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 August 2, 2020

 

Commission file number 000-25349

 

HOOKER FURNITURE 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 4, 2020, there were 11,889,968 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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

36

 

 

 

Signature

37

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

As of

 

August 2,

   

February 2,

 
   

2020

   

2020

 
   

(unaudited)

         

Assets

               

Current assets

               

    Cash and cash equivalents

  $ 82,210     $ 36,031  

    Trade accounts receivable, net

    67,115       87,653  

    Inventories

    67,707       92,813  

    Income tax recoverable

    -       751  

    Prepaid expenses and other current assets

    6,331       4,719  

         Total current assets

    223,363       221,967  

Property, plant and equipment, net

    28,271       29,907  

Cash surrender value of life insurance policies

    24,904       24,888  

Deferred taxes

    14,044       2,880  

Operating leases right-of-use assets

    37,987       39,512  

Intangible assets, net

    27,429       33,371  

Goodwill

    490       40,058  

Other assets

    1,190       1,125  

         Total non-current assets

    134,315       171,741  

               Total assets

  $ 357,678     $ 393,708  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities

               

    Current portion of term loans

  $ 27,200     $ 5,834  

    Trade accounts payable

    24,143       25,493  

    Accrued salaries, wages and benefits

    4,206       4,933  

    Income tax payable

    975       -  

    Customer deposits

    4,328       3,351  

    Current portion of lease liabilities

    6,844       6,307  

    Other accrued expenses

    3,344       4,211  

         Total current liabilities

    71,040       50,129  

Long term debt

    -       24,282  

Deferred compensation

    11,235       11,382  

Lease liabilities

    32,411       33,794  

Other long-term liabilities

    538       -  

Total long-term liabilities

    44,184       69,458  

              Total liabilities

    115,224       119,587  
                 

Shareholders’ equity

               

    Common stock, no par value, 20,000 shares authorized,

      11,890 and 11,838 shares issued and outstanding on each date

    52,628       51,582  

    Retained earnings

    190,411       223,252  

    Accumulated other comprehensive loss

    (585 )     (713 )

              Total shareholders’ equity

    242,454       274,121  

                   Total liabilities and shareholders’ equity

  $ 357,678     $ 393,708  

 

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

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

Aug 2,

   

Aug 4,

   

Aug 2,

   

Aug 4,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net sales

  $ 130,537     $ 152,248     $ 235,134     $ 287,766  
                                 

Cost of sales

    103,537       123,422       189,480       233,423  
                                 

      Gross profit

    27,000       28,826       45,654       54,343  
                                 

Selling and administrative expenses

    18,892       22,462       38,070       44,478  

Goodwill impairment charges

    -       -       39,568       -  

Trade name impairment charges

    -       -       4,750       -  

Intangible asset amortization

    596       596       1,192       1,192  
                                 

        Operating income / (loss)

    7,512       5,768       (37,926 )     8,673  
                                 

Other expense, net

    10       32       51       94  

Interest expense, net

    118       328       327       669  
                                 

      Income/(loss) before income taxes

    7,384       5,408       (38,304 )     7,910  
                                 

Income tax expense / (benefit)

    1,610       1,248       (9,259 )     1,763  
                                 

       Net income/(loss)

  $ 5,774     $ 4,160     $ (29,045 )   $ 6,147  
                                 

Earnings/(Loss) per share

                         

       Basic

  $ 0.49     $ 0.35     $ (2.46 )   $ 0.52  

       Diluted

  $ 0.48     $ 0.35     $ (2.46 )   $ 0.52  
                                 

Weighted average shares outstanding:

                         

       Basic

    11,824       11,787       11,811       11,778  

       Diluted

    11,853       11,810       11,811       11,811  
                                 

Cash dividends declared per share

  $ 0.16     $ 0.15     $ 0.32     $ 0.30  

 

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

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

Aug 2,

   

Aug 4,

   

Aug 2,

   

Aug 4,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income/(loss)

  $ 5,774     $ 4,160     $ (29,045 )   $ 6,147  

       Other comprehensive income (loss):

                               

                 Amortization of actuarial loss

    84       37       168       74  

                 Income tax effect on amortization

    (20 )     (9 )     (40 )     (18 )

