EDGAR 10-K Filing

Company CIK: 1077688
Filing Year: 2022
Filename: 1077688_10-K_2022_0001185185-22-000451.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Hooker Furnishings Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture, fabric-upholstered furniture and outdoor 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 2020 shipments to U.S. retailers, according to a 2021 survey by a leading trade publication.
Recent Sunset Acquisition
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 $23.5 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 is a leading West Coast-based manufacturer of outdoor furniture with its headquarters in Vista, California. The transaction enables us to immediately gain market share in the growing outdoor furniture segment of the industry with one of the most respected brands in the category. For more information regarding the Sunset Acquisition, please see Note 20 Subsequent Events to our Consolidated Financial Statements on page.
Reportable Segments
Furniture sales account for all of our net sales. For financial reporting purposes and as described further below, we are organized into three reportable segments, Hooker Branded, Home Meridian and Domestic Upholstery. Our other businesses are aggregated into “All Other”. See Note 16 -Segment Information to our Consolidated Financial Statements for additional financial information regarding our operating segments.
Products
Our product lines cover the design spectrum of residential furniture: traditional, contemporary and transitional. Further, our product lines are in the “good”, “better” and “best” product categories, which carry medium and upper price points. Hooker Furnishings Corporation consists of the following three operating segments and “All Other”:
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The Hooker Branded segment which includes two businesses:
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Hooker Casegoods, which covers a wide range of design categories and includes home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand; and
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Hooker Upholstery, imported upholstered furniture targeted at the upper-medium price-range.
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The Home Meridian segment which includes the following brands/marketing units:
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Accentrics Home, home furnishings centered around an eclectic mix of unique pieces and materials that offer a fresh take on home fashion;
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Pulaski Furniture, casegoods covering the complete design spectrum in a wide range of bedroom, dining room, accent and display cabinets at medium price points;
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Samuel Lawrence Furniture, value-conscious offerings in bedroom, dining room, home office and youth furnishings;
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Prime Resources International, value-conscious imported leather motion upholstery;
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Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings targeted toward four and five-star hotels; and
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HMidea, ready-to-assemble (RTA) furniture category and Clubs channel in its wind-down phase. Due to low profitability, we began exiting the RTA furniture category and warehouse clubs (Clubs) channel in fiscal 2022.
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The Domestic Upholstery segment which includes the following operations:
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Bradington-Young, a seating specialist in upscale motion and stationary leather furniture;
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Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization; and
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Shenandoah Furniture, an upscale upholstered furniture business specializing in private label sectionals, modulars, sofas, chairs, ottomans, benches, beds and dining chairs in the upper-medium price points for lifestyle specialty retailers.
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All Other consisting of:
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The H Contract product line which supplies upholstered seating and casegoods to upscale senior living and assisted living facilities through designers, design firms, industry dealers and distributors that service that market; and
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Lifestyle Brands, a business started in fiscal 2019 targeted at the interior designer channel.
While we are still analyzing Sunset West’s operations and the requirements of ASC 280: Segment Reporting, we anticipate Sunset West will be included in the Domestic Upholstery segment.
Sourcing
Imported Products
We have sourced products from foreign manufacturers for over thirty years, predominantly from Asia. Imported casegoods and upholstered furniture together accounted for approximately 82% in fiscal 2022 and 83% of our net sales in both fiscal 2021 and fiscal 2020.
Our imported furniture business is subject to inherent risks in importing products manufactured abroad, including, but not limited to, supply disruptions and delays due to a variety of reasons, including our foreign suppliers’ factory capacities, factory shutdowns, and delays caused by the COVID-19 pandemic and possible similar health-related issues, much higher ocean freight costs, container and vessel space availability, currency exchange rate fluctuations, economic and political developments and instability, as well as the laws, policies and actions of foreign governments and the United States. These laws, policies and actions may include regulations affecting trade or the application of tariffs, much like the 25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China since fiscal 2019. In response to these tariffs, we began re-sourcing products from non-tariff countries, primarily Vietnam, and to a lesser extent Malaysia, and reduced our Chinese imports to less than 15% by the end of fiscal 2022.
Because of the large number and diverse nature of the foreign suppliers from which we source our imported products, we have flexibility in the sourcing of products among any particular supplier or country. However, a disruption in our supply chain from a major supplier or from Vietnam, China, or Malaysia in general, could significantly compromise our ability to fill customer orders for products manufactured at that factory or in that country. Supply disruptions and delays on selected items could occur for six months or longer. If we were to be unsuccessful in obtaining those products from other sources or at a comparable cost, a disruption in our supply chain from a major furniture supplier, or from Vietnam, China, or Malaysia in general, could decrease our sales, earnings and liquidity.
In the summer of calendar 2021, many of our Vietnam and Malaysia suppliers were temporarily closed or operating at reduced capacity due to a COVID-19-related lockdown and did not fully resume until after the Lunar New Year holidays in calendar 2022. Slower-than expected re-openings and delays at the factories, along with constrained container and steamship availability, negatively impacted shipments and sales at our Home Meridian segment and the inventory levels at our Hooker Branded segment, which resulted in out-of-stock issues and decreased sales. Additionally, port congestion has led to delays in unloading furniture once it reaches U.S. ports. All of these factors, combined with the production halt that regularly occurs at the Lunar New Year holidays, have significantly lengthened the time it takes to ship and receive goods and our order backlog is at historic levels.
Given the sourcing capacity available in Vietnam, China, Malaysia and other low-cost producing countries, we currently believe the risks from these potential supply disruptions are manageable; however, we have limited insight into the extent to which our business could be further impacted by COVID-19 and there are many unknowns including, how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. See Item 1A, “Risk Factors” for additional information on our risks related to imported products.
For imported products, we generally negotiate firm pricing with foreign suppliers in U.S. Dollars, typically for a term of at least one year. However, under certain circumstances, we may re-negotiate pricings during the year. During fiscal 2022, due to the global supply chain crisis and inflation pressure in Asia and the U.S., we were forced to re-negotiate prices multiple times during the year. We accept the exposure to exchange rate movements during these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effects of any price increases from suppliers in the prices we charge for imported products. However, these price changes could adversely impact sales volume and profit margin during the affected periods. Conversely, a relative increase in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could decrease the cost of imported products and favorably impact net sales and profit margins during the affected period. However, due to other factors, such as inflationary pressure in China and other countries, we may not fully realize savings when exchange rates fall. Therefore, lower exchange rates may only have a tempering effect on future price increases by merely delaying cost increases on imported products. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”
Raw Materials
Significant materials used in manufacturing our domestic upholstered furniture products include leather, fabric, foam, wooden and metal frames and electronic mechanisms. Most of the leather is imported from Italy, South America and China, and is purchased as full hides and cut and sewn in our facilities or is purchased as pre-cut and sewn kits processed by our vendors to our pattern specifications. We believe our sources for raw materials are adequate and that we are not dependent on any one supplier. Our five largest domestic upholstery suppliers accounted for 32% of our raw materials purchases for domestic upholstered furniture manufacturing operations in fiscal 2022. In the first half of fiscal 2022, we experienced shortages of foam which had a short-term but material impact on production levels, sales volume and operating efficiencies for that same period. Should disruptions with these suppliers occur, other than macro disruptions affecting all such suppliers, we believe we could successfully source these products from other suppliers without significant disruption to our operations. For example, as of the date of this report, our SFI division is in the process of re-sourcing Russian Birch plywood as a result of possible tariffs and lack of availability due to the current conflict in Ukraine.
Customers
Our home furnishings products are sold through a variety of retailers including independent furniture stores, department stores, mass merchants, national chains, catalog merchants, interior designers, e-commerce retailers and warehouse clubs. No single customer accounted for more than 8% of our consolidated sales in fiscal 2022. Our top five customers accounted for approximately 26% of our fiscal 2022 consolidated sales. The loss of any one or more of these customers would have a material adverse impact on our business. Roughly 2% of our sales in fiscal 2022 were to international customers. We define sales to international customers as sales to customers outside of the United States and Canada since our independent domestic sales force services both countries.
Competition
The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers and importers, none of which dominates the market in our price points. While the markets in which we compete include a large number of relatively small and medium-sized manufacturers, certain competitors have substantially greater sales volumes and financial resources than we do. U.S. imports of furniture produced overseas, such as from Vietnam and China, have stabilized in recent years. The primary competitive factors for home furnishings in our price points include price, style, availability, service, quality and durability. Competitive factors in the hospitality and contract furniture markets include product value and utility, lead times, on-time delivery and the ability to respond to requests for special and non-standard products. We believe our design capabilities, ability to import and/or manufacture upholstered furniture, product value, longstanding customer and supplier relationships, significant sales, distribution and inventory capabilities, ease of ordering, financial strength, experienced management and customer support are significant competitive advantages.
Warehousing and Distribution
We distribute furniture to retailers directly from factories and warehouses in Asia via our container direct programs and from our distribution centers in Virginia, North Carolina, Georgia and California, and in limited cases, from customer operated warehouses in strategic locations. We are in the process of consolidating our Home Meridian segment’s North Carolina warehousing operations into an 800,000 square foot distribution center in Liberty County, Georgia, which we occupied in the Fall of 2021. We believe that this strategically located facility near the Port of Savannah and major interstate highways will allow us to more efficiently service our customers, reduce transportation costs and better position us for future growth.
Working Capital Practices
Inventory: We generally import casegoods inventory and certain upholstery items in amounts that enable us to meet the delivery requirements of our customers, our internal in-stock goals and minimum purchase requirements from our sourcing partners.
In the summer of calendar 2021, factories in Vietnam and Malaysia were temporarily closed due to COVID-related lockdown. Slower than expected re-openings and factory delays led to low inventory receipts in the second half of the year in Hooker Branded segment, which ships the majority of its products from U.S. warehouses to customers. Additionally, container availability and steamship capacity continued to be challenging. We expect these conditions to improve as we move through the second quarter of fiscal 2023.
Most of the Hooker Branded segment’s products are shipped from our US warehouses, while a large percentage of products sold at our Home Meridian segment are not warehoused by us but ship directly to our customers and thus not included as inventory. However, Home Meridian’s warehoused inventory increased $7 million as compared to the end of the prior fiscal year, due primarily to increased inventory in Home Meridian’s Accentrics Home division. Generally, our domestic upholstery segment products are made to order and shipped shortly after they are produced; however, due to the domestic truck driver shortage, shipments of this segment’s finished goods slowed somewhat in fiscal 2022. We do not carry significant amounts of hospitality products, as most of these products are built to order and are shipped shortly after their manufacture.
Accounts receivable: Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, which consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. For qualified customers, we offer payment terms, generally requiring payment 30 days from shipment. However, we may offer extended payment terms in certain circumstances, including to promote sales of our product. We purchase accounts receivable insurance on certain customers if their risk profile warrants it and the insurance is available. Due to the highly customized nature of our hospitality products, we typically require a 50% deposit with order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer.
