week period that began February 1, 2021, which both ended August 1, 2021; and our financial condition as of July 31, 2022 compared to January 30, 2022.

References in this report to:

■

the 2023 fiscal year and comparable terminology mean the fiscal year that began January 31, 2022 and will end January 29, 2023; and

■

the 2022 fiscal year and comparable terminology mean the fiscal year that began February 1, 2021 and ended January 30, 2022.

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 SEC, especially our 2022 Annual Report. Our 2022 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 2022 Annual Report and other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurnishings.com.

Overview

Hooker Furnishings 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, custom fabric-upholstered furniture and outdoor furniture. 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.

Changes to segment reporting for fiscal 2023

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.

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Orders and Backlog

In the discussion below and herein we reference changes in sales orders or “orders” and sales order backlog (unshipped orders at a point in time) or “backlog” over and compared to certain periods of time and changes discussed are in sales dollars and not units of inventory, unless stated otherwise. We believe orders are generally good current indicators of sales momentum and business conditions. If the items ordered are in stock and the customer has requested immediate delivery, we generally ship products in about seven days or less from receipt of order; however, orders may be shipped later if they are out of stock or there are production or shipping delays, or the customer has requested the order to be shipped at a later date. It is our policy and industry practice to allow order cancellation for casegoods up to the time of shipment or, in the case of container direct orders, up until the time the container is booked with the ocean freight carrier; therefore, customer orders for casegoods are not firm. However, domestically produced upholstered products are predominantly custom-built and consequently, cannot be cancelled once the leather or fabric has been cut. Additionally, our hospitality products are highly customized and are generally not cancellable.

For the Hooker Branded and Domestic Upholstery segments and All Other, we generally consider backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies, we do not consider order backlogs to be a reliable indicator of expected long-term sales. We generally consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period. Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass and mega account channels of distribution, (iii) the proprietary nature of many of its products and (iv) the project nature of its hospitality business, for which average order sizes tend to be larger and consequently, its order backlog tends to be larger. There are exceptions to the general predictive nature of our orders and backlogs noted in this paragraph due to current demand and supply chain challenges related to the COVID-19 pandemic and subsequent recovery. They are discussed in greater detail below and are essential to understanding our prospects. During fiscal 2022, orders were not converting to shipments as quickly as would be expected compared to the pre-pandemic environment due to the lack and cost of shipping containers and vessel space as well as limited overseas vendor capacity. As a result, backlogs were elevated to historical high levels. At July 31, 2022, our backlog of unshipped orders was as follows and a further discussion of our current backlog by segment is discussed below under “Review”:

	Order Backlog
	(Dollars in 000s)

Reporting Segment	July 31, 2022		January 30, 2022		August 1, 2021

Hooker Branded	$	54,168	$	68,925	$	54,041
Home Meridian		80,087		167,968		201,060
Domestic Upholstery		61,849		67,068		60,570
All Other		5,333		6,148		4,701

Consolidated	$	201,437	$	310,109	$	320,372

Executive Summary-Results of Operations

■

Consolidated net sales for the fiscal 2023 second quarter decreased by $9.6 million, or 5.9%, as compared to the prior year quarter, driven by decreased net sales in the Home Meridian segment, partially offset by sales increases in the Domestic Upholstery (due in part to the addition of Sunset West results) and Hooker Branded segments, and the recovery in the H Contract business. Consolidated gross profit decreased due to decreases in the Home Meridian and Hooker Branded segments, partially offset by increased gross profit in the Domestic Upholstery segment. Consolidated gross margin increased due to improved margin at Home Meridian. Consolidated operating income was $7.3 million or 4.8% of net sales as compared to a $9.7 million or 5.9% of net sales in the prior year period. Consolidated net income was $5.5 million or $0.46 per diluted share for the fiscal 2023 second quarter, as compared to $7.5 million or $0.62 per diluted share in the prior year quarter.

■

For the fiscal 2023 first half, consolidated net sales decreased by $25.2 million, or 7.7%, compared to the prior year period due to decreased net sales in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment and the addition of Sunset West results therein. Consolidated gross profit decreased while gross margin stayed about the same. Consolidated operating income was $11.2 million or 3.7% of net sales as compared to $21.9 million or 6.7% of net sales in the prior year first half. Consolidated net income was $8.7 million or $0.73 per diluted share for the fiscal 2023 first half, as compared to $16.9 million or $1.40 per diluted share in the prior year period.