        Adjustments to net periodic benefit cost

    64       28       128       56  
                                 

Total Comprehensive Income/(Loss)

  $ 5,838     $ 4,188     $ (28,917 )   $ 6,203  

  

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

 

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited) 

 

   

For the

 
   

Twenty-Six Weeks Ended

 
   

Aug 2,

   

Aug 4,

 
   

2020

   

2019

 

Operating Activities:

               

Net (loss)/income

  $ (29,045 )   $ 6,147  

Adjustments to reconcile net income to net cash

provided by operating activities:

               

Goodwill and intangible asset impairment charges

    44,318       -  

Depreciation and amortization

    3,365       3,471  

Gain on disposal of assets

    -       (285 )

Deferred income tax (benefit) / expense

    (10,665 )     2,155  

Noncash restricted stock and performance awards

    1,046       558  

Provision for doubtful accounts and sales allowances

    3,396       1,053  

Gain on life insurance policies

    (651 )     (624 )

Changes in assets and liabilities:

               

Trade accounts receivable

    17,142       25,206  

Inventories

    25,106       (8,389 )

Income tax recoverable

    751       (3,856 )

Prepaid expenses and other current assets

    (1,261 )     (3,191 )

Trade accounts payable

    (1,391 )     (9,058 )

Accrued salaries, wages, and benefits

    (726 )     (2,856 )

Accrued income taxes

    975       (3,159 )

Customer deposits

    977       2,475  

Operating lease liabilities

    678       187  

Other accrued expenses

    (867 )     1,033  

Deferred compensation

    20       145  

              Net cash provided by operating activities

  $ 53,168     $ 11,012  
                 

Investing Activities:

         

Purchases of property and equipment

    (484 )     (3,659 )

Proceeds received on notes from sale of assets

    -       1,459  

Premiums paid on life insurance policies

    (453 )     (489 )

Proceeds received on life insurance policies

    673       -  

              Net cash used in investing activities

    (264 )     (2,689 )
                 

Financing Activities:

               

Payments for long-term debt

    (2,929 )     (2,928 )

Cash dividends paid

    (3,796 )     (3,541 )

              Cash used in financing activities

    (6,725 )     (6,469 )
                 

Net increase in cash and cash equivalents

    46,179       1,854  

Cash and cash equivalents - beginning of year

    36,031       11,435  

Cash and cash equivalents - end of quarter

  $ 82,210     $ 13,289  
                 

Supplemental disclosure of cash flow information:

               

Cash paid for income taxes

  $ 220     $ 6,622  

Cash paid for interest, net

    295       599  
                 

Non-cash transactions:

               

Decrease in lease liabilities arising from obtaining right-of-use assets

  $ 1,987     $ 266  

Increase in property and equipment through accrued purchases

    41       49  

 

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

 

 

HOOKER FURNITURE 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 February 3, 2019

    11,785     $ 49,549     $ 213,380     $ 247     $ 263,176  

Net income

                    6,147               6,147  

Unrealized loss on defined benefit plan, net of tax of $18

                            56       56  

Cash dividends paid and accrued ($0.15 per share)

                    (3,541 )             (3,541 )

Restricted stock grants, net of forfeitures

    53       344                       344  

Restricted stock compensation cost

            367                       367  

Recognition of PSUs as equity-based awards

            584                       584  

      Balance at August 4, 2019

    11,838     $ 50,844     $ 215,986     $ 303     $ 267,133  
                                         
                                         
                                         
                                         

      Balance at February 2, 2020

    11,838     $ 51,582     $ 223,252     $ (713 )   $ 274,121  

Net loss

                    (29,045 )             (29,045 )

Unrealized loss on defined benefit plan, net of tax of $40

                            128       128  

Cash dividends paid and accrued ($0.16 per share)

                    (3,796 )             (3,796 )

Restricted stock grants, net of forfeitures

    52       169                       169  

Restricted stock compensation cost

            442                       442  

Performance-based restricted stock units cost

            435                       435  

      Balance at August 2, 2020

    11,890     $ 52,628     $ 190,411     $ (585 )   $ 242,454  

 

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

 

 

HOOKER FURNITURE 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 August 2, 2020

 

 

1.     Preparation of Interim Financial Statements

 

The condensed consolidated financial statements of Hooker Furniture 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 February 2, 2020 (“2020 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 2021 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 4, 2020, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began February 3, 2020, which both ended August 2, 2020. This report discusses our results of operations for this period compared to the 2020 fiscal year thirteen-week period that began May 6, 2019 and the twenty-six week period that began February 4, 2019, which both ended August 4, 2019; and our financial condition as of August 2, 2020 compared to February 2, 2020.