Accounts payable: Payment for our imported products warehoused first in Asia is due ten to fourteen days after our quality audit inspections are complete and the vendor invoice is presented. Payment for goods which are shipped to our US warehouses or container direct to our customers FOB Origin (free on board origin, which means the buyer is responsible for the costs and liability of the freight during transport) is generally due upon proof of lading onto a US-bound vessel and invoice presentation; however, payment terms, depending on the supplier, can stretch up to 45 days from invoice date. Payment terms for domestic raw materials and non-inventory related charges vary but are generally 30 days from invoice date.
Order Backlog
At January 30, 2022, our backlog of unshipped orders was as follows:
Order Backlog
(Dollars in 000s)
January 30, 2022
January 31, 2021
Reporting Segment
Dollars
Weeks
Dollars
Weeks
Hooker Branded
$ 68,925
17.9
$ 34,776
11.1
Home Meridian
167,968
31.3
180,188
33.2
Domestic Upholstery
67,068
34.1
30,271
18.8
All Other
6,148
27.2
2,845
12.8
Consolidated
$ 310,109
27.2
$ 248,080
23.9
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. They are discussed in greater detail below and are essential to understanding our prospects.
We are very encouraged by the current historic levels of orders and backlogs; however, due to the current supply chain issues including the lack and cost of shipping containers and vessel space and limited overseas vendor capacity, orders are not converting to shipments as quickly as would be expected compared to the pre-pandemic environment and we expect that to continue at some level through at least the fiscal 2023 second quarter. The current logistics challenges are slowing order fulfillment, particularly for Home Meridian whose average order sizes tend to be larger and more project-based versus orders for the traditional Hooker businesses, which tend to be smaller and more predictable. Additionally, Home Meridian orders are programmed out and scheduled for delivery to its larger accounts further into the future than usual, which is also contributing to its large backlog.
At the end of fiscal 2022, order backlog increased $62 million or 25% as compared to the prior year end due largely to increased incoming orders in the Hooker Branded and Domestic Upholstery segments, and to a lesser degree, continued supply chain disruptions and delays affecting those segments.
Seasonality
Generally, sales in our fiscal first quarter are lower than our other fiscal quarters due to the post-Chinese New Year shipping lag and sales in our fiscal fourth quarter are generally stronger due to the pre-Chinese New Year surge in shipments from Asia.
Environmental Matters
As a part of our business operations, our manufacturing sites generate both non-hazardous and hazardous wastes; the treatment, storage, transportation and disposal of which are subject to various local, state and federal laws relating to environmental protection. Our policy is to record monitoring commitments and environmental liabilities when expenses are probable and can be reasonably estimated. The costs associated with our environmental responsibilities, compliance with federal, state and local laws regulating the discharge of materials into the environment, or costs otherwise relating to the protection of the environment, have not had and are not expected to have a material effect on our financial position, results of operations, capital expenditures or competitive position.
We are actively working to refine our environmental stewardship based on current best practices, shareholder expectations and regulatory developments. Our environmental steering committee meets at least monthly to discuss the development and implementation of environmental initiatives and our Board is updated at least quarterly on those initiatives. We note the following ongoing activities and new developments:
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won the Sustainable Furnishings Council Green Ribbon Award for our Octavius Cocktail Table for design, aesthetics, sustainability, and ingenuity;
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became EFEC (“Enhancing Furniture’s Environmental Culture”) certified at Hooker Branded, Sam Moore, and Bradington-Young facilities;
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began using FSC (“Forest Stewardship Council”) compliant paper products and replaced Styrofoam packing with recyclable material for repacking in all distribution centers;
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switched to LED lighting and cleaner-operating electric forklifts in many locations including our new distribution center in Georgia;
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recycled, reused or repurposed substantially all of our pallets;
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repurposed wood chips and sawdust from Bradington-Young and the Shenandoah Valdese and Mount Airy facilities for use in the farming industry;
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disposed of eWaste using an EPA compliant eWaste recycling firm in all divisions; and
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provided monetary support to the Sustainable Furnishings Council, the Arbor Day Foundation, the Eco-Council of the Dan River basin, and Foothills Conservancy to support various projects including reforestation in Florida and clean-up efforts in local counties.
Human Capital Resources
As of January 30, 2022, we had 1,294 full-time employees, of which 242 were employed in our Hooker Branded segment, 371 were employed in our Home Meridian segment, 674 were employed in our Domestic Upholstery segment and 7 were employed in All Other. 1,091 employees were located in the United States and 203 were located in Asia. None of our employees are represented by a labor union. We consider our relations with our employees to be good.
We are committed to creating a diverse, equitable and inclusive space for all our employees, customers and retail partners. The core values of our company include integrity, caring and inclusivity that affirms every individual. Our leadership team is committed to fostering an environment where everyone is welcomed, respected, listened to and valued for their unique contributions to the organization, and to providing a work environment that is free from all forms of harassment, discrimination and inequality. We recruit, employ, train, promote and compensate our employees without regard to race, ethnicity, age, gender, gender identity, religion, national origin, citizenship, marital status, veteran’s status or disability. All facilities have established human resource departments with formal hiring processes and controls in place to ensure ethical and fair hiring practices. The action steps that we have taken recently or are working on currently include:
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formed a Diversity, Equity, and Inclusion (DEI) leadership team with over 15 senior executives representing all divisions of the Company meeting on a regular basis to guide both short- and long-term goals in addition to creating the overall strategic direction of DEI at the Company;
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formed an employee-led Diversity Council consisting of a diverse group of employees;
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partner with an outside DEI consultant to assist in crafting a plan to embed DEI culturally;
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provide diversity, equity and inclusion training for all employees; and
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formalized our Occupational Health and Safety Policy.
We compensate employees competitively relative to the industry and local labor market, and in accordance with all applicable federal, state and local wage, work hour, overtime and benefit laws. In addition, we offer competitive benefits to support the well-being of all employees including health insurance, disability and life insurance, wellness credits, paid time off, a 401(k) savings plan with company-match, an employee assistance program, and educational stipends to children and spouses of our employees (excluding family members of officers and board directors of the Company). Additionally, need and merit-based renewable undergraduate college scholarships are available through the Hooker Educational Scholarship Fund for children and spouses of full-time employees, excluding family members of current and former officers and board directors of the Company.
Patents and Trademarks
The Hooker Furnishings, Hooker Furniture, Bradington-Young, Sam Moore, Pulaski Furniture, Samuel Lawrence Furniture, Samuel Lawrence Hospitality, Room Gear, Right2Home, Home Meridian International, Prime Resources International, Accentrics Home, HMidea, Shenandoah, H Contract, Homeware, MARQ and Sunset West trade names represent many years of continued business. We believe these trade names are well-recognized and associated with quality and service in the furnishings industry. We also own a number of patents and trademarks, both domestically and internationally, none of which is considered to be material.
Governmental Regulations
Our company is subject to U.S. federal, state and local laws and regulations in the areas of safety, health, employment and environmental pollution controls, as well as U.S. and international trade laws and regulations. We are also subject to foreign laws and regulations. In the past, compliance with these laws and regulations has not had any material effect on our earnings, capital expenditures, or competitive position in excess of those affecting others in our industry; however, the effect of compliance in the future cannot be predicted. We believe we are in material compliance with applicable U.S. and international laws and regulations.
Additional Information
You may visit us online at hookerfurnishings.com, hookerfurniture.com, bradington-young.com, sammoore.com, homemeridian.com, pulaskifurniture.com, slh-co.com, hcontractfurniture.com and sunsetwestusa.com. We make available, free of charge through our Hooker Furnishings website hookerfurnishings.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other documents as soon as practical after they are filed with or furnished to the Securities and Exchange Commission. A free copy of our annual report on Form 10-K may also be obtained by contacting Earl Armstrong, Corporate Controller and Secretary at earmstrong@hookerfurnishings.com or by calling 276-632-2133.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks. The risk factors discussed below should be considered in conjunction with the other information contained in this annual report on Form 10-K. If any of these risks actually materialize, our business, results of operations, financial condition or future prospects could be negatively impacted. These risks are not the only ones we face. There may be additional risks that are presently unknown to us or that we currently believe to be immaterial that could affect us.
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Risks related to COVID-19 and future pandemics
The impact of COVID-19 and future pandemics could adversely affect our business, results of operations, financial condition and liquidity, and stock price.
The COVID-19 pandemic is a serious threat to health and economic well-being affecting our customers, our associates and our suppliers. Home furnishings purchases are largely postponable and heavily influenced by consumer confidence and most of our customers’ businesses are classified as non-essential. Consequently, traffic to our customers’ stores and demand for our products significantly decreased at the initial height of the pandemic, our sales deteriorated and our earnings were negatively impacted. COVID-19 also impacted our Asian supply chain, particularly as a result of mandatory shutdowns in locations where our products are manufactured, and we experienced out-of-stocks and lost sales as a result. Additionally, the demand surge that occurred after the initial height of the pandemic continues to cause supplier capacity restraints, shipping container and steamship space shortages. These logistics issues have increased costs, led to out-of-stocks and adversely affected our sales and earnings. Our sales order backlog is at historic levels due to these factors, and we cannot assure that we will be able to convert this backlog into sales at a normal pace or at all. We face the risk that current consumer demand could soften, or our customers could go elsewhere for products if our competitors are able to solve the current issues and we cannot. Alternatively, solving these issues may significantly diminish our profit margins if we are unable to offset these additional costs.
The extent of the continued impact of COVID-19 on our business and financial results depends on future developments, including the emergence of new and different strains of the virus and the effectiveness of vaccinations and other public health measures. Other pandemics are also possible with similar or worse public health outcomes.
The sweeping nature of pandemics makes it extremely difficult to predict how our business and operations could be affected in the longer run. Any of the foregoing factors, or other cascading effects of this or other pandemics, could materially increase our costs, negatively impact our sales and damage the company’s results of operations and its liquidity, possibly to a significant degree. The duration of any such impacts cannot be predicted.
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Risks related to our business and industry
We rely on offshore sourcing from Vietnam, China and Malaysia for most of our sales. Consequently:
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A disruption in supply from Vietnam, China or Malaysia or from our most significant suppliers in Asia could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.
In fiscal 2022, imported products sourced from Vietnam and China accounted for 88% of our import purchases and our top five suppliers in Vietnam and China accounted for 42% of our fiscal 2022 import purchases. Our supply chain could be adversely impacted by the uncertainties of health concerns and governmental restrictions. A disruption in our supply chain, or from Vietnam, China or Malaysia in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. For example, in the summer of calendar 2021, our suppliers in Vietnam and Malaysia were temporarily closed or operated at substantially reduced levels due to a COVID-related lockdown. We faced supply chain constraints including but not limited to slower-than-expected re-openings, capacity limitations and production delays at some of our suppliers, along with the reduced shipping container and ocean vessel space availability. Home Meridian segment shipping and sales were immediately impacted as the majority of its business is container direct customers. In the fourth quarter of fiscal 2022, Hooker Branded segment sales were also impacted due to low inventory receipts in the second half of fiscal 2022 which consequently resulted in out-of-stocks. In some cases, we were able to provide substitutions using inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales. Supply disruptions and delays on selected items could occur for six months or longer before the impact of remedial measures would be reflected in our results. If we are unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam, China or Malaysia in general, could adversely affect our sales, earnings, financial condition and liquidity.