Our fiscal 2023 second quarter and first-half performance are discussed in greater detail below under “Review” and “Results of Operations.”

Table of Contents

Review

In the second quarter and first half of fiscal 2023, consolidated net sales and profitability both decreased as compared to the corresponding periods in the prior year. In the first half of the prior year, sales and profitability were favorably impacted by the demand surge that followed the initial Covid crisis and a return to more normal factory production, which benefitted home furnishings and other industries, before new Covid variants resulted in new lockdowns at many of our Asian suppliers in the second half of fiscal 2022. Effects of these lockdowns continued into the fiscal 2023 first quarter, however factory production improved substantially during the second quarter of fiscal 2023 and helped us exceed our internal expectations for the quarter.

The Hooker Branded segment’s net sales increased by $2.9 million, or 5.8%, as compared to the prior year quarter when sales were already elevated, due to sales increases at both Hooker Casegoods and Hooker Upholstery. The unexpected COVID-related lockdown at our suppliers in Vietnam last summer and their slow re-openings caused low inventory receipts in our U.S. warehouses and resulted in a sales decline in the second half of fiscal 2022 and the fiscal 2023 first quarter. As these suppliers resumed production and shipments after the Lunar New Year, inventory receipts at our U.S. warehouses have increased each month, allowing us to fulfill orders and reduce backlogs. At the end of fiscal 2023 second quarter, inventory levels for this segment increased by $33 million as compared to fiscal 2022 year-end and $15 million as compared to fiscal 2023 first quarter end, including $24 million of in-transit inventory. The majority of Hooker Branded sales are shipped out of U.S. warehouses, so we believe our investment in inventory is essential to keep our best sellers in stock, support our inventory positioning, help reduce impacts of the ongoing supply chain disruptions, flow imports from Asia, and prepare for the fall and holiday selling seasons. Additionally, a large percentage of this inventory is designated for sales orders in our backlog and carries the price increases we implemented last year and earlier this year to mitigate higher freight and product costs. This segment reported $6.1 million operating income and a 11.5% operating margin for the fiscal 2023 second quarter. Incoming orders decreased as compared to the prior year quarter and the quarter-end backlog was at a comparable level to the prior year second quarter end but was 21% lower than at fiscal 2022 year-end due to increased shipments during the quarter. Hooker Branded backlog was still about four times higher than pre-pandemic levels in fiscal 2020.

The Home Meridian segment’s net sales decreased by $28.3 million, or 32.4%, as compared to the prior year quarter. Sales with mass merchants and major furniture chains decreased due to retailers accelerating orders in the prior year and rationalizing their inventory levels in the current year. In addition, our exit of the unprofitable Clubs channel, which accounted for about 40% of the sales decline. E-commerce sales decreased as sales in this channel returned to pre-pandemic levels and growth rates. These decreases were partially offset by the continued recovery of hospitality business and the launch of the Pulaski Upholstery division. Despite significant sales declines, Home Meridian gross margin improved in fiscal 2023 second quarter due to the fact that most shipments carried price increases and freight surcharges to help mitigate higher freight costs and lower allowances as a result of our exit from the Clubs channel. Profitability was negatively impacted by a large quality-related chargeback and transition and start-up costs at the new Georgia warehouse. On a more positive note, during the quarter we completed the exit from all three older warehouses and leased additional space at our new Georgia warehouse to support HMI’s expansion into higher-margin channels of distribution. This segment reported an operating loss of $991,000, as compared to breakeven in the prior year quarter; however, it improved from $3.1 million operating loss in the first quarter of fiscal 2023. Quarter-end backlog was lower than the prior year second quarter end and fiscal 2022 year-end due to decreased incoming orders with mass merchants, as these customers continue to rationalize their inventories to match current demand levels, and the absence of Clubs channel orders but was at about the same levels the segment experienced in fiscal 2020.

The Domestic Upholstery segment’s net sales increased by $14.7 million, or 62.0%, as compared to the prior year quarter due to organic sales growth at Bradington Young, Sam Moore and Shenandoah, as well as the addition of Sunset West results. Despite strong sales, gross margins decreased in the fiscal 2023 second quarter due to significantly increased raw material costs, partially offset by overhead absorption on higher sales volume and higher gross margin at the Shenandoah division whose production was impacted by a foam shortage issue in the prior year period. This segment reported an operating income of $1.7 million and a 4.5% operating margin for the fiscal 2023 second quarter. Incoming orders decreased due to current lead times and high backlogs. Quarter-end backlog was at the same level as prior year quarter, but was 7.8% lower than at fiscal 2022 year-end as higher shipments reduced backlog. Domestic Upholstery backlog was almost five times pre-pandemic levels in fiscal 2020.