 

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

 

 

the 2021 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 3, 2020 and will end January 31, 2021; and

 

 

the 2020 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 4, 2019 and ended February 2, 2020.

 

We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2020, we updated our reportable segments. Consequently, the segment disclosures in this filing have been recast to reflect these changes and therefore differ from prior quarterly filings. See Note 13 Segment Information for additional details.

 

2.     Recently Adopted Accounting Policies

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This update seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted the provisions of Topic 326 on February 3, 2020, the first day of our 2021 fiscal year. The adoption of this standard did not have a material effect on our condensed consolidated financial statements or results of operations. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.

 

 

In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740) – Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions for intra-period tax allocation, the recognition of deferred tax liabilities after an investment in a foreign entity transitions to or from the equity method, and the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also introduce new guidance on determining how to apply the income tax guidance to franchise taxes that are partially based on income, clarifying the accounting for transactions that result in a step-up in the tax basis of goodwill, and the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We elected to adopt ASU 2019-12 on February 3, 2020, the first day of our 2021 fiscal year. The adoption of this standard impacted our condensed consolidated balance sheets and statements of operations by $5.4 million. See Note 12 Income Taxes for additional details.

 

3.     Accounts Receivable

 

   

August 2,

   

February 2,

 
   

2020

   

2020

 
                 

Trade accounts receivable

  $ 75,198     $ 91,261  

Receivable from factor

    -       788  

Other accounts receivable allowances

    (6,526 )     (3,493 )

Allowance for doubtful accounts

    (1,557 )     (903 )

   Accounts receivable

  $ 67,115     $ 87,653  

 

“Receivable from factor” represented amounts due with respect to factored accounts receivable. The agreement was discontinued in early fiscal 2021.

 

4.     Inventories

 

   

August 2,

   

February 2,

 
   

2020

   

2020

 

Finished furniture

  $ 80,770     $ 106,495  

Furniture in process

    1,278       1,304  

Materials and supplies

    8,151       8,479  

   Inventories at FIFO

    90,199       116,278  

Reduction to LIFO basis

    (22,492 )     (23,465 )

   Inventories

  $ 67,707     $ 92,813  

 

 

5.     Property, Plant and Equipment

 

   

Depreciable Lives

   

August 2,

   

February 2,

 
   

(In years)

   

2020

   

2020

 
   

Buildings and land improvements

  15 - 30     $ 31,316     $ 31,316  

Computer software and hardware

  3 - 10       19,243       19,166  

Machinery and equipment

  10       9,317       9,271  

Leasehold improvements

 

Term of lease

      9,785       9,737  

Furniture and fixtures

  3 - 10       2,603       2,597  

Other

  5       651       651  

   Total depreciable property at cost

          72,915       72,738  

Less accumulated depreciation

          46,250       44,089  

   Total depreciable property, net

          26,665       28,649  

Land

          1,077       1,077  

Construction-in-progress

          529       181  

   Property, plant and equipment, net

        $ 28,271     $ 29,907  

 

6.      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 August 2, 2020 and February 2, 2020, 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 August 2, 2020 and February 2, 2020, were as follows:

 

   

Fair value at August 2, 2020

   

Fair value at February 2, 2020

 

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

  $ -     $ 24,904     $ -     $ 24,904     $ -     $ 24,888     $ -     $ 24,888  

 

 

7.     Intangible Assets

 

The adverse economic effects brought on by the COVID-19 pandemic, including reductions in our sales, earnings and market value, as well as other changing market dynamics, required that we perform a valuation of our intangible assets.

 

The calculation methodology for the fair value of our Home Meridian segment and the Shenandoah division of our Domestic Upholstery segment included three approaches: the Discounted Cash Flow Method (DCF) which was given the largest weighting, the Guideline Public Company Method (GPCM) based on the consideration of the facts of the Company’s peer competitors and the Guideline Transaction Method (GTM) based on consideration of transactions with varying risk profiles, geographies and market conditions.