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Increased transportation costs, including freight costs on imported products could decrease earnings and liquidity.
Transportation costs, including ocean freight costs and domestic trucking costs, on imported products currently represent a significant portion of the cost of those products. Transportation costs on our imported products are affected by a myriad of factors including the global economy, petroleum prices and ocean freight carrier capacity. We have seen a significant spike in these costs over the past year and our profitability has been materially impacted. We have implemented price increases and surcharges; however, there can be no assurance that we will be successful in increasing prices or receiving freight surcharges in the future or that we can do it quickly enough to offset increased costs. Increased transportation costs, both domestically and internationally, in the future would likely adversely affect earnings, financial condition and liquidity.
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Our dependence on suppliers could, over time, adversely affect our ability to service customers.
We rely heavily on suppliers we do not own or control, including a large number of non-US suppliers. All of our suppliers may not provide goods that meet our quality, design or other specifications in a timely manner and at a competitive price. If our suppliers do not meet our specifications, we may need to find alternative suppliers, potentially at a higher cost, or may be forced to discontinue products. Also, delivery of goods from non-U.S. suppliers may be delayed for reasons not typically encountered for domestically manufactured furniture, such as shipment delays caused by customs issues, labor issues, port-related issues such as weather, congestion or port equipment, decreased availability of shipping containers and/or the inability to secure space aboard shipping vessels to transport our products. Our failure to timely fill customer orders due to an extended business interruption for a major supplier, or due to transportation issues, could negatively impact existing customer relationships and adversely affect our sales, earnings, financial condition and liquidity.
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Our inability to accurately forecast demand for our imported products could cause us to purchase too much, too little or the wrong mix of inventory.
Manufacturing and delivery lead times for our imported products necessitate that we make forecasts and assumptions regarding current and future demand for these products. If our forecasts and assumptions are inaccurate, we may purchase excess or insufficient amounts of inventory. If we purchase too much or the wrong mix of inventory, we may be forced to sell it at lower margins, which could adversely affect our sales, earnings, financial condition and liquidity. If we purchase too little or the wrong mix of inventory, we may not be able to fill customer orders and may lose market share and weaken or damage customer relationships, which also could adversely affect our sales, earnings, financial condition and liquidity.
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Potential future increases in tariffs on manufactured goods imported from China or new tariffs imposed on other countries from which we source, including Vietnam, could adversely affect our business.
Effective September 24, 2018, the prior U.S. administration imposed a 10% tariff on certain goods imported into the United States from China, including all furniture and furniture components manufactured in China, which increased to 25% in May 2019 and such tariffs have not been repealed. New tariffs could be imposed on manufactured goods from other countries from which we source, including Vietnam. Inability to reduce product costs, pass through price increases or find other suitable manufacturing sources outside of China may have a material adverse impact on sales volume, earnings and liquidity. In addition, the tariffs, and our responses to the tariffs, may cause our products to become less competitive due to price increases or less profitable due to lower margins. Our inability to effectively manage the negative impacts of changing U.S. and foreign trade policies could adversely affect our business and financial results.
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We are subject to 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.
Changes in political, economic and social conditions, as well as in the laws and regulations in the foreign countries from which we source our products could adversely affect our sales, earnings, financial condition and liquidity. These changes could make it more difficult to provide products and service to our customers or could increase the cost of those products. International trade regulations and policies of the United States and the countries from which we source finished products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports affecting our products could increase our costs and decrease our earnings. For example, the U.S. Department of Commerce imposes tariffs on wooden bedroom furniture coming into the United States from China. In this case, none of the rates imposed have been of sufficient magnitude to alter our import strategy in any meaningful way; however, these and other tariffs are subject to review and could be increased or new tariffs implemented in the future.
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Changes in the value of the U.S. Dollar compared to the currencies for the countries from which we obtain our imported products could adversely affect our sales, earnings, financial condition and liquidity.
For imported products, we generally negotiate firm pricing with our foreign suppliers in U.S. Dollars, typically for periods of at least one year. We accept the exposure to exchange rate movements during these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. 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 must pay for imported products beyond the negotiated periods. These price changes could decrease our sales, earnings, financial condition and liquidity during affected periods.
■
Supplier transitions, including cost or quality issues, could result in longer lead times and shipping delays.
In the past, inflation concerns, and to a lesser extent quality and supplier viability concerns, affecting some of our imported product suppliers located in China prompted us to source more of our products from lower cost suppliers located in other countries, such as Vietnam. As discussed above, during fiscal 2020 and fiscal 2021 we transitioned a significant portion of our imported product purchases from China to Vietnam due to the imposition of tariffs on most furniture and component parts imported from China. As conditions dictate, we could be forced to make similar transitions in the future. When undertaken, transitions of this type involve significant planning and coordination by and between us and our new suppliers in these countries. Despite our best efforts and those of our new sourcing partners, these transition efforts are likely to result in longer lead times and shipping delays over the short term. 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. One or a combination of these issues could adversely affect our sales, earnings, financial condition and liquidity.
A disruption affecting our domestic facilities could disrupt our business.
The warehouses in which we store our inventory in Virginia, North Carolina, Georgia and California are critical to our success. Our corporate and divisional headquarters, which house our administration, sourcing, sales, finance, merchandising, customer service and logistics functions for our imported and domestic products are located in Virginia, North Carolina and California.
Our domestic upholstery manufacturing facilities are located in Virginia and North Carolina. Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subject to the risk of losses arising from explosions and fires.
Additionally, our domestic operations have been negatively affected by COVID-19 and we experienced some COVID-related employee absences. During the initial height of the COVID-19 crisis in early calendar 2020, we activated business continuity plans and many administrative employees telecommuted given recommendations for social distancing and most of our domestic manufacturing facilities temporarily closed or operated at reduced levels. We also instituted increased cleaning regimens and social distancing and masking protocols for office, manufacturing and warehousing associates. As COVID-infection rates have decreased, more administrative employees have returned to our offices and social distancing and masking protocols have adjusted to current public health guidelines. Any disruption affecting our domestic facilities, for even a relatively short period of time, could adversely affect our ability to ship our furniture products and disrupt our business, which could adversely affect our sales, earnings, financial condition and liquidity.
Labor shortages could disrupt operations at our domestic warehousing and manufacturing facilities
Demand for home furnishings rose after the COVID-19 pandemic and lead to higher-than-normal order rates and historic levels of order backlogs. We hired an increased number of employees in all three segments during fiscal 2022 in response to business growth. It has become increasingly difficult to recruit skilled labor into our domestic upholstery plants and training and turnover costs have increased. In fiscal 2022, lack of qualified workers and high turnover in a variety of positions caused increased training costs, adversely affected our production schedules and the ability to ship our furniture products, which adversely affected our sales, earnings and liquidity. Should these issues persist or increase due to the COVID-19 pandemic or similar pandemics in the future, our sales, earnings, financial condition and liquidity could again be adversely affected.
Fluctuations in the price, availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase our costs.
We use various types of wood, leather, fabric, foam and other filling material, high carbon spring steel, bar and wire stock and other raw materials in manufacturing upholstered furniture. We depend on outside suppliers for raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at acceptable prices and in a timely manner. We do not have long-term supply contracts with our suppliers. Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers. For example, our domestic upholstery segment experienced foam allocations of between 60-75% of requested amounts in early fiscal 2022 which negatively impacted production efficiencies for several months. Later we experienced raw material cost inflation for nearly all of our raw materials and higher freight surcharges to bring in these materials. We may not always be able to pass price increases on raw materials through to our customers due to competition and other market pressures. In addition, the price increases are frequently implemented on future orders instead of existing order backlogs. Considering our lead times of five to six months, the benefits of new pricing could be offset by continued price increases from our suppliers that could impact us before we realize the benefit from our price increases. The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings, financial condition and liquidity.
In 2021, Russia was the third largest source of US hardwood plywood imports. Due to the current Ukraine-Russia conflict, the U.S. House of Representatives voted to raise tariffs on some Russian imports, which could impose tariffs of 40% to 50% on Russian Birch. Currently, 50% - 60% of the plywood used at our Shenandoah (SFI) division is Russian birch. Based on current rates of sale, we believe we have an adequate supply to support SFI manufacturing operations through mid-to-late summer 2022. SFI has begun the process of switching from the Russian Birch to another plywood species and are currently working with suppliers and testing those products. If we are unable to find a suitable replacement for Russian Birch before we exhaust our supply, our sales, earnings and liquidity could be adversely affected.
If demand for our domestically manufactured upholstered furniture declines, we may respond by realigning manufacturing.
Our domestic manufacturing operations make only upholstered furniture. A decline in demand for our domestically produced upholstered furniture could result in the realignment of our domestic manufacturing operations and capabilities and the implementation of cost-saving measures. These programs could include the consolidation and integration of facilities, functions, systems and procedures. We may decide to source certain products from other suppliers instead of continuing to manufacture them. These realignments and cost-saving measures typically involve initial upfront costs and could result in decreases in our near-term earnings before the expected cost savings are realized, if they are realized at all. We may not always accomplish these actions as quickly as anticipated and may not achieve the expected cost savings, which could adversely affect our sales, earnings, financial condition and liquidity.
A material part of our sales and accounts receivable are concentrated in a few customers. The loss of several large customers through business consolidations, the loss of a major customer or significant sales programs with major customers, failures or other reasons, including the adverse economic effects of the COVID-19 pandemic or similar events, could adversely affect our business.
One customer accounted for approximately 8% of our consolidated sales in fiscal 2022, our top five customers accounted for about 26% of our fiscal 2022 consolidated sales. Approximately 25% of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity. The loss of any one or more of these customers could adversely affect our sales, earnings, financial condition and liquidity. The loss of several of our major customers through business consolidations, the loss of major product placements, failures or otherwise, could adversely affect our sales, earnings, financial condition and liquidity and the resulting loss in sales may be difficult or impossible to replace.
Sales and earnings in the Clubs channel of our Home Meridian segment are subject to higher volatility than other distribution channels subject to our success or failure in developing suitable products at acceptable prices for this channel. The Clubs channel has proven to be a particularly difficult channel in which to do business. We have taken steps to minimize our exposure in this channel however, given the relatively liberal return policies in this channel, we are subject to higher-than-normal customer chargebacks. While we accrue estimated amounts for chargebacks based on sales and chargeback history, those accruals may not be adequate and given the relative size of customers in this channel, we may not be successful in negotiating resolutions to these extra costs. Consequently, our sales and earnings could be adversely affected.
Should the negative economic effects of COVID-19 persist, or another similar event or events occur, the negative developments described in this paragraph would be more likely to occur. Amounts owed to us by a customer whose business fails, or is failing, may become uncollectible, and we could lose future sales, any of which could adversely affect our sales, earnings, financial condition and liquidity.
We may not be able to collect amounts owed to us.