Cash and cash equivalents stood at $11.7 million at fiscal 2023 second quarter-end, down $57.7 million as compared to the balance at the fiscal 2022 year-end due principally to a $56.1 million increase in inventory. At fiscal 2023 second quarter end, inventory stood at $131.1 million, $27.5 million higher than prior year second quarter end and $38.3 million higher than pre-pandemic level at fiscal 2020 year-end. During the fiscal 2023 second quarter, we received $25 million in term loan proceeds to replenish cash used to make the Sunset West Acquisition. We also paid $4.8 million in cash dividends to our shareholders and spent $3 million for development of our new cloud-based ERP system. In addition to our cash balance, we had $27.9 million available under our existing revolver to fund working capital needs. With strategic inventory management and cautious capital expenditures, we believe we have the financial resources to support our business operations for the foreseeable future.

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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
	July 31,			August 1,			July 31,			August 1,
	2022			2021			2022			2021
Net sales		100	%		100	%		100	%		100	%
Cost of sales		79.7			80.5			79.8			79.9
Gross profit		20.3			19.5			20.2			20.1
Selling and administrative expenses		15.0			13.2			15.8			13.0
Intangible asset amortization		0.6			0.4			0.6			0.4
Operating income		4.8			5.9			3.7			6.7
Other (expense)/income, net		(0.1	)		-			0.1			-
Income before income taxes		4.7			5.9			3.8			6.7
Income tax expense		1.1			1.3			0.9			1.5
Net income		3.6			4.6			2.9			5.2

Fiscal 2023 Second Quarter and First-Half Compared to Fiscal 2022 Second Quarter and First-Half

	Net Sales
	Thirteen Weeks Ended																Twenty-Six Weeks Ended
	July 31,					August 1,											July 31,					August 1,
	2022					2021											2022					2021
			% Net Sales					% Net Sales			$ Change			% Change					% Net Sales					% Net Sales			$ Change			% Change
Hooker Branded	$	52,817		34.5	%	$	49,929		30.7	%	$	2,888			5.8	%	$	95,047		31.7	%	$	101,268		31.1	%	$	(6,221	)		-6.1	%
Home Meridian		59,048		38.6	%		87,323		53.7	%		(28,275	)		-32.4	%		121,133		40.3	%		171,732		52.8	%		(50,599	)		-29.5	%
Domestic Upholstery		38,326		25.1	%		23,665		14.6	%		14,661			62.0	%		79,546		26.5	%		49,086		15.1	%		30,460			62.1	%
All Other		2,717		1.8	%		1,602		1.0	%		1,115			69.6	%		4,497		1.5	%		3,293		1.0	%		1,204			36.6	%
Consolidated	$	152,908		100	%	$	162,519		100	%	$	(9,611	)		-5.9	%	$	300,223		100	%	$	325,379		100	%	$	(25,156	)		-7.7	%

Unit Volume

FY23 Q2 %

Increase

vs. FY22 Q2

FY23 YTD %

Increase

vs. FY22 YTD

Average Selling Price ("ASP")

FY23 Q2 %

Increase

vs. FY22 Q2

FY23 YTD %

Increase

vs. FY22 YTD

Hooker Branded

-7.7

-18.5

Hooker Branded

14.0

14.8

Home Meridian

-34.6

-33.1

Home Meridian

-0.9

1.9

Domestic Upholstery *

10.8

7.5

Domestic Upholstery *

22.1

23.2

All Other

56.2

33.7

All Other

7.0

1.8

Consolidated

-27.9

-28.4

Consolidated

22.5

20.5

*Sunset West is excluded from the Domestic Upholstery segment in the Unit Volume and ASP portions of the table above since it was not a part of our fiscal 2022 results. Consequently, we believe including their fiscal 2023 results would skew Domestic Upholstery results and reduce the usefulness of those portions of the table.

Table of Contents

Consolidated net sales decreased in the fiscal 2023 second quarter due to sales declines in the Home Meridian segment, partially offset by increased net sales in the Domestic Upholstery and Hooker Branded segments. Consolidated net sales decreased in the fiscal 2023 first half due to sales declines in the Home Meridian and Hooker Branded segments, partially offset by increased net sales in the Domestic Upholstery segment.