 

The income approach, specifically the relief from royalty method, was used as the valuation methodology for our trade names and trademarks, based on cash flow projections and growth rates for each trade name for five years in the future provided by management, and a royalty rate benchmark for companies with similar activities.

 

As a result of our intangible asset valuation analysis, in the first quarter of fiscal 2021, we recorded $44.3 million non-cash impairment charges including $23.2 million to Home Meridian goodwill, $16.4 million to Shenandoah goodwill and $4.8 million to certain of Home Meridian segment’s trade names.

 

       

Twenty-Six Weeks Ended

August 2, 2020

   

February 2, 2020

 

Non-amortizable Intangible Assets

 

Segment

 

Beginning Balance

   

Impairment Charges

   

Net Book Value

   

Beginning Balance

   

Impairment Charges

   

Net Book Value

 

Goodwill

 

Home Meridian

  $ 23,187     $ (23,187 )   $ -     $ 23,187     $ -     $ 23,187  

Goodwill

 

Domestic Upholstery

    16,871       (16,381 )     490       16,871       -       16,871  

   Total Goodwill

    40,058       (39,568 )     490       40,058       -       40,058  
                                                     

Trademarks and trade names - Home Meridian

 

Home Meridian

    11,400       (4,750 )     6,650       11,400       -       11,400  

Trademarks and trade names - Bradington-Young

 

Domestic Upholstery

    861       -       861       861       -       861  

Trademarks and trade names - Sam Moore

 

Domestic Upholstery

    396       -       396       396       -       396  

   Total Trademarks and trade names

  $ 12,657     $ (4,750 )   $ 7,907     $ 12,657     $ -     $ 12,657  
                                                     

   Total non-amortizable assets

  $ 52,715     $ (44,318 )   $ 8,397     $ 52,715     $ -     $ 52,715  

 

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 February 2, 2020

  $ 19,996     $ 718     $ 20,714  

Amortization

    (1,162 )     (30 )     (1,192 )

Balance at August 2, 2020

  $ 18,834     $ 688     $ 19,522  

 

For the remainder of fiscal 2021, amortization expense is expected to be approximately $1.2 million.

 

 

8.     Leases

 

In fiscal 2020, we adopted Accounting Standards Codification Topic 842 Leases. We recognized sub-lease income of $144,000 for the three-month period and $288,000 for the six-month period, both ended August 2, 2020. The components of lease cost and supplemental cash flow information for leases for the three-months and six-months ended August 2, 2020 were:

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 2, 2020

   

August 4, 2019

   

August 2, 2020

   

August 4, 2019

 

Operating lease cost

  $ 2,153     $ 2,123     $ 4,253     $ 4,200  

Variable lease cost

    22       -       69       -  

Short-term lease cost

    67       178       186       291  

Total operating lease cost

  $ 2,242     $ 2,301     $ 4,508     $ 4,491  
                                 

Operating cash outflows

  $ 1,931     $ 1,948     $ 3,833     $ 4,334  

 

The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of August 2, 2020 were:

 

   

August 2, 2020

   

February 2, 2020

 

Real estate

  $ 36,909     $ 38,175  

Property and equipment

    1,078       1,337  

Total operating leases right-of-use assets

  $ 37,987     $ 39,512  
                 
                 

Current portion of operating lease liabilities

  $ 6,844     $ 6,307  

Long term operating lease liabilities

    32,411       33,794  

Total operating lease liabilities

  $ 39,255     $ 40,101  

 

The weighted-average remaining lease term is 7.0 years. We used our incremental borrowing rate which is LIBOR plus 1.5% at the adoption date. The weighted-average discount rate is 2.75%. Due to the COVID-19 pandemic, we received concessions on several of our leases, including changes in lease terms and deferred rent payments. We accounted for the concessions as lease modifications and used current LIBOR plus 1.5% for those leases. The weighted-average discount rate decreased due to a decrease in LIBOR.

 

None of the modifications had a material effect on our condensed consolidated financial statements or results of operations.

