Whore Furniture Downgrades Due to Major Industry Weakness (NASDAQ:HOFT)

Back in December of 2022, I wrote an article in which I took a bullish stance on a company named Hooker Furniture (Nasdaq: HOFT). The company, for those unfamiliar, acts as a designer, marketer and Importer of furniture and other similar goods. It produces some of its own furniture and sells these products to retailers such as independent furniture stores, department stores, national chains, and more. At the time, she acknowledged that the company was facing some headwinds. However, I said the stock price was attractive at the time. Furthermore, the company had only a small amount of net debt.

Since then, things have not gone as I had hoped. Although shares are up 5.5% since this article was published, that’s a far cry from the 31.4% increase the company saw. Standard & Poor’s 500 during the same time period. Fast forward to today, the picture is certainly interesting. Compared to similar companies, the shares may appear slightly undervalued. The company has gone from net debt of $18.1 million on its books to net cash of $20.3 million. This is definitely an improvement. However, revenues and cash flows remain weak as challenging industry conditions lead to lower demand. This also caused the company’s backlog to collapse.

Because of these problems, I’m definitely not as optimistic as I used to be. While the company’s shares are still very cheap, even after taking into account recent weaknesses, the change in industry conditions is an issue. Out of an abundance of caution, these issues prompted me to become more cautious, which ultimately led to the downgrade I’m making now from a simple “buy” to a “hold.” Of course, this picture can always change based on new data that comes to light. It just so happens that before the market opens on June 6th, the management team at Hooker Furnishings is expected to announce financial results for the first quarter of fiscal year 2025. If the analysts turn out to be right, the bottom line will be additional pain on both the top and bottom lines. But if management can come up with a positive surprise, I might become a little optimistic again.

tough times

Basically, things were not looking good for Hooker Furnishings. For example, we only need to look at the financial results covering fiscal year 2024 compared to what the company achieved in 2023. Revenue for 2024 was $433.2 million. This represents a 25.7% decline compared to the $583.1 million achieved in 2023. Management attributed this to declining industry-wide demand. However, it wasn’t all because of that. The $21 million decrease in revenue was actually attributable to the company’s decision to exit unprofitable product lines in the Home Meridian segment. If we adjusted that, revenue would have actually declined by 22.9%.

When it comes to specific sectors, there has been pain across the board. The Home Meridian segment saw revenue decline 33.7%. But this decline decreases to 26.5% if we remove the mentioned exits. The larger brands segment recorded a 24% decline, largely due to a 21.6% decline in unit volume. In comparison, average selling prices for this sector fell by only 0.1%. The Home Meridian segment recorded a 23% decline in volume and a 13.2% decline in average selling prices. Finally, the home furnishings sector was affected by 24.2% due to a decrease in sales volume. This was marginally offset by a 7.7% price improvement.

The company’s bottom line was a bit more complicated. While revenues took a hit, the company went from posting a net loss of $4.3 million in 2023 to making a profit of $9.9 million last year. But that was largely a result of missing the $24 million writedown the company saw in 2023 associated with inventories in its Home Meridian segment. Most other profitability metrics also worsened. It’s true that operating cash flow went from negative $21.7 million to positive $55.5 million. But if we adjust for the changes in working capital, we get a decrease from $26 million to $23.2 million. Finally, the company’s EBITDA fell from $26 million to $20.8 million.

If we use the financial results generated in 2023 and 2024, valuing the company becomes easy. In the chart above, you can see how stocks are priced on a price-to-adjusted operating cash flow basis and on an EV-to-EBITDA basis. I like to see companies trading in the mid to high single digit range like this. But compared to similar companies, the stock looks only a little cheap. As you can see in the table below, two of the five companies I decided to compare Hooker Furnishings to are trading at lower multiples than what our nominee is.

Click to enlarge

As I mentioned at the beginning of this article, management is expected to announce financial results for the first quarter of fiscal year 2025 before the market opens on June 6. Current forecasts by analysts are that revenue will reach approximately $94.9 million. That would represent a massive 22.1% decline compared to the $121.8 million generated one year ago. It is very likely that the reduction of certain products was a major contributor to this decline. But general weakness is also likely to occur.

I say this because the latest data provided by the Federal Reserve shows that furniture sales, at the retail level, are slightly lower this year than they were the year before. In the first four months of the year, revenues totaled $43.56 billion. This represents a 10.4% decline compared to the $48.61 billion generated in the first four months of 2023. As the chart below shows, we are seeing year-over-year declines each month. Going back to January, the decline was 13.5%. By April, that had dropped to 8.4%. This creates some hope that the final pain will be very fleeting.

Regardless of what we ultimately see from a revenue perspective, the bottom line is also likely to worsen. Analysts expect a loss of $0.03 per share. This compares to $0.13 per share of earnings generated in the first quarter of 2024. This would result in net income falling from $1.5 million to negative $0.3 million. In the table below, you can also see other financial results for the first quarter of 2024. In all likelihood, these results will also worsen year-on-year.

Eventually, I think things will change for Hooker Furnishings. The company, which has a net cash position of $20.3 million, certainly has time to wait. But the first major indicator we’re likely to see that the worst is over and good times are on the horizon will be in the company’s business backlog. If we focus solely on the year-end results, Hooker Furnishings’ backlog peaked at $310.1 million in 2022. By the end of 2023, we saw it decline to $95.4 million. By the end of fiscal year 2024, that number had fallen to $71.8 million. If or when we start to see improvement on this front, especially if it is a significant improvement, optimism will likely be warranted. But until then, we are looking to be in a weak trend.

He stays away

As much as I love Hooker Furnishings, the company’s image has turned out much worse than I expected. It is only because of the cheap stock prices that the stock has not declined since I last wrote about it. If it had been an expensive stock, I think a significant amount of the downside would have been justified. Instead, investors received below-average returns. Over the long term, I fully expect Hooker Furnishings to create significant value for its investors. But because of the current state of things, even with earnings on the horizon, I think a more cautious approach is warranted. This prompted me to downgrade the stock from a simple ‘buy’ to ‘hold’.