HOFT - Hooker Furnishings: Ramping Up Income Power

2023-12-07 15:53:59 ET

Summary

• Hooker Furnishings Corporation has recently struggled due to the housing market slowdown and softer demand, leading to the sale of the Accentrics Home product line.
• The company's stock has been stagnant for a decade but has shown potential for swing traders in the past year.
• Despite a drop in sales, Hooker Furnishings has seen an increase in earnings power and has reorganized its Home Meridian segment for more sustainable revenue and profit.
• Despite falling sales, we see income power on the rise, and inventory improvement.

Hooker Furnishings Corporation ( HOFT ) is a manufacturer and importer of residential household and contract furniture for sale. The company has struggled over the last year with the housing market slowdown and from softer demand, in part due to higher rates for consumers to borrow money or utilize their credit. The company has made strategic moves to offload lower margin businesses, specifically by selling off the Accentrics Home product line. This is a company with a rich history, and has been in operation for nearly a century. The stock has not done much for investors, though, and has swung back and forth, making it a target for traders.

As you can see, the stock has basically gone nowhere for a decade, although the stock does offer a growing dividend , which has helped total returns. But in the last year, it has really been a swing trader's stock.

The question is with today's bounce due to the earnings release, can the stock bust through upside resistance? If so, there is clear sailing to $24-$25 if we look to the medium term and longer-term chart above, but we suspect the stock will struggle here at resistance. It is tough to chase this one. In fact, we lean more toward taking profits if you have them, and then holding onto a house position that consists of just the profit, and collecting all future dividends, spinoffs, and capital appreciation potential. We think backing out the initial position and letting the rest run if you were a buyer in the $15-$18 range is the best play. We would not sell it all, however, because operationally, the company is seeing an inflection in earnings power despite an ongoing drop in sales in its three segments as indicated by the just reported earnings.

Net sales for the just reported fiscal Q3 dropped $34.7 million, or 22.9%, compared to a year ago. This was both from ongoing soft demand for home furnishings, as well as the aforementioned sale of the Accentrics Home product line. But it was across the board weakness for sales in each segment. That said, while the comps from last year were tough, looking to quarters this fiscal year there is improvement. The Home Meridian segment’s sales increased compared to the first and second quarters thanks to increased volume of shipments for new product placements. Further, Hooker Branded sales also increased compared to the sequential Q2, which is a hidden positive.

The company has also reorganize the focus of the Home Meridian Segment from a volatile, high-risk model with unpredictable profitability to a lower risk, more sustainable revenue and profit model. Another positive is that this segment saw positive quarterly operating income for the first time since calendar year 2021 and helped contribute $0.9 million to income in the current-year third quarter compared to a $3.2 million loss in the prior-year third quarter.

Despite sales falling precipitously, earnings power went up. That is pretty bullish especially with a stock with a questionable valuation on several metrics. Consolidated operating income increased 36.6% from last year while operating margin surged to 7.5% from 4.2% versus last year. Net income rocketed 45.4% higher to $7.0 million or $0.65 per share, compared to $4.8 million or $0.42 per share a year ago.

Are brighter days ahead? It looks that way, especially if the stock can break through and hold above the $22 resistance. CEO Jeremy Hoff noted that:

“After spending considerable time repositioning HMI to focus on its core products and businesses, it is encouraging to see HMI report a quarterly profit for the first time in two years and contribute to our overall profitability. Liquidating excess inventories, rightsizing our overhead and exiting unprofitable businesses have put us in a much stronger overall position"

That is another reason we think you hold shares here for the future. The inventory improvement was dramatic. Coming into 2023 inventories were $96.7 million. At the end of Q3, inventory was moved significantly, down to $65.1 million. This level of inventory is seemingly much more in line with consumer demand, which means the company can be less promotional and thus start to expand gross margins on sales once again.

As we look ahead, the company's cash and equivalents were $40 million, an increase of $21 million from the prior year-end. Inventory levels are down of course. The company also has an aggregate of $27.2 million available under its existing revolver at quarter-end. The company just finished a buy back as well. There is about $21.8 million in long-term debt, but interest expense is down as total debt has declined. We do not see a major risk here due to the debt. Instead, risks center on competition, and persistently high rates keeping the housing market cool. The major boost seen from COVID when people were improving their homes at near zero rates, and predominately stuck inside, along with a hot housing market, has passed. But the efforts to streamline the business and move inventory have paid off. We think Hooker Furnishings Corporation stock can make a move higher, but it is smart to take trading gains if you have them, then run a long-term house position.

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