 

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 August 2, 2020:

 

   

Undiscounted Future Operating Lease Payments

 

Remainder of 2020

  $ 3,947  

2021

    7,451  

2022

    5,671  

2023

    5,726  

2024

    5,280  

2025 and thereafter

    15,205  

Total lease payments

  $ 43,280  

Less: impact of discounting

    (4,025 )

Present value of lease payments

  $ 39,255  

 

As of August 2, 2020, we did not have any additional operating or finance leases that had not yet commenced.

 

 

9.     Debt

 

As of August 2, 2020, we had an aggregate $25.7 million available under the Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of August 2, 2020. There were no additional borrowings outstanding under the Existing Revolver as of August 2, 2020.

 

We currently have one unsecured term loan and one secured term loan outstanding and a revolving credit facility. The term loans are related to the Home Meridian acquisition. The full remaining principal amounts of $27.2 million on our term loans are due on February 1, 2021. We expect to enter into a new credit facility on or before the expiration of the current agreement.

 

10.    Employee Benefit Plans

 

We maintain two “frozen” retirement plans, which are paying benefits and may include active employees among the participants. We do not expect to add participants to these plans in the future. The two plans include:

 

 

a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation; and

 

the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives.

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 2,

   

August 4,

   

August 2,

   

August 4,

 
   

2020

   

2019

   

2020

   

2019

 

Net periodic benefit costs

                               

      Service cost

    32       26       64       52  

      Interest cost

    74       204       148       409  

      Actuarial loss

    84       37       169       74  

      Expected return on pension plan assets

    -       (101 )     -       (202 )

      Expected administrative expenses

    -       98       -       195  
                                 

Consolidated net periodic benefit costs

  $ 190     $ 264     $ 381     $ 528  

 

The SRIP and SERP plans are unfunded plans. In fiscal 2021, we paid $181,000 in the second quarter and $359,000 in the first half and expect to pay a total of approximately $370,000 in benefit payments from our general assets during the remainder of fiscal 2021 to fund SRIP and SERP payments.

 

11.    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 2020 Annual Report, for additional information concerning the calculation of earnings per share.

 

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:

 

   

August 2,

   

February 2,

 
   

2020

   

2020

 
                 

Restricted shares

    57       46  

RSUs and PSUs

    159       76  
      216       122  

 

The number of outstanding restricted shares increased due primarily to grants of restricted shares to a larger population of our non-executive employees as an incentive for retention and alignment of individual performance to our goals.

 

All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 2,

   

August 4,

   

August 2,

   

August 4,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income/(loss)

  $ 5,774     $ 4,160     $ (29,045 )   $ 6,147  

   Less: Unvested participating restricted stock dividends

    9       7       17       10  

            Net earnings allocated to unvested participating restricted stock

    28       15       -       18  

Earnings/(loss) available for common shareholders

    5,737       4,138       (29,062 )     6,119  
                                 

Weighted average shares outstanding for basic earnings per share

    11,824       11,787       11,811       11,778  

Dilutive effect of unvested restricted stock, RSU and PSU awards

    29       23       *       33  

   Weighted average shares outstanding for diluted earnings per share

    11,853       11,810       11,811       11,811  
                                 

Basic earnings/(loss) per share

  $ 0.49     $ 0.35     $ (2.46 )   $ 0.52  
                                 

Diluted earnings/(loss) per share

  $ 0.48     $ 0.35     $ (2.46 )   $ 0.52  

 

*Due to the fiscal 2021 year-to-date net loss, approximately 31,000 shares would have been antidilutive and are therefore excluded from the calculation of earnings per share for the twenty-six weeks ended August 2, 2020. 

 

12.    Income Taxes

 

We recorded income tax expense of $1.6 million for the fiscal 2021 second quarter compared to $1.2 million for the comparable prior year period. The effective tax rates for the fiscal 2021 and 2020 second quarters were 21.8% and 23.1%, respectively. We recorded income tax benefit of $9.3 million for the fiscal 2021 first half, of which income tax benefit of $10.7 million was recorded related to goodwill and trade name impairment charges, compared to $1.8 million income tax expense for the comparable prior year period. respectively. The effective tax rates for the first half of fiscal 2021 and 2020 were 24.2% and 22.3%.