■

The Hooker Branded segment’s net sales increased in the fiscal 2023 second quarter compared to the prior year quarter as both Hooker Casegoods and Hooker Upholstery divisions reported higher net sales. Unit volume was lower than prior year second quarter, but significantly improved from the fourth quarter of previous year and the first quarter of this year. ASP increased due to price increases we implemented in response to higher freight costs and product cost inflation. For the fiscal 2023 first half, net sales decreased driven by lower shipments at the Hooker Casegoods division in the first quarter due to inventory unavailability. The decrease was partially offset by continued higher sales at Hooker Upholstery due to quicker inventory turns at this division. However, it was not sufficient to offset the sales decreases driven by unit volume loss.

■

The Home Meridian segment’s net sales decreased in the fiscal 2023 second quarter and first half compared to the prior year periods due to lower sales in the mass merchants and furniture chains as customers rationalize their inventory levels, the absence of sales from the unprofitable Clubs channel, and lower sales in the e-commerce channel. These declines were partially offset by the recovery of hospitality business and the addition of Pulaski Upholstery division. In addition, the prior year quarter’s sales were up over 20% as compared to the fiscal 2021 second quarter due to a demand surge after the initial COVID crisis. We implemented price increases to mitigate higher freight costs; however, ASP was negatively impacted by deeply discounted Ready-To-Assemble category sales, the category we determined to exit last year.

■

The Domestic Upholstery segment reported strong net sales in the fiscal 2023 second quarter and first half due to double-digit sales growth at all three divisions as well as the addition of Sunset West’s sales. Prior-year sales were negatively affected by a foam shortage which is no longer a significant issue. Although we experienced some disruptions of the delivery of raw materials for production, all three divisions were operating near full capacity with shipments exceeding prior year periods and our internal goals. Additionally, ASP increased at three divisions due to price increases we implemented in response to the inflation of raw material costs.

■

All Other’s net sales increased in the fiscal 2023 second quarter and first half due to increased unit volume at H Contract, as this division is gradually recovering from the impact of reduced capital spending by the senior living industry during the COVID pandemic.

	Gross Profit and Margin
	Thirteen Weeks Ended																Twenty-Six Weeks Ended
	July 31,					August 1,											July 31,					August 1,
	2022					2021											2022					2021
			% Net Sales					% Net Sales			$ Change			% Change					% Net Sales					% Net Sales			$ Change			% Change
Hooker Branded	$	15,598		29.5	%	$	17,060		34.2	%	$	(1,462	)		-8.6	%	$	28,837		30.3	%	$	34,273		33.8	%	$	(5,436	)		-15.9	%
Home Meridian		7,321		12.4	%		9,607		11.0	%		(2,286	)		-23.8	%		13,626		11.2	%		19,742		11.5	%		(6,116	)		-31.0	%
Domestic Upholstery		7,128		18.6	%		4,517		19.1	%		2,611			57.8	%		16,483		20.7	%		10,154		20.7	%		6,329			62.3	%
All Other		1,008		37.1	%		533		33.3	%		475			89.1	%		1,568		34.9	%		1,130		34.3	%		438			38.8	%
Consolidated	$	31,055		20.3	%	$	31,717		19.5	%	$	(662	)		-2.1	%	$	60,514		20.2	%	$	65,299		20.1	%	$	(4,785	)		-7.3	%

Consolidated gross profit decreased while margin increased in the fiscal 2023 second quarter. For the fiscal 2023 first half, consolidated gross profit decreased and margin stayed about the same as compared to prior year period.

■

The Hooker Branded segment’s gross profit and margin both decreased in the fiscal 2023 second quarter, despite increased net sales, due primarily to higher freight and product costs, and to a lesser extent higher warehousing labor costs due to increased shipping and receiving activity, higher wage levels, and higher demurrage and drayage expenses as more containers were delivered to the U.S and continued to experience supply chain interruptions. Hooker Branded gross profit and margin decreased in the fiscal 2023 first half also due to sales declines in the first quarter and increased costs.

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■

The Home Meridian segment’s gross profit decreased in the fiscal 2023 second quarter and first half driven by sales volume loss, higher product costs, higher warehousing labor costs, transition and start-up costs at the new Georgia warehouse, and margin loss on a quality-related issue. Gross margin increased in the fiscal 2023 second quarter but decreased slightly in the first half. Freight costs still negatively impacted margin in this segment but improved as compared to prior year periods due to price increases and surcharges to offset the increased freight and product costs.