We grant payment terms to most customers ranging from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. We purchase credit insurance on certain customers’ receivables and factor certain other customer accounts. Some of our customers have experienced, and may in the future experience, credit-related issues. Were the negative economic effects of COVID-19 to persist or a similar pandemic or another major, unexpected event with negative economic effects occur, we may not be able to collect amounts owed to us or such payment may only occur after significant delay. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment, especially in the current environment. We may be unable to obtain sufficient credit insurance on certain customers’ receivable balances. Should more customers than we anticipate experience liquidity issues, if payment is not received on a timely basis, or if a customer declares bankruptcy or closes stores, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity.
Our sales and operating results could be adversely affected by product safety concerns.
If our product offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to regulatory enforcement action and/or private litigation. While we carry general and umbrella liability insurance for such events, settlements or jury awards could exceed our policy limits. Reputational damage caused by real or perceived product safety concerns or failure to prevail in private litigation against us could adversely affect our business, sales, earnings, financial condition and liquidity.
The implementation of our Enterprise Resource Planning system could disrupt our business.
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 our Hooker Branded segment in the second half of our 2023 fiscal year, with other segments and divisions following thereafter. Although we currently expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout all divisions and standardizing processes and reporting, our ERP system implementation may not result in improvements that outweigh its costs and may disrupt our operations. Our inability to mitigate existing and future disruptions could adversely affect our sales, earnings, financial condition and liquidity. The ERP system implementation subjects us to substantial costs and inherent risks associated with migrating from our legacy systems. These costs and risks could include, but are not limited to:
●
Significant capital and operating expenditures;
●
Disruptions to our domestic and international supply chains;
●
Inability to fill customer orders accurately and on a timely basis, or at all;
●
Inability to process payments to suppliers, vendors and associates accurately and in a timely manner;
●
Disruption to our system of internal controls;
●
Inability to fulfill our SEC or other governmental reporting requirements in a timely or accurate manner;
●
Inability to fulfill international, federal, state, or local tax filing requirements in a timely or accurate manner; and
●
Increased demands on management and staff time to the detriment of other corporate initiatives.
We may engage in acquisitions and investments in companies, form strategic alliances and pursue new business lines. These activities could disrupt our business, divert management attention from our current business, pose integration concerns, dilute our earnings per share, decrease the value of our common stock and decrease our earnings and liquidity.
Our growth strategy includes growth by acquisition, which is highly dependent upon finding attractive targets and there can be no assurance those targets will be found. We may acquire or invest in businesses such as those that offer complementary products or that we believe offer competitive advantages. However, we may fail to identify significant liabilities or risks that could negatively affect us or result in our paying more for the acquired company or assets than they are worth. We may also have difficulty assimilating and integrating the operations and personnel of an acquired business into our current operations. Acquisitions may disrupt or distract management from our ongoing business. We may pay for future acquisitions using cash, stock, the assumption of debt or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share and decrease the value of our common stock. We may pursue new business lines in which we have limited or no prior experience or expertise. These pursuits may require substantial investment of capital, personnel and management attention. New business initiatives may fail outright or fail to produce an adequate return, which could adversely affect our earnings, financial condition and liquidity.
We may fail to realize all of the anticipated benefits of the Sunset West acquisition.
We incurred significant acquisition and acquisition-related costs in fiscal 2022 in connection with the Sunset West acquisition and expect to incur additional integration-related costs in fiscal 2023, but we may fail to realize all the anticipated benefits of the acquisition or they may take longer to realize than expected. While we believe the Sunset West acquisition will be accretive to our earnings per share beginning in fiscal 2023, this expectation is based on preliminary estimates which may materially change. Although we do not expect to merge operations or change customer-facing services, the success of this acquisition will depend, in part, on our ability to improve each business by sharing best practices in order to lower costs, improve efficiencies and grow sales. We have based our expectations in part on the historical results and trends in Sunset West’s business; however there can be no assurance regarding when or the extent to which we will be able to realize these benefits. Achieving the anticipated benefits is subject to a number of uncertainties, including whether the business acquired can be operated in the manner we intend. Events outside of our control could also adversely affect our ability to realize the anticipated benefits from the acquisition. Thus, the integration of Sunset West’s business may be unpredictable, subject to delays or changed circumstances, and we can give no assurance that the acquired business will perform in accordance with our expectations, or that our expectations with respect to integration or benefits as a result of the contemplated acquisition will materialize.
The integration process could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. If the integration is not completed as planned, our ongoing business and financial results may be adversely affected, which could adversely affect our sales, earnings, financial condition and liquidity.
We may experience impairment of our long-lived assets, which would decrease our earnings and net worth.
At January 30, 2022, we had $52.4 million in net long-lived assets, consisting primarily of property, plant and equipment, trademarks, trade names and goodwill. Our goodwill, some trademarks and tradenames have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. As an example, COVID-19 had a material impact on our financial performance in the fiscal 2021 first quarter and on the market valuations, discount rates and other inputs used in our intangibles valuation analysis. We determined that an immediate intangible asset valuation was necessary given our performance and changing market dynamics. As a result of the intangible asset valuation analysis, in the fiscal 2021 first quarter, we recorded $44.3 million in non-cash impairment charges to write down goodwill and certain tradenames in the Home Meridian segment and goodwill in the Shenandoah division of its Domestic Upholstery segment. Our definite-lived assets consist of property, plant and equipment and certain intangible assets related to our recent acquisitions and are tested for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. The outcome of impairment testing could result in the write-down of all or a portion of the value of these assets. A write-down of our assets would, in turn, reduce our earnings and net worth. See Notes 7 and 8 to our Consolidated Financial Statements for additional information.
We may lose market share due to furniture retailers by-passing us and sourcing directly from non-U.S. furnishings sources.
Some large furniture retailers are sourcing directly from non-U.S. furniture factories. Over time, this practice may expand to smaller retailers. As a result, we are continually subject to the risk of losing market share to these non-U.S. furnishings sources, which could adversely affect our sales, earnings, financial condition and liquidity.
Failure to anticipate or timely respond to changes in fashion and consumer tastes could adversely impact our business.
Furniture is a styled product and is subject to rapidly changing fashion trends and consumer tastes, as well as to increasingly shorter product life cycles. If we fail to anticipate or promptly respond to these changes, we may lose market share or be faced with the decision of whether to sell excess inventory at reduced prices. This could adversely affect our sales, earnings, financial condition and liquidity.
Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.
Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions, availability of raw materials and finished inventory and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect to availability of and demand for our home furnishing products. Accordingly, our results of operations for any quarter are not necessarily indicative of the results of operations to be expected for a full year.
►
Other general risk factors applicable to us and our business
We may not be able to maintain, raise prices, or raise prices in a timely manner in response to inflation and increasing costs.
Competitive and market forces could prohibit future successful price increases for our products in order to offset increased costs of labor, finished goods, raw materials, freight and other product-related costs, which could adversely affect our sales, earnings, financial condition and liquidity.
The interruption, inadequacy or security failure of our information systems or information technology infrastructure or the internet or inadequate levels of cyber-insurance could adversely impact our business, sales, earnings, financial condition and liquidity.
Our information systems (software) and information technology (hardware) infrastructure platforms and those of third parties who provide these services to us, including internet service providers and third parties who store data for us on their servers (“the cloud”), facilitate and support every facet of our business, including the sourcing of raw materials and finished goods, planning, manufacturing, warehousing, customer service, shipping, accounting, payroll and human resources. Our systems, and those of third parties who provide services to us, are vulnerable to disruption or damage caused by a variety of factors including, but not limited to: power disruptions or outages; natural disasters or other so-called “Acts of God”; computer system or network failures; viruses or malware; physical or electronic break-ins; the theft of computers, tablets and smart phones utilized by our employees or contractors; unauthorized access, phishing and cyber-attacks. The risk of cyberattacks also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a cybersecurity program designed to protect and preserve the integrity of our information systems. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition. Additionally, while we carry cyber insurance, including insurance for social engineering fraud, the amounts of insurance we carry may be inadequate due either to inadequate limits available from the insurance markets or inadequate coverage purchased. Because cyber threat scenarios are inherently difficult to predict and can take many forms, cyber insurance may not cover certain risks. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our information systems or to manage the information systems of third parties to accommodate these changes. If these information systems or technologies are interrupted or fail, or we are unable to adapt our systems or those of third parties as a result of legislative or regulatory actions, our operations and reputation may be adversely affected, we may be subject to legal proceedings, including regulatory investigations and actions, which could diminish investor and customer confidence which could adversely affect our sales, earnings, financial condition and liquidity.
Economic downturns could result in decreased sales, earnings and liquidity.
The furniture industry is particularly sensitive to cyclical variations in the general economy and to uncertainty regarding future economic prospects, including those caused by pandemics such as COVID-19. Home furnishings are generally considered a postponable purchase by most consumers. Economic downturns could affect consumer spending habits by decreasing the overall demand for home furnishings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, the availability of consumer credit and broader national or geopolitical factors have particularly significant effects on our business. We have seen negative effects on all of these measures due to the COVID-19 pandemic. A recovery in our sales could lag significantly behind a general recovery in the economy after an economic downturn, due to, among other things, the postponable nature and relatively significant cost of home furnishings purchases or scarcity of transportation and Asian manufacturing capacity during times of increased demand. These events could also impact retailers, who are our primary customers, possibly adversely affecting our sales, earnings, financial condition and liquidity.
Unauthorized disclosure of confidential information provided to us by our customers, employees, or third parties could harm our business.
We rely on the internet and other electronic methods to transmit confidential information and we store confidential information on our networks. If there was a disclosure of confidential information by our employees or contractors, including accidental loss, inadvertent disclosure or unapproved dissemination of information, or if a third party were to gain access to the confidential information we possess, our reputation could be harmed, and we could be subject to civil or criminal liability and regulatory actions. A claim that is brought against us, successful or unsuccessful, that is uninsured or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings, financial condition and liquidity.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Set forth below is information with respect to our principal properties on April 15, 2022. We believe all of these properties are well-maintained and in good condition. During fiscal 2022, we estimate our upholstery plants operated at approximately 88% of capacity on a one-shift basis. All our production facilities are equipped with automatic sprinkler systems. All facilities maintain modern fire and spark detection systems, which we believe are adequate. We have leased certain warehouse facilities for our distribution and import operations, typically on a short or medium-term basis. We expect that we will be able to renew or extend these leases or find alternative facilities to meet our warehousing and distribution needs at a reasonable cost. All facilities set forth below are active and operational, representing approximately 4.1 million square feet of owned space, leased space or properties utilized under third-party operating agreements.
Location
Segment
Use
Primary
Use
Approximate Size in
Square Feet
Owned or
Leased
Martinsville, Va.
All segments
Corporate Headquarters, Distribution, Manufacturing and Warehousing
1,489,766
Owned / Leased
High Point, N.C.
All segments
Office, Showroom and Warehouse
216,505
Leased
Madison, NC
HM
Warehouse
500,000
Leased
Midway, GA
HM
Warehouse
798,560
Leased
Bedford, VA
DU
Manufacturing and Offices
327,000
Owned
Hickory, N.C.
DU
Manufacturing and Offices
166,000
Owned
Mt. Airy, N.C.
DU
Manufacturing and warehousing
104,150
Leased
Valdese, N.C.