 

An entity is required to make its best estimate of the annual effective tax rate for the full fiscal year at the end of each interim period and to use this rate to calculate its income taxes on a year-to-date basis. Under the current income tax guidance, there is an exception that when the year-to-date loss for an interim period exceeds the projected loss for the full fiscal year, the income tax benefit recognized year-to-date is limited to the amount of benefit that would be recognized if the year-to-date loss were the anticipated loss for the full fiscal year. ASU 2019-12 removes this exception and no longer limits the computed benefit. We elected to early adopt ASU 2019-12 in the first quarter of fiscal 2021 and recognized an additional $5.4 million of tax benefit that exceeds our anticipated annual income tax benefit in the fiscal 2021 first half.

 

The net unrecognized tax benefits as of August 2, 2020 and February 2, 2020, which, if recognized, would affect our effective tax rate are $3,000.

 

 

Tax years ending January 29, 2017 through February 2, 2020 remain subject to examination by federal and state taxing authorities.

 

13.    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.

 

We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2020, we updated our reportable segments as follows: domestic upholstery producers Bradington-Young, Sam Moore and Shenandoah Furniture were moved from All Other and aggregated into a new reportable segment called “Domestic Upholstery.” All Other now consists of H Contract and Lifestyle Brands. Lifestyle Brands is a business in its start-up phase targeted at the interior design channel. The Hooker Branded and Home Meridian segments were unchanged. Therefore, 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 and Shenandoah Furniture; and

 

All Other, consisting of H Contract and Lifestyle Brands, a new business started in late fiscal 2019. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

 

 

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

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 2, 2020

           

August 4, 2019

           

August 2, 2020

           

August 4, 2019

         
           

% Net

           

% Net

           

% Net

           

% Net

 

Net Sales

         

Sales

           

Sales

           

Sales

           

Sales

 

   Hooker Branded

  $ 38,820       29.7 %   $ 39,405       25.9 %   $ 65,982       28.1 %   $ 79,004       27.5 %

   Home Meridian

    71,168       54.6 %     87,188       57.3 %     128,833       54.7 %     154,818       53.8 %

   Domestic Upholstery

    17,507       13.4 %     22,663       14.8 %     34,290       14.6 %     47,987       16.7 %

   All Other

    3,042       2.3 %     2,992       2.0 %     6,029       2.6 %     5,957       2.0 %

Consolidated

  $ 130,537       100.0 %   $ 152,248       100.0 %   $ 235,134       100.0 %   $ 287,766       100.0 %
                                                                 

Gross Profit

                                                               

   Hooker Branded

  $ 12,443       32.1 %   $ 11,820       30.0 %   $ 20,448       31.0 %   $ 24,376       30.9 %

   Home Meridian

    10,510       14.8 %     10,951       12.6 %     17,320       13.4 %     16,854       10.9 %

   Domestic Upholstery

    3,021       17.3 %     4,917       21.7 %     5,804       16.9 %     10,919       22.8 %

   All Other

    1,026       33.7 %     1,138       38.0 %     2,082       34.5 %     2,194       36.8 %

Consolidated

  $ 27,000       20.7 %   $ 28,826       18.9 %   $ 45,654       19.4 %   $ 54,343       18.9 %
                                                                 

Operating Income/(Loss)

                                                               

   Hooker Branded

  $ 6,090       15.7 %   $ 4,088       10.4 %   $ 7,423       11.2 %   $ 9,265       11.7 %

   Home Meridian

    1,083       1.5 %     (66 )     -0.1 %     (29,265 )     -22.7 %     (5,059 )     -3.3 %

   Domestic Upholstery

    (10 )     -0.1 %     1,260       5.6 %     (16,820 )     -49.1 %     3,552       7.4 %

   All Other

    349       11.5 %     486       16.3 %     736       12.2 %     915       15.4 %

Consolidated

  $ 7,512       5.8 %   $ 5,768       3.8 %   $ (37,926 )     -16.1 %   $ 8,673       3.0 %
                                                                 

Capital Expenditures

                                                               

   Hooker Branded

  $ 29             $ 386             $ 82             $ 511          

   Home Meridian

    20               57               108               173          

   Domestic Upholstery

    54               1,680               294               2,965          

   All Other

    -               10               -               10          

Consolidated

  $ 103             $ 2,133             $ 484             $ 3,659          
                                                                 

Depreciation & Amortization

                                                               