■

The Domestic Upholstery segment’s gross profit increased in the fiscal 2023 second quarter and first half due to strong sales across all divisions and the addition of Sunset West gross profit. Despite significant sales increases, gross margin decreased in the fiscal 2023 second quarter and stayed the same in the first half due to increased raw material costs, partially offset by overhead absorption which benefitted from higher sales volume and production efficiencies. Prior-year gross profit was negatively affected by production inefficiencies from a foam shortage which is no longer a significant issue.

■

All Other’s gross profit and margin both increased in the fiscal 2023 second quarter and first half driven by stronger net sales.

	Selling and Administrative Expenses (S&A)
	Thirteen Weeks Ended																Twenty-Six Weeks Ended
	July 31,					August 1,											July 31,					August 1,
	2022					2021											2022					2021
			% Net Sales					% Net Sales			$ Change			% Change					% Net Sales					% Net Sales			$ Change			% Change
Hooker Branded	$	9,526		18.0	%	$	8,132		16.3	%	$	1,394			17.1	%	$	18,624		19.6	%	$	15,902		15.7	%	$	2,722			17.1	%
Home Meridian		7,978		13.5	%		9,230		10.6	%		(1,252	)		-13.6	%		17,043		14.1	%		18,167		10.6	%		(1,124	)		-6.2	%
Domestic Upholstery		4,871		12.7	%		3,685		15.6	%		1,186			32.2	%		10,929		13.7	%		7,329		14.9	%		3,600			49.1	%
All Other		511		18.8	%		413		25.8	%		98			23.7	%		947		21.1	%		806		24.5	%		141			17.5	%
Consolidated	$	22,886		15.0	%	$	21,460		13.2	%	$	1,426			6.6	%	$	47,543		15.8	%	$	42,204		13.0	%	$	5,339			12.7	%

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half.

■

The Hooker Branded segment’s S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2023 second quarter and first half driven by increased salaries and wages due to salary inflation, higher professional service fees, higher commissions on undiscounted sales, higher bonus accruals due to the reversal of unearned executive bonuses in the prior year first quarter, and higher travel expenses and other operating expenditures as business continued to resume to normal.

■

The Home Meridian segment’s S&A expenses decreased in absolute terms in the fiscal 2023 second quarter and first half due to decreased salaries and wages because of personnel changes and lower selling costs on decreased net sales, partially offset by higher depreciation expenses on additions of property and equipment at the new Georgia warehouse, higher designing fees on a new licensing arrangement, and higher international travel expenses as normal travel schedules resumed. S&A expenses increased as a percentage of net sales in the fiscal 2023 second quarter and first half due to decreased net sales.

■

The Domestic Upholstery segment’s S&A expenses increased in absolute terms in the fiscal 2023 second quarter and first half driven by the addition of Sunset West’s S&A expenses, higher selling costs on increased net sales across all divisions, and higher salaries and wages. Domestic Upholstery S&A expenses decreased as a percentage of net sales in the fiscal 2023 second quarter and first half due principally to higher net sales.

■

All Other S&A expenses increased in absolute terms while decreased as a percentage of net sales in the fiscal 2023 second quarter and first half.

Table of Contents

	Intangible Asset Amortization
	Thirteen Weeks Ended															Twenty-Six Weeks Ended
	July 31,					August 1,										July 31,					August 1,
	2022					2021										2022					2021
			% Net Sales					% Net Sales			$ Change		% Change					% Net Sales					% Net Sales			$ Change		% Change
Intangible asset amortization	$	878		0.6	%	$	596		0.4	%	$	282		47.3	%	$	1,756		0.6	%	$	1,192		0.4	%	$	564		47.3	%

Intangible asset amortization expense was higher in fiscal 2023 second quarter and first half due to Acquisition-related amortization expense.

	Operating Profit/(Loss) and Margin
	Thirteen Weeks Ended																	Twenty-Six Weeks Ended
	July 31,						August 1,											July 31,						August 1,
	2022						2021											2022						2021
				% Net Sales					% Net Sales			$ Change			% Change						% Net Sales					% Net Sales			$ Change			% Change
Hooker Branded	$	6,072			11.5	%	$	8,929		17.9	%	$	(2,857	)		-32.0	%	$	10,214			10.7	%	$	18,371		18.1	%	$	(8,157	)		-44.4	%
Home Meridian		(991	)		-1.7	%		43		0.0	%		(1,034	)		-2404.7	%		(4,085	)		-3.4	%		908		0.5	%		(4,993	)		-549.9	%
Domestic Upholstery		1,713			4.5	%		569		2.4	%		1,144			201.1	%		4,465			5.6	%		2,300		4.7	%		2,165			94.1	%
All Other		497			18.3	%		120		7.5	%		377			314.2	%		621			13.8	%		324		9.8	%		297			91.7	%
Consolidated	$	7,291			4.8	%	$	9,661		5.9	%	$	(2,370	)		-24.5	%	$	11,215			3.7	%	$	21,903		6.7	%	$	(10,688	)		-48.8	%