DU
Manufacturing and warehousing
102,905
Leased
Cherryville, N.C.
DU
Manufacturing Supply Plant
53,000
Owned
Dongguan, China
HB, HM
Office, Warehouse and Distribution
213,426
Leased
Ho Chi Minh City, VN
HB, HM
Office, Warehouse and Distribution
108,364
Leased
HB=Hooker Branded, HM=Home Meridian, DU=Domestic Upholstery

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
None.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Hooker Furnishings’ executive officers and their ages as of April 15, 2022 and the calendar year each joined the Company are as follows:
Name
Age
Position
Year Joined Company
Jeremy R. Hoff
Chief Executive Officer and Director
Paul A. Huckfeldt
Chief Financial Officer and
Senior Vice President - Finance and Accounting
Anne J. Smith
Chief Administration Officer and President-Domestic Upholstery
Tod R. Phelps
Senior Vice President - Operations and Chief Information Officer
Jeremy R. Hoff has been Chief Executive Officer and Director since February 2021. Mr. Hoff served as President of Hooker Legacy Brands from February 2020 to January 2021, President of the Hooker Branded segment from April 2018 to January 2020. Mr. Hoff joined the Company in August of 2017 as President of Hooker Upholstery. Prior to that, Mr. Hoff served as President of Theodore Alexander USA from December 2015 to August 2017.
Paul A. Huckfeldt has been Senior Vice President - Finance and Accounting since September 2013 and Chief Financial Officer since January 2011. Mr. Huckfeldt served as Vice President - Finance and Accounting from December 2010 to September 2013, Corporate Controller and Chief Accounting Officer from January 2010 to January 2011, Manager of Operations Accounting from March 2006 to December 2009 and led the Company’s Sarbanes-Oxley implementation and subsequent compliance efforts from April 2004 to March 2006.
Anne J. Smith has been Chief Administration Officer and President - Domestic Upholstery since February 2021. Ms. Smith served as Chief Administration Officer from July 2018 to January 2021, Senior Vice President - Administration from January 2014 to June 2018, Vice President- HR and Administration from January 2011 to January 2014 and Vice President-Human Resources from November 2008 to January 2011. Ms. Smith joined the Company in January of 2008 as Director of Human Resources.
Tod R. Phelps has been Chief Information Officer and Senior Vice President - Operations since February 2021. Mr. Phelps joined the Company in April 2017 as Chief Information Officer. From March 2014 to April 2017, he served as Chief Technology Officer of Heritage Home Group, LLC.
Hooker Furnishings Corporation
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of January 30, 2022, we had approximately 9,600 beneficial shareholders. As we have done in the past, we currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.
Performance Graph (1)
The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index (2), and a published industry index, the Household Furniture Index (3), for the period from January 29, 2017 to January 30, 2022.
Comparison of Cumulative Total Return
Hooker Furnishings Corporation
(1)
The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends.
(2)
The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization and includes the Company.
(3)
Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under Standard Industrial Classification (SIC) Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada. At January 30, 2022, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Nova Lifestyle, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furnishings Corporation, Sleep Number Corp., Kimball International, Inc., Luvu Brands, Inc., Tempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Casper Sleep Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., Horrison Resources, Inc., The Rowe Companies, Dorel Industries, and Instadose Pharma Corp.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
SEC disclosure rules no longer require the presentation of selected financial data; however, based on shareholder and internal feedback we continue to provide this information. The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations.
Fiscal Year Ended (1)
January 30,
January 31,
February 2,
February 3,
January 28,
(In thousands, except per share data)
Income Statement Data:
Net sales
$ 593,612
$ 540,081
$ 610,824
$ 683,501
$ 620,632
Cost of sales
491,910
427,333
496,866
536,014
485,815
Casualty loss (2)
-
-
-
-
Gross profit
101,702
112,748
113,958
146,987
134,817
Selling and administrative expenses (3)
84,475
80,410
88,867
91,928
87,279
Goodwill impairment (4)
-
39,568
-
-
-
Trade names impairment (4)
-
4,750
-
-
-
Intangible asset amortization (4)
2,384
2,384
2,384
2,384
2,084
Operating income / (loss)(3)
14,843
(14,364 )
22,707
52,675
45,454
Other income, net (3)
1,566
Interest Expense, net
1,238
1,454
1,248
Income / (loss) before income taxes
15,106
(14,568 )
21,927
51,590
45,772
Income tax expense / (benefit)
3,388
(4,142 )
4,844
11,717
17,522
Net income / (loss)
11,718
(10,426 )
17,083
39,873
28,250
Per Share Data:
Basic earnings/(loss) per share
$ 0.99
$ (0.88 )
$ 1.44
$ 3.38
$ 2.42
Diluted earnings/(loss) per share
0.97
(0.88 )
1.44
3.38
2.42
Cash dividends per share
0.74
0.66
0.61
0.57
0.50
Net book value per share (5)
22.01
21.76
23.25
22.37
19.53
Weighted average shares outstanding (basic)
11,852
11,822
11,784
11,759
11,633
Balance Sheet Data:
Cash and cash equivalents
$ 69,366
$ 65,841
$ 36,031
$ 11,435
$ 30,915
Trade accounts receivable
73,727
83,290
87,653
112,557
92,803
Inventories
75,023
70,159
92,813
105,204
84,459
Working capital
170,777
169,612
171,838
170,516
153,162
Total assets
374,559
352,273
393,708
369,716
350,058
Long-term debt (including current maturities) (6)
-
-
30,138
35,508
53,425
Shareholders' equity
261,128
257,503
274,121
263,176
229,460
(1)
Our fiscal years end on the Sunday closest to January 31. The fiscal years presented above all had 52 weeks, except for the prior fiscal year ended February 3, 2019, which had 53 weeks.
(2)
Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019.
(3)
Amounts for fiscal 2018 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000).
(4)
Represents impairment charges and amortization expense on acquisition-related intangibles. See Note 8 to our Consolidated Financial Statements for additional information on our intangible assets.
(5)
Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period.
(6)
Long-term debt (including current maturities) consisted of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions. We paid off the term loans in January 2021.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As you read Management’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with:
■
All of our recent public filings made with the Securities and Exchange Commission (“SEC”) which are available, without charge, at www.sec.gov and at http://investors.hookerfurnishings.com;
■
The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K;
■
The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and
■
Our commitments and contractual obligations and off-balance sheet arrangements described in Note 17 to our Consolidated Financial Statements on page of this report. This note describes commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements.
In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2022 compared to fiscal 2021. We also provide information regarding the performance of each of our operating segments and All Other. The analysis and discussions of fiscal 2021 compared to fiscal 2020 results are in our 2021 Form-10K available through Hooker Furnishings and SEC websites.
Unless otherwise indicated, references to the “Company”, "we," "our" or "us" refer to Hooker Furnishings 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.
Furniture sales account for all of our net sales. For financial reporting purposes, we are organized into three reportable segments- Hooker Branded, Home Meridian and Domestic Upholstery, with our other businesses included in All Other. 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 designer channel. The Hooker Branded and Home Meridian segments were unchanged. See Note 16 to our consolidated financial statements for additional financial information regarding our segments.
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, contract and outdoor 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 2020 shipments to U.S. retailers, according to a 2021 survey by a leading trade publication.
Executive Summary- Fiscal 2022 Results of Operations
Consolidated net sales increased by $53.5 million, or 9.9%, compared to the prior year period, due to over 20% increases in sales in both Hooker Branded and Domestic Upholstery segments, partially offset by a 1.2% sales decrease in the Home Meridian segment. Despite the sales increases and slight sales decrease in the Home Meridian segment, consolidated gross profit and margin both decreased due to excess freight costs and product cost inflation in the Home Meridian segment and, to a lesser extent, in the Hooker Branded segment, as well as ready-to-assemble (“RTA”) product cancellation costs in the Home Meridian segment incurred as we exited that product category. Consolidated operating income was $14.8 million compared to a $14.4 million operating loss in the prior year period. The prior year loss was driven by $44.3 million ($33.7 million net of tax) non-cash intangible assets impairment charge. Consolidated net income was $11.7 million or $0.97 per diluted share, as compared to net loss of $10.4 million or ($0.88) per diluted share in the prior year period.
Our fiscal 2022 performance is discussed in greater detail below under “Review” and “Results of Operations”.
Review
We started fiscal 2022 with strong order backlogs carried over from the prior year end and reported significantly increased sales and profits in the first two quarters. Although we were pleased that favorable demand for home furnishings continued through the year, ongoing global supply chain disruptions, the COVID lockdowns in Vietnam and Malaysia and the slower than expected re-openings of our suppliers in those two countries, coupled with freight and product inflationary pressures adversely affected our sales and profitability. We reported a 9.9% consolidated net sales increase and $14.8 million in operating income and finished fiscal 2022 with a consolidated order backlog 25% higher over the level at the end of our fiscal 2021 year-end.
The Hooker Branded segment’s net sales increased by $38.3 million, or 23.5%, as compared to the prior fiscal year, which was attributable to increased sales volume and lower discounting driven by higher demand. About 80% of the net sales increases were in our casegoods non-container business as we were better able to manage our inventory availability and keep our best-selling products in stock during the first half of fiscal 2022. However, the unexpected COVID-related lockdown at our suppliers in Vietnam and Malaysia for nearly three months, beginning in August and their slow re-openings coupled with continued difficulty obtaining shipping containers and vessel space caused low inventory receipts in the second half of this year which resulted in out-of-stock issues and decreased net sales in the fourth quarter. On a more positive note, the majority of shipments in this segment carried the price increases we implemented in July 2021 to mitigate higher ocean freight and product cost inflation. Hooker Branded reported $30.7 million operating income or 15.3% operating margin, an increase of $7.8 million or 34.3% as compared to the prior year. Given the current economic conditions, we are pleased to have maintained Hooker Branded segment profitability. Incoming orders increased by 24.2% as compared to prior year period when business dramatically rebounded. Backlog remained historically high and nearly doubled as compared to the prior year end when backlog was already at a high level, with part of that increase being due to lower shipments in the fourth quarter.
The Home Meridian segment had a difficult year with net sales decreasing by $3.5 million, or 1.2%, as compared to the prior year. This segment also reported a $21.3 million operating loss. Despite the disappointing financial results, we believe the challenges are short-term and the strategic decisions made by management will provide us with opportunities to significantly improve profitability in the coming year.
●
Net sales decreased due to sales declines with e-commerce and Clubs channels, and the hospitality business, nearly offset by sales increases with mass merchants and major furniture chains driven by higher demand. E-commerce sales decreased by 30% due to lower demand (which was driven by higher product costs due to excess freight costs) and inventory availability issues. Clubs sales decreased due to lower volume (which was intentional as we began exiting this channel in fiscal 2022) and $2.9 million of higher than expected chargebacks which negatively impacted net sales. Hospitality sales also decreased during the year as capital spending in the hospitality industry is still recovering from the COVID crisis. On a more positive note, hospitality order backlog at fiscal 2022 year-end was higher than prior year end. In the summer of 2021, the temporary COVID lockdowns at our suppliers in Vietnam and Malaysia immediately impacted shipments and sales as the majority of revenue in this segment is container direct sales. The sales volume loss during the second half of this year largely offset the sales increases in the first and second quarters.