   Hooker Branded

  $ 445             $ 490             $ 894             $ 982          

   Home Meridian

    533               547               1,068               1,078          

   Domestic Upholstery

    700               715               1,397               1,404          

   All Other

    3               3               6               7          

Consolidated

  $ 1,681             $ 1,755             $ 3,365             $ 3,471          

 

   

As of August 2,

           

As of February 2,

         
   

2020

   

%Total

   

2020

   

%Total

 

Identifiable Assets

         

Assets

           

Assets

 

   Hooker Branded

  $ 189,816       57.6 %   $ 144,112       45.0 %

   Home Meridian

    93,216       28.3 %     138,313       43.2 %

   Domestic Upholstery

    45,485       13.7 %     36,085       11.3 %

   All Other

    1,242       0.4 %     1,769       0.5 %

Consolidated

  $ 329,759       100.0 %   $ 320,279       100.0 %

   Consolidated Goodwill and Intangibles

    27,919               73,429          

Total Consolidated Assets

  $ 357,678             $ 393,708          

 

 

Sales by product type are as follows:

 

   

Net Sales (in thousands)

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 2, 2020

   

%Total

   

August 4, 2019

   

%Total

   

August 2, 2020

   

%Total

   

August 4, 2019

   

%Total

 

Casegoods

  $ 79,181       61 %   $ 98,488       65 %   $ 142,373       61 %   $ 182,954       64 %

Upholstery

    51,356       39 %     53,760       35 %     92,761       39 %     104,812       36 %
    $ 130,537       100 %   $ 152,248       100 %   $ 235,134       100 %   $ 287,766       100 %

 

14.     Subsequent Events

 

Dividends

 

On September 2, 2020, our board of directors declared a quarterly cash dividend of $0.16 per share, payable on September 30, 2020 to shareholders of record at September 18, 2020.

 

 

 

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 Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery Segment including Bradington-Young, Sam Moore, and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands.

 

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

 

Forward-Looking Statements

 

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

 

 

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

 

 

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

 

 

risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, ocean freight costs and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders;

 

 

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;

 

 

disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;

 

 

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;

 

 

 

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

 

 

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 specifically related to the concentrations of a material part of our sales and accounts receivable in only a few 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;

 

 

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

 

 

higher than expected employee medical and workers’ compensation costs that may increase the cost of our high-deductible healthcare and workers compensation plans;

 

 

risks related to our other defined benefit plans;

 

 

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

 

 

capital requirements and costs, including the servicing of our floating-rate term loans;

 

 

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 due to, among other things, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit.

 

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

 

Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 2020 annual report on Form 10-K (the “2020 Annual Report”).

 

 

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

 

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2021 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 4, 2020, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began February 3, 2020, which both ended August 2, 2020. This report discusses our results of operations for this period compared to the 2020 fiscal year thirteen-week period that began May 6, 2019 and the twenty-six week period that began February 4, 2019, which both ended August 4, 2019; and our financial condition as of August 2, 2020 compared to February 2, 2020.

 

References in this report to:

 

 

the 2021 fiscal year and comparable terminology mean the fiscal year that began February 3, 2020 and will end January 31, 2021; and

 

 

the 2020 fiscal year and comparable terminology mean the fiscal year that began February 4, 2019 and ended February 2, 2020.

 

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

 

In the discussion below 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. However, except for custom or proprietary products, orders may be cancelled before shipment. If the items ordered are in stock and the customer has requested immediate delivery, we generally ship products in about 7 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. For the Hooker Branded segment, Domestic Upholstery segment and All Other, we consider unshipped order 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 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, club 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.

 

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 2020 Annual Report. Our 2020 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 2020 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.

 

Overview 

 

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of case goods (wooden and metal furniture), leather-and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2019 shipments to U.S. retailers, according to a 2020 survey by a leading trade publication.

 

 

We believe that consumer tastes and buying habits are evolving at a rapid pace and we continue to change to meet these demands.

 

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

 

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and hospitality furniture. While growing faster than industry average, these channels tend to operate at lower margins.