Operating profit and margin decreased as compared to the prior year quarter due to the factors discussed above. Sunset West operating profit of $150,000 and $1.0 million for the fiscal 2023 second quarter and first half, respectively, net of $282,000 and $564,000 in intangible asset amortization expense on Acquisition-related intangibles, is included in the Domestic Upholstery segment’s results.

	Interest Expense, net
	Thirteen Weeks Ended															Twenty-Six Weeks Ended
	July 31,					August 1,										July 31,					August 1,
	2022					2021										2022					2021
			% Net Sales					% Net Sales			$ Change		% Change					% Net Sales					% Net Sales			$ Change		% Change
Consolidated interest expense, net	$	83		0.1	%	$	23		0.0	%	$	60		260.9	%	$	111		0.0	%	$	54		0.0	%	$	57		105.6	%

Consolidated interest expense was higher in fiscal 2023 second quarter and first half due to interest on the amounts drawn on the revolving credit facility in the second quarter.

	Income taxes
	Thirteen Weeks Ended																		Twenty-Six Weeks Ended
	July 31,						August 1,												July 31,						August 1,
	2022						2021												2022						2021
				% Net Sales						% Net Sales			$ Change			% Change						% Net Sales						% Net Sales			$ Change			% Change
Consolidated income tax expense	$	1,621			1.1	%	$	2,192			1.3	%	$	(571	)		-26.0	%	$	2,612			0.9	%	$	4,966			1.5	%	$	(2,354	)		-47.4	%

Effective Tax Rate		22.6	%					22.7	%											23.0	%					22.7	%

Table of Contents

Consolidated income tax expense was $1.6 million for the fiscal 2023 second quarter compared to $2.2 million for the prior year quarter. The effective tax rates for the fiscal 2023 and 2022 second quarters were 22.6% and 22.7%, respectively. For the fiscal 2023 first half, consolidated income tax expense was $2.6 million, compared to $5.0 million for the prior year period. The effective tax rates for the fiscal 2023 and 2022 first half periods were 23.0% and 22.7%, respectively.

	Net Income
	Thirteen Weeks Ended																Twenty-Six Weeks Ended
	July 31,					August 1,											July 31,					August 1,
	2022					2021											2022					2021
			% Net Sales					% Net Sales			$ Change			% Change					% Net Sales					% Net Sales			$ Change			% Change
Consolidated Net Income	$	5,543		3.6	%	$	7,467		4.6	%	$	(1,924	)		-25.8	%	$	8,726		2.9	%	$	16,910		5.2	%	$	(8,184	)		-48.4	%

Diluted earnings per share	$	0.46				$	0.62										$	0.73				$	1.40

COVID-19

We continue to monitor information on COVID-19 from the CDC and believe we are adhering to their recommendations regarding the health and safety of our personnel. We have adjusted social distancing and masking protocols to recently updated CDC guidelines. Testing, treatment, and vaccinations for COVID-19 are covered 100% under our medical plan and counseling is available through our employee assistance plan to assist employees with financial, mental, and emotional stress related to the virus and other issues.

Outlook

We are closely monitoring economic disrupters like inflation, rising interest rates, and a slowing housing market. At the same time, we see many reasons for optimism as the U.S. enjoys strong levels of employment, rising household incomes, continuing strength in consumer spending and watching as yet another sizeable generation enters into their prime furniture purchasing years.

While incoming orders are down from pandemic highs, we have substantial backlogs to ship and we believe the reduction of incoming orders from retailers may be temporary, and more a result of right-sizing their inventories than a significant decline in normalized consumer demand.

We expect that the fall and holiday season sales activity will align more closely with the pre-pandemic ordering environment that we have become accustomed to. We are preparing for a strong second half of the year, and based on our backlogs and solid inventory position, we are on track to increase sales in all three segments as compared to the prior fiscal year.

We believe organic growth will be buoyed by several new strategic initiatives including our recent entry into outdoor furniture, expansion of our presence in the interior design channel in all segments along with the post pandemic recovery within the hospitality and contract businesses. HMI’s portfolio program launches at the upcoming October High Point market which we believe will accelerate the expansion of HMI’s customer base.