●
Higher freight costs adversely impacted gross margin by 530 bps in fiscal 2022 and were the primary driver of increased product costs. Home Meridian’s Accentrics Home division, was impacted the most by higher freight costs due to the lower sales value of its product. We imposed freight surcharges and price increases during the second and third quarters to mitigate these excess costs; however, significant volume was shipped at pre-surcharge selling prices.
●
To help improve future profitability, eliminate low-margin categories and avoid unnecessary costs, we took steps to optimize our product, sales channel and customer mix at Home Meridian.
o
Current freight costs made our RTA furniture products unprofitable. Consequently, we exited the RTA furniture category and incurred one-time order cancellation costs of $2.6 million. We estimate we avoided at least $10 million of additional costs by exiting this category.
o
Due to continued poor profitability and excess chargebacks of $2.9 million, we made the decision to exit the Clubs channel and incurred one-time order cancellation costs of $900,000.
●
Although these actions adversely affected our sales and earnings and helped drive an operating loss at Home Meridian, we believe these actions allow us to focus resources on more profitable business and stable channels to drive long-term growth. We are also in the process of redefining our e-commerce business’ price points.
The Domestic Upholstery segment net sales increased by $18.6 million, or 22.2%, in fiscal 2022 due to double-digit sales increases at all three divisions as well as the absence of factory shutdowns in the current year. However, gross margin decreased as compared to the prior year and pre-pandemic levels as this segment faced several manufacturing constraints which adversely impacted profitability. Raw material cost increases and higher freight surcharges increased product costs by 360 bps. The foam shortage we experienced early in fiscal 2022 and inconsistent deliveries of raw materials due to supply chain disruptions with our suppliers adversely impacted our production levels. Labor shortages and inefficiencies at the Sam Moore division also impacted manufacturing capacities and resulted in higher over-time at already inflated wage rates. We filled key positions at Sam Moore to improve labor productivity and reevaluated pay and benefits in order to attract and retain qualified employees. In addition, domestic driver and truck shortages adversely impacted the delivery of finished products. Despite increased material and labor costs, this segment reported operating income of $4.3 million, or a 4.2% operating margin as compared to a $12.4 million operating loss in the prior year, which was attributable to $16.4 million non-cash intangible assets impairment charge. Incoming orders increased by 38% and this segment finished the year with an order backlog 122% higher than prior year, when backlog levels were already at a historical high. We implemented price increases and surcharges in July and October of 2021 to mitigate increased material costs. Since this segment has current order backlog levels of 5-6 months from when the sale was made and prices were not increased on backlog orders, we anticipate seeing the benefits of the price increases beginning in the second quarter of fiscal 2023. However, these benefits could be offset by continuing price increases from our suppliers that impact us sooner than our price increases.
All Other net sales increased by $197,000 or 1.7% as compared to the prior fiscal year, due principally to sales increase at Lifestyle Brands, a business started in fiscal 2019 targeted at the interior design channel. Although this business is still small, its net sales increased nearly 80% as compared to the prior fiscal year. H Contract’s net sales stayed essentially flat as compared to the prior year. The senior living industry, which comprises the majority of H Contract’s business, has been severely impacted by the pandemic and has reduced capital spending due to increased costs and uncertain revenues. However, according to an industry survey, with new treatments and increased vaccination rates, especially among the senior population, occupancy level increased in the last two quarters of 2021 despite the later waves caused by delta and omicron variants. H Contract’s incoming orders increased by 27% in fiscal 2022 and turned into 44% increased net sales in the fourth quarter, which offset the sales decreases in the first three quarters. H Contract finished the year with backlog 126% higher than prior year end. H Contract’s gross profit and margin decreased due to an unfavorable product mix and much of the product sold did not carry the full price increases. All Other reported $1.1 million operating income or 9.6% operating margin for fiscal 2022.
Cash and cash equivalents stood at $69.4 million at fiscal 2022 year-end, an increase of $3.5 million compared to the balance at the fiscal 2021 year-end due primarily to collection of accounts receivable. During fiscal 2022, we used a portion of the $19.2 million generated from operations and $372,000 in life insurance proceeds to pay $8.8 million in cash dividends to our shareholders, $6.7 million in capital expenditures in our newly opened Georgia distribution center and enhancements of other facilities and systems. In the third quarter of fiscal 2022, our Board of Directors approved the increase of our quarterly dividend to $0.20 per share, an increase of 11.1% or $0.02 per share. In fiscal 2022, dividends totaled $0.74 per share or $8.8 million in the aggregate paid, an increase of 12.1% or $0.08 per share, compared to the prior year representing the sixth consecutive annual dividend increase. In addition to our cash balance, we have an aggregate of $27.9 million available under our $35 million revolving credit facility with BofA (the “Existing Revolver”) to fund working capital needs and have access to $26.5 million in cash surrender value of Company-owned life insurance policies. We believe we have the financial resources to fund our business operations for the foreseeable future, including weathering an extended impact of COVID-19 pandemic as well as the logistics issues, cost increases and production capacity constraints which are currently impacting our industry.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income:
Fifty-two weeks ended
January 30,
January 31,
February 2,
Net sales
100.0
%
100.0
%
100.0
%
Cost of sales
82.9
79.1
81.3
Gross profit
17.1
20.9
18.7
Selling and administrative expenses
14.2
14.9
14.5
Goodwill impairment charges
-
7.3
-
Trade name impairment charges
-
0.9
-
Intangible asset amortization
0.4
0.4
0.4
Operating income/(loss)
2.5
(2.7
)
3.7
Other income (expense), net
0.1
0.1
0.1
Interest expense, net
-
0.1
0.2
Income/(loss) before income taxes
2.6
(2.7
)
3.6
Income tax expense/(benefit)
0.6
(0.8
)
0.8
Net income/(loss)
2.0
(1.9
)
2.8
Fiscal 2022 Compared to Fiscal 2021
Net Sales
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Net Sales
% Net Sales
Hooker Branded
$ 200,692
33.8
%
$ 162,442
30.1
%
$ 38,250
23.5
%
Home Meridian
278,902
47.0
%
282,423
52.3
%
(3,521
)
-1.2
%
Domestic Upholstery
102,283
17.2
%
83,678
15.5
%
18,605
22.2
%
All Other
11,735
2.0
%
11,538
2.1
%
1.7
%
Consolidated
$ 593,612
%
$ 540,081
%
$ 53,531
9.9
%
Unit Volume and Average Selling Price (“ASP”)
Unit Volume
FY22 % Increase /
(Decrease) vs. FY21
Average Selling Price
FY22 % Increase /
(Decrease) vs. FY21
Hooker Branded
6.0 %
Hooker Branded
16.1 %
Home Meridian
-8.9 %
Home Meridian
1.4 %
Domestic Upholstery
9.6 %
Domestic Upholstery
10.8 %
All Other
-7.0 %
All Other
6.8 %
Consolidated
-5.7 %
Consolidated
12.2 %
Consolidated net sales increased due to sales increases at Hooker Branded and Domestic Upholstery segments, partially offset by a small sales decrease at Home Meridian segment.
■
Hooker Branded segment’s net sales increased significantly in fiscal 2022 driven by increased demand. ASP increased in response to higher freight costs and product cost inflation. However, Hooker Branded net sales decreased in the fourth quarter of fiscal 2022 due to inventory unavailability issues. The temporary factory shutdown in Vietnam and Malaysia during the summer resulted in low inventory receipts in the third and fourth quarters of fiscal 2022.
■
The Home Meridian segment’s net sales decreased by 1.2% as compared to the prior year period due to decreased unit volume as the result of COVID-19 lockdown in Vietnam and Malaysia, which led to lower shipments. The majority of Home Meridian’s business are container direct customers, which were immediately impacted by factory delays. Net sales and ASP decreased within the e-commence , hospitality and Clubs channels, partially offset by ASP increases with major furniture chains and retail stores as the result of strong demand.
■
Domestic Upholstery net sales increased in fiscal 2022 as all three divisions of this segment reported double digit net sales increases due to high demand and reduced prior-year sales due to temporary COVID-19 factory shutdowns. ASP increased at all three divisions in response to the inflation of raw material costs. Unit volume increased by double digits at Bradington-Young and Shenandoah, while increasing by lower single digits at Sam Moore due to labor inefficiencies.
■
All Other net sales increased slightly in fiscal 2022 due to sales increases in the Lifestyle Brands business. H Contract’s net sales were essentially flat as compared to prior year period even though sales rebounded in the fourth quarter when the orders started to improve.
Gross Profit and Margin
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Hooker Branded
$ 63,146
31.5 %
$ 51,832
31.9 %
$ 11,314
21.8 %
Home Meridian
15,213
5.5 %
39,832
14.1 %
(24,619 )
-61.8 %
Domestic Upholstery
19,471
19.0 %
17,121
20.5 %
2,350
13.7 %
All Other
3,872
33.0 %
3,963
34.4 %
(91 )
-2.3 %
Consolidated
$ 101,702
17.1 %
$ 112,748
20.9 %
$ (11,046 )
-9.8 %
Consolidated gross profit and margin both decreased as compared to the prior fiscal year due principally to significantly decreased gross profit and margin in the Home Meridian segment.
■
Hooker Branded segment gross profit increased while margin decreased slightly in fiscal 2022. Favorable sales variances were partially offset by product cost inflation, increased warehouse labor costs due to increased shipments, and higher demurrage and drayage expenses due to supply chain interruptions. In the third quarter of fiscal 2022, product sold started to carry the price increases we implemented in the second quarter of fiscal 2022, which helped offset excess ocean freight costs.
■
Home Meridian segment gross profit and margin decreased significantly in fiscal 2022 due to excess ocean freight costs, which impacted margin by 530 bps, as well as sales volume declines, increased product costs due to inflation, order cancellation costs related to the exit of the RTA furniture category, Clubs channel order cancellation costs, and excess moving costs and disposal of obsolete inventory related to the consolidation of segment warehouse operations to our new Georgia warehouse.
■
Domestic Upholstery segment gross profit increased in fiscal 2022 driven by increased net sales. Gross margin decreased in fiscal 2022 due primarily to increased raw material costs (including increased freight costs), which negatively impacted margin by 360 bps, partially offset by improved production efficiencies from operating near full capacity due to historic levels of backlog, as compared to the prior year when factories were temporarily closed or operating at a reduced production level during the initial wave of COVID-19 crisis, which resulted in unabsorbed fixed costs.
■
All Other gross profit and margin both decreased despite increased net sales because of higher costs due to inflation, partially offset by price increases on these products and increased Lifestyle Brands gross profit.
Selling and Administrative Expenses (S&A)
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Hooker Branded
$ 32,479
16.2 %
$ 29,005
17.9 %
$ 3,474
12.0 %
Home Meridian
35,139
12.6 %
36,632
13.0 %
(1,493 )
-4.1 %
Domestic Upholstery
14,117
13.8 %
12,108
14.5 %
2,009
16.6 %
All Other
2,740
23.4 %
2,665
23.1 %
2.8 %
Consolidated
$ 84,475
14.2 %
$ 80,410
14.9 %
$ 4,065
5.1 %
Consolidated selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales in fiscal 2022.