 

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

 

COVID-19

 

During the fiscal 2021 first quarter, COVID-19 was recognized as a global pandemic. Federal, state and local governments in the U.S and elsewhere have imposed restrictions on travel and business operations and have advised or required individuals to limit or eliminate time outside of their homes. Temporary closures of certain businesses were also ordered in certain jurisdictions and other businesses temporarily closed voluntarily. Consequently, the COVID-19 outbreak severely restricted the level of economic activity in the U.S. and around the world and demand for our products plummeted, and orders decreased 40.5% in the fiscal 2021 first quarter as compared to the same prior-year period.

 

To address the financial impact of the virus, we delayed non-essential capital spending and implemented other cost-cutting measures, including abbreviated shifts, furloughs, the temporary closure of our domestic manufacturing plants, staff reductions, temporary fee reductions for our Board of Directors, temporary salary reductions for officers and other managers, rationalizing current import purchase orders and collaborating with our vendors to cut costs and extend payment terms where possible.

 

While we continue to spend cautiously, business has improved steadily beginning in May 2020 and we’ve seen greatly increased demand for our products compared to the prior-year period and the first quarter of fiscal 2021. Cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown partially drove the steep declines in the fiscal 2021 first quarter. Fiscal 2021 second quarter orders increased nearly 24% compared to the same prior-year period and year-to-date orders as of the end of the fiscal 2021 second quarter were down only 6.5% as compared to the same prior-year period, despite abysmal first quarter orders. (The favorable trend continued into fiscal August as orders increased over 50% which brought year-to-date orders up 3% as compared to the same prior-year period.) Consequently, during the 2021 second quarter, our domestic manufacturing plants reopened and are currently operating near capacity. Most furloughs of our associates have ended, and temporary salary and fee reductions have been rescinded. We are in the process of re-building inventory to meet increased customer demand.

 

We monitor information on COVID-19 from the Centers for Disease Control and Prevention (“CDC”) and believe we are adhering to their recommendations regarding the health and safety of our personnel. To address the potential human impact of the virus, most of our administrative staff are still telecommuting. For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have implemented social distancing and mask policies, instituted daily temperature checks and have stepped-up facility cleaning at each location. Non-essential domestic travel for our employees has ceased and international travel has been prohibited outright. Testing and treatment for COVID-19 is 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. In addition, for employees diagnosed with the virus (and those associates with another diagnosed person or persons in their household) we are offering work-from-home arrangements where feasible and are working to accommodate associates with child-care issues related to school or day-care closures and anticipated re-openings.

 

 

Executive Summary-Results of Operations

 

We began to recover from the depths of the initial COVID-19 crisis in the fiscal 2021 second quarter. Our results were greatly improved as compared to the first quarter of fiscal 2021, which was our worst quarterly performance recorded in over a decade. While second quarter net sales were lower than the prior year-quarter due to the lagging effects of the crisis, net income was up 39% and quarterly earnings per share was $0.48 as compared to $0.35 in the prior year second quarter. Fiscal 2021 first half results clearly show the adverse economic effects brought on by the initial severity of COVID-19 crisis conditions, which caused demand for our products to plummet. First half sales were down over 18% with nearly 60% of the consolidated net sales decrease occurring in the first quarter of fiscal 2021. The net loss reported in the first half was due principally to $44.3 million non-cash impairment charges on our goodwill and trade names ($33.7 million net of tax), driven largely by our depressed stock price which occurred at the depth of the crisis and which was a primary input in the valuation analysis that necessitated the write-off. First-half loss per share was $2.46 as compared to earnings per share of $0.52 in the comparable period.

 

Our fiscal 2021 second quarter and first-half performance is discussed in greater detail below under “Review” and “Results of Operations.”

 

Review

 

Although the COVID-19 pandemic continued to impact current economic conditions and our business, we are pleased to report encouraging results for the second quarter of fiscal 2021. Consolidated operating income increased by $1.7 million or 30.2% as compared to the prior year second quarter. The Home Meridian segment reported $1.1 million in operating income compared to a small operating loss in the prior year second quarter. Our Hooker Branded segment reported $6.1 million in operating income, with an increased operating margin of 15.7% of net sales compared to 10.4% net sales in the comparable prior-year period. The Domestic Upholstery segment reported essentially break-even operating results for the second quarter despite decreased net sales and inefficiencies from operating at reduced production volumes and lower capacities, which is a much better performance than initially expected under crisis conditions.