MARTINSVILLE, Va. – Hooker Furniture Corp. reported a 7.8% decrease in net sales and a 58% decline in net income for its fiscal third quarter, resulting largely from the loss of a single major customer in its Home Meridian segment.
The company reported net sales of $158.2 million and net income of $3.9 million, or 33 cents per diluted share for the quarter ended Nov. 3. This compares with net sales of $171.5 million and net income of $9.3 million in the third quarter of last year. Earnings per share were 79 cents in the third quarter of last year.
For the first nine months of the year, the company reported sales of $445.9 million, down 7.7%, or $37.1 million from $483 million in the first nine months of last year. Net income totaled $10.06 million, down from $25.2 million in the same period last year. Earnings per share in the first nine months of this year were 85 cents, compared to $2.14 in the same period last year.
“Our lower third quarter sales and earnings were impacted by significantly higher chargebacks and reduced volume from a single large retail customer at Home Meridian,” said Paul B Toms, chairman and CEO. “The lingering effects of 25% tariffs on finished goods and component parts imported from China, along with spotty retail demand that has continued through the first nine months of the year, also negatively affected our performance.”
The company said the sales decline with the same single major customer represented 70% or $6.4 million of a $9 million volume reduction at the Home Meridian segment. It also noted that about $3 million in excess chargebacks from the same retailer drove a $4 million operating loss for the quarter in the segment, which compares with operating income of about $5 million at Home Meridian in the same quarter last year.
The company noted that while sales in its Hooker branded and “All Other” divisions – which include domestically produced upholstery divisions Bradington-Young, Shenandoah and Sam Moore – were down 6% and 4.3% respectively, gross profits and operating income as a percentage of net sales improved compared with last year’s third quarter.
“In total, given the challenging retail environment and the continued impact of tariffs, we were gratified to improve profitability in the Hooker Branded segment and All Other,” Toms said, adding that the Hooker Branded segment achieved a 190-basis point improvement in operating income margin and the All Other achieved a 390-basis point improvement compared to last year’s third quarter.
Toms also noted that the company built its cash position by more than $13 million since the end of last fiscal year and also reduced inventories including discontinued and overstocked items “as we adjusted inventory levels to correspond with our lower incoming order and sales rates.”
Toms said the impact of 25% tariffs on imported furniture from China enacted this summer has generally resulted in a 10% price increase on the portion of the company’s product line imported from China in the Hooker Branded segment, which in turn suppressed retail demand. He added that Home Meridian has had a harder time raising prices in the short term but noted, “Our sourcing transitions to non-tariff countries are on schedule. Company-wide, we expect to reduce the portion of our overall product line imported from China from 40% at the end of our most recent fiscal year to approximately 22% by this fiscal year, with further progress expected in fiscal 2021.”
The earnings report also noted that net sales in the Hooker Branded segment fell $2.8 million, or 6%, in the fiscal third quarter compared with the prior-year third quarter. Hooker case goods in particular experienced lower incoming orders and reduced sales volume driven by lower consumer demand and soft home furnishings retail business conditions. The volume loss was mitigated by higher average selling prices as the division adjusted pricing to mitigate increased product costs and tariffs.
In the upholstery segment, incoming orders were up 10% year-over-year, due largely to a broader product offering including more sofas and sectionals, which the company said have higher average selling prices.
During the third quarter, Home Meridian’s sales fell $9.2 million to $85.8 million, a 9.7% drop compared to the same period last year.
“A $6.4 million sales decline with the single large retailer referenced earlier, along with about $3.3 million in excess chargebacks from the same large retailer this quarter and margin deterioration due to tariffs and increased freight costs, especially on existing programs with large retailers, are the primary reasons for the decrease,” said Doug Townsend, co-president of Home Meridian. “Continued softness at retail across most sales channels and business disruptions from tariffs also contributed to the sales decline.”
He added that year to date, sales are down 9.8%, the majority of which is due to the loss of the same large customer.
Orders in the quarter were down 9.2% compared to the prior year, and backlog was down 10.7% compared to last year.
“Looking forward to next quarter, we anticipate shipments to be down with the single large retailer by approximately $20 million compared to fiscal 2019 fourth quarter,” Townsend said. “However, on a positive note, we expect the balance of shipments to other customers to improve during the quarter and a significant improvement in overall segment profitability. Longer term, we believe the Home Meridian segment is poised to turn the corner towards far better performance beginning next year.
“Both Pulaski Furniture and Samuel Lawrence Furniture gained new product placements with multiple mega accounts at the recent International High Point Market, with the new SLF mixing warehouse instrumental in gaining new placements with smaller retailers that were previously unable to buy large mixed product assortments from HMI via direct container.”
The All Other divisions referenced earlier reported a net sales decrease of $1.3 million, down 4.3% from $30 million in last year’s third quarter to $28.7 million in the fiscal 2020 third quarter. Lower sales resulted from a sales decline in two out of three of the domestic upholstery manufacturing divisions due to soft retail conditions and partially offset by continued growth at H Contract, which specializes in furnishings for senior living and retirement facilities.
The company added that the All Other segment’s gross profit increased in absolute terms and as a percentage of net sales due to lower materials costs and better cost containment. The segment reported operating income margin of 9.6% and 8.7% for the fiscal third quarter and first nine months, respectively.
The company also ended the fiscal 2020 third quarter with $24.5 million in cash and cash equivalents and $31.1 million in acquisition-related debt. It also generated $26.6 million in cash from operating activities and $1.4 million from proceeds received on a note receivable from the sale of a former distribution facility. It also paid $5.3 million in cash dividends to its shareholders, $4.7 million for capital expenditures to expand manufacturing facilities and $4.4 million towards its long-term loans.
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