HOOKER FURNISHINGS Corp: Form 10-Q for the period ended Oct 27, 2024

All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furnishings Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker,” “Hooker Division(s),” “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to all current business units and brands except for those in the Home Meridian segment. The Hooker Branded segment includes Hooker Casegoods and Hooker Upholstery. The Domestic Upholstery segment includes Bradington-Young, HF Custom (formerly Sam Moore), Shenandoah Furniture and Sunset West. All Other includes H Contract, Lifestyle Brands, and BOBO Intriguing Objects.

Forward-Looking Statements

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

1) general economic or business conditions, both domestically and internationally, including the current macro-economic uncertainties and challenges to the retail environment for home furnishings along with instability in the financial and credit markets, in part due to inflation and high interest rates, including their potential impact on (i) our sales and operating costs and access to financing, (ii) customers, and (iii) suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

2) the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;

3) risks associated with the ultimate outcome of our planned cost reduction plans, including the amounts and timing of savings realized;

4) risks associated with the outcome of the HMI segment restructuring which we expect to complete in fiscal 2025, including whether we can return the segment to consistent profitability;

5) risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, customs issues, freight costs, including the price and availability of shipping containers, ocean vessels, domestic trucking, and warehousing costs and the risk that a disruption in our offshore suppliers or the transportation and handling industries, including labor stoppages, strikes, or slowdowns, could adversely affect our ability to timely fill customer orders;

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

7) difficulties in forecasting demand for our imported products and raw materials used in our domestic operations;

8) adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government;

9) our inability to collect amounts owed to us or significant delays in collecting such amounts;

10) the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information, hacking or other cyber-security threats or inadequate levels of cyber-insurance or risks not covered by cyber-insurance;

11) risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs;

12) disruptions and damage (including those due to weather) affecting our Virginia or Georgia warehouses, our Virginia, North Carolina or California administrative facilities, our High Point, Las Vegas, and Atlanta showrooms or our representative offices or warehouses in Vietnam and China;

13) 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;

14) risks associated with product defects, including higher than expected costs associated with product quality and safety, regulatory compliance costs (such as the costs associated with the US Consumer Product Safety Commission’s new mandatory furniture tip-over standard, STURDY) related to the sale of consumer products and costs related to defective or non-compliant products, product liability claims and costs to recall defective products and the adverse effects of negative media coverage;

15) the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers, including the loss of several large customers through business consolidations, failures or other reasons, or the loss of significant sales programs with major customers;

16) the direct and indirect costs and time spent by our associates associated with the implementation of our Enterprise Resource Planning system (“ERP”), including costs resulting from unanticipated disruptions to our business;

17) achieving and managing growth and change, and the risks associated with new business lines, acquisitions, including the selection of suitable acquisition targets, restructurings, strategic alliances and international operations;

18) risks associated with securing a suitable credit facility, which may include restrictive covenants that could limit our ability to pursue our business strategies;

19) risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

20) the cost and difficulty of marketing and selling our products in foreign markets;

21) changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials;

22) price competition in the furniture industry; and

23) changes in consumer preferences, including increased demand for lower-priced furniture.

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

Also, our business is subject to significant risks and uncertainties, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 2024 Annual Report.

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

Quarterly Reporting

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the 2025 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began July 29, 2024 and the thirty-nine week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began January 29, 2024, which both ended October 27, 2024. This report discusses our results of operations for these periods compared to the 2024 fiscal year thirteen-week period that began July 31, 2023, and the thirty-nine week period that began January 30, 2023, which both ended October 29, 2023; and our financial condition as of October 27, 2024 compared to January 28, 2024.

References in this report to:

• the 2025 fiscal year and comparable terminology mean the fiscal year that began January 29, 2024, and will end February 2, 2025; and
• the 2024 fiscal year and comparable terminology mean the fiscal year that began January 30, 2023, and ended January 28, 2024.

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

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all our recent public filings made with the SEC, especially our 2024 Annual Report. Our 2024 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.

Our 2024 Annual Report and other public filings made with the SEC are available, without charge, at www.sec.gov (http://www.sec.gov) and at http://investors.hookerfurnishings.com.

Overview

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, lighting, accessories, and home décor for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather, custom fabric-upholstered furniture and outdoor furniture.

Orders and Backlog

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. Our hospitality products are highly customized and are generally non-cancellable. For our outdoor furnishings, most orders require a deposit upon order and the balance before production is started, and hence are generally non-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. At times, the ratio of new products to currently available inventory items can affect the amount of the backlog that can be converted to shipments in the short-term. 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) the average sales order sizes of its mass and mega account channels of distribution, (ii) the proprietary nature of many of its products and (iii) the project nature of its hospitality business, for which average order sizes tend to be larger and consequently, the Home Meridian segment’s order backlog tends to be larger.

There have been exceptions to the general predictive nature of our orders and backlogs noted in the above paragraph, such as during times of extremely high demand and supply chain challenges as experienced during the immediate aftermath of the initial COVID-19 crisis and subsequent recovery. Orders were not being converted to shipments as quickly as would be expected compared to the pre-pandemic environment due to the lack and cost of shipping containers and vessel space as well as limited overseas vendor capacity and our domestic production capacity. As a result, backlogs were significantly elevated and reached historical levels in the prior two years.