Financial Condition, Liquidity and Capital Resources

Cash Flows – Operating, Investing and Financing Activities

	Twenty-Six Weeks Ended
	July 31,			August 1,
	2022			2021
Net cash used in operating activities	$	(48,481	)	$	(20,207	)
Net cash used in investing activities		(28,263	)		(3,938	)
Cash provided by/(used in) financing activities		19,031			(4,285	)
Net decrease in cash and cash equivalents	$	(57,713	)	$	(28,430	)

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During the six months ended July 31, 2022, we used a portion of the $25 million term-loan proceeds and existing cash and cash equivalents on hand to build up inventory levels, fund the Acquisition, pay $4.8 million in cash dividends, $1.9 million capital expenditures to enhance our business systems and facilities, $1.1 million in purchases and retirement of common stock, and $404,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the six months ended August 1, 2021, we used a portion of the existing cash and cash equivalent on hand to pay $3.5 million of capital expenditures to enhance our business systems and facilities, $4.3 million in cash dividends, and $473,000 in life insurance premiums on Company-owned life insurance policies.

Liquidity, Financial Resources and Capital Expenditures

Our financial resources include:

■

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.

We believe these resources are sufficient to meet our business requirements and the payment of dividends through fiscal 2023 and for the foreseeable future, including expected capital expenditures and working capital needs.

Loan Agreements and Revolving Credit Facility

On July 26, 2022, we entered into a Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) in order to replenish cash for all or a portion of the purchase price and other costs associated with the acquisition of substantially all of the assets of Sunset West. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”).

Details of the individual credit facilities provided for in the Amendment are as follows:

●

Unsecured Revolving Credit Facility. Under this Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current BSBY (adjusted periodically) plus 1.00%. The interest rate will be adjusted monthly. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

●

2022 Secured Term Loan. The Amendment provided us with a $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and

●

2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

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The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

●

Maintain a ratio of funded debt to EBITDA not exceeding:

2.50:1.0 through July 30, 2023;

2.25:1.0 through July 30, 2024; and

2.00:1.00 thereafter.

We were in compliance with each of these financial covenants at July 31, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

As of July 31, 2022, we had $27.9 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $7.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of July 31, 2022. There were no additional borrowings outstanding under the Existing Revolver as of July 31, 2022.

Share Repurchase Authorization

On June 6, 2022, our Board of Directors authorized the repurchase of up to $20 million of the Company’s common shares. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended, or discontinued at any time at the discretion of our Board of Directors. Repurchases may 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.

During the second quarter of fiscal 2023, we had used approximately $1.1 million of the authorization to purchase 68,400 of our common shares (at an average price of $16.59 per share), with approximately $18.9 million remaining available for future purchases under the authorization as of the end of the fiscal 2023 second quarter. Through September 7, 2022, we have purchased a total of 362,000 shares at a total cost of $5.9 million.

Capital Expenditures

We expect to spend approximately $4 million in capital expenditures over the remainder of fiscal 2023 to maintain and enhance our operating systems and facilities. We expect about $2.5 million of this amount will be spent on the High Point showroom renovations for both legacy Hooker divisions and the Home Meridian segment. The showroom for the Hooker legacy will be moved to a location to maximize interior design traffic and to showcase Sunset West products in an outdoor setting. The Home Meridian renovation will support new initiatives including the new ‘Portfolio’ sales program aimed at retailers who prefer to buy from our warehouse rather than container direct. The majority of current Home Meridian sales are container direct, proprietary products which are typically at lower margins than are warehouse sales, since sales from our warehouse require less inventory investment and risk by customers and, therefore, command higher margins. The Portfolio program is designed to broaden and strengthen Home Meridian’s customer base and improve average margins over time.

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Enterprise Resource Planning Project

During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts began shortly thereafter. We expect to implement the ERP upgrade in our legacy Hooker divisions in the first quarter of fiscal 2024, with the Home Meridian segment following afterwards. To complete the ERP system implementation as anticipated, we will be required to expend significant financial and human resources. In addition to the capital expenditures discussed in the section immediately above, we anticipate spending approximately $3 million over the remainder of the year, with a significant amount of time invested by our associates.

Dividends

On September 7, 2022, our board of directors declared a quarterly cash dividend of $0.20 per share which will be paid on September 30, 2022 to shareholders of record at September 19, 2022.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2022 Annual Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, raw materials price risk and changes in foreign currency exchange rates, which could impact our results of operations or financial condition. We manage our exposure to this risk through our normal operating activities.