■
Hooker Branded segment S&A expenses increased in absolute terms in fiscal 2022 driven by increased selling costs as the result of higher net sales, increased salaries and wages due primarily to inflation, increased professional service expenses related to the recent Sunset West acquisition, increased ERP project expenses, and increased showroom, samples, travel and other general spendings as business returned to more normal levels. These increases were partially offset by reversal of executives’ bonus accrual on lower profits and lower bad debt expenses due to the absence of a customer write-off in the current year. S&A expenses decreased as a percentage of net sales in fiscal 2022 due to increased net sales.
■
Home Meridian segment S&A expenses decreased in absolute terms and as a percentage of net sales due to decreased selling expenses on lower net sales, absence of employee bonuses due to failure to achieve profitability goals, decreased compliance costs and the absence of a customer write-off in the current year period, partially offset by increased severance expenses due to personnel changes, increased depreciation expenses and increased marketing, showroom, travel and other expenses as business returned to more normal levels.
■
Domestic Upholstery segment S&A expenses increased in absolute terms in fiscal 2022 due to increased salaries and wages because of the absence of employee furloughs when factories were temporarily shut down in the prior year period (and to a lesser extent inflationary pressures), increased selling expenses on higher net sales, and increased depreciation expenses due to the accelerated depreciation of our existing ERP system because of the expected implementation of an upgraded cloud-based ERP solution in fiscal 2023. S&A decreased as a percentage of net sales due to increased net sales.
■
All Other S&A expenses increased slightly in absolute terms and as a percentage of net sales in fiscal 2022 due to increased selling and market expenses, partially offset by decreased advertising supply expenses.
Goodwill impairment charges
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Home Meridian
$ -
$ 23,187
8.2 %
$ (23,187 )
Domestic Upholstery
-
16,381
19.6 %
(16,381 )
Consolidated
$ -
$ 39,568
7.3 %
(39,568 )
Trade name impairment charges
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Segment Net Sales
% Segment Net Sales
Home Meridian
$ -
$ 4,750
1.7 %
$ (4,750 )
Consolidated
$ -
$ 4,750
0.9 %
(4,750 )
In fiscal 2021, we recorded $23.2 million and $16.4 million in non-cash impairment charges to write down goodwill in the Home Meridian segment and the Shenandoah division of the Domestic Upholstery segment, respectively. We also recorded $4.8 million in non-cash impairment charges to write down tradenames in the Home Meridian segment. See Note 8 to our Consolidated Financial Statements for additional details on these impairment charges.
Intangible Asset Amortization
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Net Sales
% Net Sales
Intangible asset amortization
$ 2,384
0.4 %
$ 2,384
0.4 %
$ -
0.0 %
Intangible asset amortization expense was unchanged compared to the prior year period. See Note 8 Intangible Assets and Goodwill to our Consolidated Financial Statements for additional information about our amortizable intangible assets.
Operating Profit/(Loss) and Margin
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
%Segment Net Sales
%Segment Net Sales
Hooker Branded
$ 30,667
15.3 %
$ 22,827
14.1 %
$ 7,840
34.3 %
Home Meridian
(21,260 )
-7.6 %
(26,071 )
-9.2 %
4,811
18.5 %
Domestic Upholstery
4,304
4.2 %
(12,418 )
-14.8 %
16,722
134.7 %
All Other
1,132
9.6 %
1,298
11.3 %
(166 )
-12.8 %
Consolidated
$ 14,843
2.5 %
$ (14,364 )
-2.7 %
$ 29,207
203.3 %
Consolidated operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2022 compared to the same prior-year period due to the factors discussed above.
Interest Expense, net
Fifty-two Weeks Ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Net Sales
% Net Sales
Interest expense, net
$
0.0 %
$
0.1 %
$ (430 )
-79.6 %
Consolidated interest expense decreased in fiscal 2022 due to the payoff of our term loans in fiscal 2021 fourth quarter.
Income Taxes
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
% Net Sales
% Net Sales
Consolidated income tax expense/(benefit)
$ 3,388
0.6 %
$ (4,142 )
-0.8 %
$ 7,530
181.8 %
Effective Tax Rate
22.4 %
28.4 %
We recorded income tax expense of $3.4 million for fiscal 2022, as compared to income tax benefit of $4.1 million for fiscal 2021, of which an income tax benefit of $10.6 million was recorded related to goodwill and trade name impairment charges. The effective tax rates for fiscal 2022 and 2021 were 22.4% and 28.4%, respectively. Our effective tax rate was lower in fiscal 2022 due to change in cash surrender value and the absence of employee retention credit in the current year, which increased the effective tax rate in the prior fiscal year due to a loss before income tax benefits. See Note 15 Income Taxes to our Consolidated Financial Statements for additional information about our income taxes.
Net Income/(Loss) and Earnings/(Loss) Per Share
Fifty-two weeks ended
January 30, 2022
January 31, 2021
$ Change
% Change
Net Income/(Loss)
% Net Sales
% Net Sales
Consolidated
$ 11,718
2.0 %
$ (10,426 )
-1.9 %
$ 22,144
212.4 %
Diluted earnings/(loss) per share
$ 0.97
$ (0.88 )
The analysis and discussion of fiscal 2021 compared to fiscal 2020 results is available in Item 7 of our 2021 Annual Report on Form-10K available through Hooker Furnishings and SEC websites.
Financial Condition, Liquidity and Capital Resources
Summary Cash Flow Information - Operating, Investing and Financing Activities
Fifty-Two Weeks Ended
January 30,
January 31,
February 2,
Net cash provided by operating activities
$ 19,209
$ 68,263
$ 41,429
Net cash used in investing activities
(6,862 )
(476 )
(4,254 )
Net cash used in financing activities
(8,822 )
(37,977 )
(12,579 )
Net increase in cash and cash equivalents
$ 3,525
$ 29,810
$ 24,596
During fiscal 2022, we used a portion of the $19.2 million generated from operations and $372,000 in life insurance proceeds to pay $8.8 million in cash dividends, $6.7 million in capital expenditures to enhance our systems and facilities and $560,000 for insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees and to facilitate business continuity.
During fiscal 2021, we used existing cash, a portion of the $68.3 million generated from operations and $1.3 million in life insurance proceeds to retire our $30.1 million in outstanding term loans related to the Home Meridian acquisition, pay $7.8 million in cash dividends, $1.2 million in capital expenditures to enhance our systems and facilities and to pay $555,000 for insurance premiums on Company-owned life insurance policies.
During fiscal 2020, we used some of the $41.4 million generated from operations and $1.4 million proceeds received from a note receivable to pay $7.2 million cash dividends, $6.4 million principal payments and interest towards our term loans, $5.1 million in capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities and $590,000 for insurance premiums on Company-owned life insurance policies.
Liquidity, Financial Resources and Capital Expenditures
Our sources of liquidity are:
■
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.
The most significant components of our working capital are inventory, accounts receivable and cash and cash equivalents reduced by accounts payable and accrued expenses.
Our primary cash needs are for imported finished goods and raw materials for our domestic upholstery operations and lease payments on our distribution centers, administrative facilities and showrooms. Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for inventory, lease payments and labor), quarterly dividend payments and capital expenditures related primarily to our ERP project, showroom renovations and upgrading systems, buildings and equipment. The timing of our working capital needs can vary greatly depending on demand for and availability of raw materials and imported finished goods but is generally the greatest in the mid-summer as a result of inventory build-up for the traditional fall selling season. Long-term cash requirements relate primarily to funding lease payments.
We generally fund short-term and long-term cash requirements with cash from operating activities. We believe our primary sources of liquidity will satisfy our cash requirements over both the short-term (the next twelve months) and long-term.
Loan Agreements and Revolving Credit Facility
We paid off the term loans which were related to the Home Meridian acquisition at the end of fiscal 2021 and currently have the Existing Revolver. The Existing Revolver is based on successive past amendments to previous BofA banking agreements which are collectively referred to as the “Previous Agreements.” Details of our Existing Revolver are outlined below:
■
The Existing Revolver is available between January 27, 2021 and February 1, 2026 or such earlier date as the availability may terminate or such later date as BofA may from time to time in its sole discretion designate in any extension notice;
■
During the availability period, BofA will provide a line of credit to the maximum amount of the Existing Revolver;
■
The initial amount of the Existing Revolver is $35 million;
■
The sublimit of the Existing Revolver available for the issuance of letters of credit was increased to $10 million;
■
The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%;
■
We may, on a one-time basis, request an increase in the Existing Revolver by an amount not to exceed $30 million at BofA’s discretion; and
■
Any amounts outstanding under the Existing Revolver bear interest at a rate, equal to the then current LIBOR monthly rate (adjusted periodically) plus 1.00%. We must also pay a quarterly unused commitment fee at a rate of 0.15% determined by the actual daily amount of credit outstanding during the applicable quarter.
The loan covenants agreed to under the Second Amended and Restated Loan Agreement continue to apply to us. They include customary representations and warranties and require us to comply with customary covenants, including, among other things, the following financial covenants:
●
Maintain a ratio of funded debt to EBITDA not exceeding 2.00:1.00.
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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.
They also limit our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. They do 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 agreements.
We were in compliance with each of these financial covenants at January 30, 2022 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have financial resources to weather the expected short-term impacts of COVID-19; however, an extended impact may materially and adversely affect our sales, earnings and liquidity.
Revolving Credit Facility Availability
As of January 30, 2022, we had an aggregate $27.9 million available under the 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 January 30, 2022. There were no additional borrowings outstanding under the Existing Revolver as of January 30, 2022.
Capital Expenditures
We expect to spend approximately $8 million in capital expenditures in fiscal 2023 to maintain and enhance our operating systems and facilities. Of those amounts, we expect to spend approximately:
●
$3.5 million on showroom renovations for both the 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; and
●
$3.5 million on implementation costs for a new common, cloud-based Enterprise Resource Planning platform which we expect to be online in our legacy Hooker divisions in the second half of our 2023 fiscal-year, with other segments following thereafter.
Enterprise Resource Planning
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 second half of fiscal 2023, with the Home Meridian segment and the Shenandoah division following afterwards. To complete the ERP system implementation as anticipated, we will be required to expend significant financial and human resources. We anticipate spending approximately $5.5 million over the course of this project, with a significant amount of time invested by our associates.
Dividends
We declared and paid dividends of $0.74 per share or approximately $8.8 million in fiscal 2022, an increase of 12.1% or $0.08 per share compared to $0.66 per share in fiscal 2021.
On March 1, 2022, our Board of Directors declared a quarterly cash dividend of $0.20 per share, payable on March 31, 2022 to shareholders of record at March 17, 2022.
Our Board of Directors will continue to evaluate the appropriateness of the current dividend rate considering our performance and economic conditions in future quarters.
COVID-19
As discussed under "Item 1A. Risk Factors," COVID-19 was recognized as a global pandemic by the World Health Organization.
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. To address the potential human impact of the virus, many of our administrative staff are telecommuting for at least part of the work week. For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have implemented appropriate social distancing policies and have stepped-up facility cleaning at each location. 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. In addition, we are offering temporary paid leave to employees diagnosed with the virus (and those associates with another diagnosed person or persons in their household) and are working to accommodate associates with child-care issues related to school or day-care closures.
As vaccination rates have increased and infection rates have stabilized and started to decline, more admin staff are returning to the office for at least partial workweeks. Domestic travel and limited international travel has resumed and we have adjusted social distancing and masking protocols to the current public health guidelines.
Outlook
We are concerned about ongoing global logistics constraints and economic headwinds affecting the consumer that could impact short-term demand, such as inflation, high gas prices and the war in Ukraine. We expect production capacity of our Asian suppliers to improve significantly, reaching full capacity at some point during the fiscal 2023 first quarter; although we don’t believe the full financial impact of this improvement will be felt until sometime in the fiscal 2023 second quarter.
We continue to be encouraged by long-term trends such as demand for housing, the renewed and sustainable focus on home interiors and exteriors, and the Millennial generation entering their prime earning and household formation years. We were also very encouraged by the recently concluded Spring High Point market. Attendance was up significantly compared to both the Fall 2021 and June 2021 markets and new products were very well received with major placements across all brands, including new placements of Home Meridian’s licensed products.
While we have worked through a broad spectrum of challenges during the past year, our team has continued to focus on multiple strategic growth initiatives, many of which we expect will positively impact us in the next six to twelve months. One such initiative is the integration of Sunset West, a leading manufacturer of outdoor furniture, which we acquired on the first day of our 2023 fiscal year. The acquisition immediately positioned us in the growing outdoor furniture segment of the industry with one of the most respected brands in the category and gives Sunset West access to our East Coast distribution system, our High Point showroom and retail and interior design customer base. We were very encouraged by the strong reception Sunset West received at its recent High Point market debut. As we integrate Sunset West and move past the current headwinds, we expect faster growth from Sunset West than our existing businesses as it is able to leverage the full capabilities of our organization. We are confident in our team’s ability to execute our strategies to grow profitably and to adapt successfully to unexpected challenges.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. Specific areas requiring the application of management’s estimates and judgments include, among others, revenue recognition, assumptions pertaining to valuation of goodwill and intangible assets and useful lives of long-lived assets. Accordingly, a different financial presentation could result depending on the judgments, estimates or assumptions that are used. However, we do not believe that actual results will deviate materially from our estimates related to our accounting policies described below but because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.
Revenue Recognition
We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container.
The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period.
Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.
Impairment of Long-Lived Assets
Tangible and Definite Lived Intangible Assets
We regularly review our property, plant and equipment and definite lived intangible assets for indicators of impairment, as specified in the Accounting Standards Codification.
When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of operations and consolidated balance sheets.
When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less.
Intangible Assets and Goodwill
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 during the interim period. 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, 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.
Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The fair value of our trademarks and tradenames is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. At January 30, 2022, based on our internal valuation, the fair values of our Bradington-Young, Home Meridian, Sam Moore and Shenandoah non-amortizable trademarks and trade names exceeded their carrying values.
Upon the adoption of ASU 2017-04, we perform our annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. Based on our internal goodwill impairment analysis as described above, we have concluded that Shenandoah goodwill in the Domestic Upholstery segment is not impaired as of January 30, 2022.
The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition.
Our other significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements beginning at page in this report.
Concentrations of Sourcing Risk
In fiscal 2022, imported products sourced from Vietnam and China accounted for 88% of our import purchases and our top five suppliers in Vietnam and China accounted for 42% of our fiscal 2022 import purchases. A disruption in our supply chain, or from Vietnam, China or Malaysia in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. Our supply chain could be adversely impacted by the uncertainties of health concerns and governmental restrictions. For example, in the summer of calendar 2021, our suppliers in Vietnam and Malaysia were temporarily closed or operated at substantially reduced levels due to a COVID-related lockdown. We faced supply chain constraints including but not limited to slower-than-expected re-openings, capacity limitations and production delays at some of our suppliers, along with the reduced shipping container and ocean vessel space availability. Home Meridian segment shipping and sales were immediately impacted as the majority of its business is container direct customers. In the fourth quarter of fiscal 2022, Hooker Branded segment sales were also impacted due to low inventory receipts in the second half of fiscal 2022 which consequently resulted in out-of-stocks. In some cases, we were able to provide substitutions using inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales. Supply disruptions and delays on selected items could occur for six months or longer before the impact of remedial measures would be reflected in our results. If we are unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam, China or Malaysia in general, could adversely affect our sales, earnings, financial condition and liquidity.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. 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 the Existing Revolver bears interest based on LIBOR plus 1.0%. As such, this debt instrument exposes us to market risk for changes in interest rates. There was no outstanding balance under our Existing Revolver as of January 30, 2022, other than amounts reserved for standby letters of credit in the amount of $7.1 million.
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.
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements listed in Item 15(a), and which begin on page, of this report are incorporated herein by reference and are filed as a part of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. 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 January 30, 2022. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of January 30, 2022, the end of the period covered by this annual report, 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 Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
In accordance with Section 404 of the Sarbanes-Oxley Act and SEC rules thereunder, management has conducted an assessment of our internal control over financial reporting as of January 30, 2022, based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s report regarding that assessment is included on page of this report, with our consolidated financial statements, and is incorporated herein by reference.
Report of Registered Public Accounting Firm
Our independent registered public accounting firm, KPMG LLP, audited the consolidated financial statements included in this annual report on Form 10-K and has issued an audit report on the effectiveness of our internal control over financial reporting. KPMG’s report is included on page and of this report, with our consolidated financial statements, and is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended January 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to our directors will be set forth under the caption “Proposal One-Election of Directors” in the 2022 Proxy Statement and is incorporated herein by reference.
Information relating to our executive officers is included in Part I of this report under the caption “Information about our Executive Officers” and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act will be set forth under the caption “Delinquent Section 16(a) Reports” in the 2022 Proxy Statement and is incorporated herein by reference.
Information relating to the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions will be set forth under the caption “Code of Business Conduct and Ethics” in the 2022 Proxy Statement and is incorporated herein by reference.
Information relating to material changes, if any, in the procedures by which shareholders may recommend nominees for our Board of Directors will be set forth under the caption “Procedures for Shareholder Recommendations of Director Nominees” in the 2022 Proxy Statement and is incorporated herein by reference.
Information relating to the Audit Committee of our Board of Directors, including the composition of the Audit Committee and the Board’s determinations concerning whether certain members of the Audit Committee are “financial experts” as that term is defined under Item 407(d)(5) of Regulation S-K will be set forth under the captions “Corporate Governance” and “Audit Committee” in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item will be set forth under the captions “Report of the Compensation Committee,” “Executive Compensation” and “Director Compensation” in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Information relating to this item will be set forth under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information relating to this item will be set forth in the last two paragraphs under the caption “Audit Committee” and the caption “Corporate Governance” in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information relating to this item will be set forth under the caption “Proposal Two - Ratification of Selection of Independent Registered Public Accounting Firm” in the 2022 Proxy Statement and is incorporated herein by reference.
Hooker Furnishings Corporation
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report on Form 10-K:
(1)
The following reports and financial statements are included in this report on Form 10-K:
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 30, 2022 and January 31, 2021
Consolidated Statements of Operations for the fifty-two-week periods ended January 30, 2022, January 31, 2021 and February 2, 2020
Consolidated Statements of Comprehensive Income/(Loss) for the fifty-two-week periods ended January 30, 2022, January 31, 2021 and February 2, 2020
Consolidated Statements of Cash Flows for the fifty-two-week periods ended January 30, 2022, January 31, 2021 and February 2, 2020
Consolidated Statements of Shareholders’ Equity for the fifty-two-week periods ended January 30, 2022, January 31, 2021 and February 2, 2020
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules:
Financial Statement Schedules have been omitted because the information required has been separately disclosed in the consolidated financial statements or related notes.
(b)
Exhibits:
3.1
Amended and Restated Articles of Incorporation of the Company, as amended September 16, 2021 (incorporated by reference to Exhibit 3.1 of the Company’s 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 of the Company’s Form 10-K (SEC File No. 000-25349) for the fiscal year ended February 2, 2014)
4.1
Amended and Restated Articles of Incorporation of the Company (See Exhibit 3.1)
4.2
Amended and Restated Bylaws of the Company (See Exhibit 3.2)
4.3
Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.3 of the Company’s Annual Report on Form 10-K (SEC File No. 000-25349) for the year ended February 2, 2020).
Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments, if any, evidencing long-term debt not exceeding 10% of the Company’s total assets have been omitted and will be furnished to the Securities and Exchange Commission upon request.
10.1(a)
Form of Executive Life Insurance Agreement dated December 31, 2003, between the Company and certain of its executive officers (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended February 29, 2004)*
10.1(b)
Form of Outside Director Restricted Stock Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on January 17, 2006)*
10.1(c)
2015 Amendment and Restatement of the Hooker Furniture Corporation Stock Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement dated March 1, 2015 (SEC File No. 000-25349))*
10.1(d)
2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income Plan, dated as of June 8, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended October 31, 2010)*
10.1(e)
Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*
10.1(f)
Form of Performance Grant Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*
10.1(i)
Employment Agreement, dated June 4, 2018, between Anne Jacobsen (now Anne Smith) and the Company (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*
10.1(j)
Employment Agreement, dated June 4, 2018, between Jeremy Hoff and the Company (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*
10.1(k)
Form of Performance Share Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on May 11, 2018)*
10.1(l)
First Amendment to the 2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed with the SEC on November 15, 2019)*
10.2(a)
Second Amended and Restated Loan Agreement, dated as of September 29, 2017, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017)
10.2(b)
First Amendment to Second Amended and Restated Loan Agreement, dated as of February 1, 2019, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC. (incorporated by reference to Exhibit 10.2(d) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 19,2019)
10.2(c)
Second Amendment to the Second Amended and Restated Loan Agreement, dated as of November 4, 2020, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC, and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 10, 2020)
10.2(d)
Third Amendment to Second Amended and Restated Loan Agreement, dated as of January 27, 2021, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on January 28, 2021)
10.3
Asset Purchase Agreement dated January 31, 2022 by and among the Company, Sunset West, Wes Stewart, Heath Malone and Martin Jamroz (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on February 1, 2022)
List of Subsidiaries:
Bradington-Young LLC, a North Carolina limited liability company
Home Meridian Group, LLC, a Virginia limited liability company
Sam Moore Furniture LLC, a Virginia limited liability company
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1
Rule 13a-14(a) Certification of the Company’s principal executive officer (filed herewith)
31.2
Rule 13a-14(a) Certification of the Company’s principal financial officer (filed herewith)
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 (furnished herewith)
The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2022, formatted in Interactive Extensible Business Reporting Language (“IXBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, (v) consolidated statements of shareholders’ equity and (vi) the notes to the consolidated financial statements, tagged as blocks of text (filed herewith)
Cover page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
*Management contract or compensatory plan