Interest Rate Risk

Borrowings under our revolving credit facility, the Secured Term Loan and the Unsecured Term loan bear interest based on BSBY plus 1.00%, BSBY plus 0.90% and BSBY plus 1.40%, respectively. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of July 31, 2022 other than standby letters of credit in the amount of $7.1 million. However, as of July 31, 2022, $25 million was outstanding under our term loans. A 1% increase in the BSBY rate would result in an annual increase in interest expenses on our terms loans of approximately $244,000.

Raw Materials Price Risk

We are exposed to market risk from changes in the cost of raw materials used in our domestic upholstery manufacturing processes; principally, wood, fabric and foam products. Increases in home construction activity could result in increases in wood and fabric costs. Additionally, the cost of petroleum-based foam products we utilize are sensitive to crude oil prices, which vary due to supply, demand and geo-political factors. Due to the Russian Invasion of Ukraine, there is a shortage of Russian Birch which was the third largest source of US hardwood plywood imports in 2021. A large portion of the plywood used at one division of our Domestic Upholstery segment is Russian Birch. We have been able to find an alternative plywood source at a higher cost.

Currency Risk

For imported products, we generally negotiate firm pricing denominated in U.S. Dollars with our foreign suppliers, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Most of our imports are purchased from suppliers located in Vietnam and China. The Chinese currency floats within a limited range in relation to the U.S. Dollar, resulting in exposure to foreign currency exchange rate fluctuations.

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 pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effect of any price increases from suppliers in the prices we charge for imported products. However, these changes could adversely impact sales volume or profit margins during affected periods.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended July 31, 2022. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of July 31, 2022 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

On January 31, 2022, we closed on the acquisition of substantially all of the assets of Sunset HWM, LLC (“Sunset West"). As permitted by SEC guidance for newly acquired businesses, we intend to exclude Sunset West’s operations from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ending January 29, 2023. We are in the process of implementing our internal control structure at Sunset West and expect that this effort will be completed in fiscal 2023.

There have been no changes in our internal control over financial reporting during the fiscal quarter ended July 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Program		Maximum Dollar Value of Shares That May Yet Be Purchased Under The Program
May 2, 2022 - June 5, 2022		-	$	-			$	-
June 6, 2022 - July 3, 2022		-		-				-
July 4, 2022 - July 31, 2022		68,409		16.59		68,409		18,865,161

Total		68,409	$	16.59		68,409

Item 6. Exhibits

3.1	Articles of Incorporation of the Company, as amended as of September 16, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-25349) for the quarter ended October 31, 2021)

3.2	Amended and Restated Bylaws of the Company, as amended December 10, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K (SEC File No. 000-25349) for the year ended February 2, 2014)

4.1	Articles of Incorporation of the Company, as amended (See Exhibit 3.1)

4.2	Amended and Restated Bylaws of the Company, as amended (See Exhibit 3.2)

10.1	Employment Agreement, dated July 13, 2022, by and between Hooker Furnishings Corporation and Jeremy R. Hoff (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 18, 2022).

10.2	Employment Agreement, dated July 13, 2022, by and between Hooker Furnishings Corporation and Paul A. Huckfeldt (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 18, 2022).

10.3	Employment Agreement, dated July 13, 2022, by and between Hooker Furnishings Corporation and Anne J. Smith (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 18, 2022).

10.4	Employment Agreement, dated July 13, 2022, by and between Hooker Furnishings Corporation and Tod R. Phelps (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 18, 2022).

10.5	Fourth Amendment to Second Amended and Restated Loan Agreement, dated as of July 26, 2022, between Bank of America, N.A. and Hooker Furnishings Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 28, 2022).

10.6	Security Agreement (Assignment of Life Insurance Policy as Collateral), dated July 26, 2022, by and between Hooker Furnishings Corporation and Bank of America, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on July 28, 2022)

31.1*	Rule 13a-14(a) Certification of the Company’s principal executive officer

31.2*	Rule 13a-14(a) Certification of the Company’s principal financial officer

32.1**	Rule 13a-14(b) Certification of the Company’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*	Interactive Data Files (formatted as Inline XBRL)

104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith

** Furnished herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOOKER FURNISHINGS CORPORATION

Date: September 8, 2022		By: /s/ Paul A. Huckfeldt
		Paul A. Huckfeldt Chief Financial Officer and Senior Vice President – Finance and Accounting