At October 27, 2024, our backlog of unshipped orders was as follows:

Consolidated order backlog decreased by 5.3% and 8.4% compared to the end of the previous year’s third quarter and the fiscal 2024 year-end in January, respectively.

Hooker Branded incoming orders decreased by 13.3% year-over-year. The quarter-end order backlog was 30% lower than at the end of the prior year’s third quarter but remained 18% higher than pre-pandemic levels at the end of the fiscal 2020 third quarter.

Home Meridian incoming orders increased by 8.1% compared to the previous year’s third quarter. The quarter-end backlog was 32.2% higher than the prior year’s third quarter end, primarily due to increased orders from the hospitality business.

Domestic Upholstery incoming orders decreased by 4.8% during the quarter, and the quarter-end backlog was 29.9% lower than at the end of the prior year’s third quarter. Excluding Sunset West, the order backlog remained consistent with pre-pandemic levels at the end of the fiscal 2020 third quarter.

*For comparison purposes, we included order backlog as of fiscal 2020 third quarter end, the year before the COVID crisis. At fiscal 2020 third quarter end, Home Meridian backlog included approximately $17 million orders from the unprofitable Clubs and Accentrics Home e-commerce (ACH) businesses which we decided to exit in fiscal 2022 and fiscal 2023, respectively. Domestic Upholstery backlog did not include Sunset West, the business we acquired in the beginning of fiscal 2023. At fiscal 2020 third quarter end, Sunset West had approximately $1.5 million in backlog. See Review below for additional information on our incoming orders and backlog.

Executive Summary-Results of Operations

Our fiscal 2025 third quarter and nine months results were adversely affected by macro-economic headwinds and challenging conditions which are impacting most of the home furnishings industry. Consolidated net sales were $104.4 million, a decrease of $12.5 million, or 10.7%, compared to the same quarter of the previous year. Additionally, we recorded $2.4 million in bad debt expense due to a large customer’s bankruptcy, which also triggered tradename impairment of $2.0 million. On a positive note, we are starting to see benefits from our cost reduction plan announced in the second quarter; however, we incurred $3.1 million in costs related to those measures in the third quarter. The Company reported a consolidated operating loss of $7.3 million and a net loss of $4.1 million, or ($0.39) per diluted share.

For the nine-month period of fiscal 2025, consolidated net sales were $293.0 million, a decrease of $43.4 million or 12.9% compared to the same period of the previous year. This decrease was also due to persistent low demand affecting the home furnishings industry, and the absence of $11 million in liquidation sales from the unprofitable ACH product line which the Company exited last year. For the current nine-month period, the Company reported a consolidated operating loss of $15.4 million and a net loss of $10.2 million, or ($0.97) per diluted share, attributed to lower overall sales, higher ocean freight costs at Hooker Branded, under-absorbed indirect costs at Domestic Upholstery, as well as a total of $7.5 million charges mentioned earlier.

Our fiscal 2025 third quarter and nine months performance are discussed in greater detail below under “Results of Operations.”

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.

Fiscal 2025 Third Quarter and Nine Months Compared to Fiscal 2024 Third Quarter and Nine Months

Consolidated net sales decreased in both the third quarter and nine-month period of fiscal 2025, as all three segments reported lower sales due to the ongoing challenging environment for home furnishings.

• The Hooker Branded segment’s net sales decreased by $4.2 million, or 10.7%, in the third quarter of fiscal 2025. The average selling price decreased by 5.6%, reflecting price reductions implemented last year to align with lower ocean freight costs, as well as higher discounting on excess inventories due to re-balancing inventory mix and levels. Additionally, returns and allowances increased by 110 bps driven by handling charges. While unit volume decreased by a modest 2.1% compared to the prior year’s third quarter, it exceeded levels seen in the first and second quarters of this fiscal year. For the nine-month period, net sales decreased by $13.9 million, or 11.7%, also due to lower average selling price and decreased unit volume.
• The Home Meridian segment’s net sales decreased by $5.1 million, or 11.8%, in the third quarter of fiscal 2025, due to reduced unit volume. Approximately 40% of this decrease was attributable to the loss of a significant customer following its bankruptcy. Sales through major furniture chains and independent furniture stores decreased, though these decreases were partially offset by an 8% increase in sales within the hospitality business. For the nine-month period, net sales decreased by $19 million, or 16.6%, largely due to the absence of $11 million in ACH liquidation sales, which accounted for approximately 60% of the sales decrease and 75% of the unit volume decrease. Sales across nearly all channels experienced decreases during the period, except for the hospitality business which experienced a strong 23% increase. The average selling price increased significantly over the nine-month period due to the absence of liquidation sales.
• The Domestic Upholstery segment’s net sales decreased by $3.2 million, or 9.9%, in the third quarter of fiscal 2025, due to sales decreases at Shenandoah, Bradington-Young, and HF Custom, attributed to persistent low demand. This decrease was partially offset by a 9.1% increase in sales at Sunset West, which has delivered year-over-year quarterly sales growth for three consecutive quarters this fiscal year, driven by its expansion on the East Coast and the stabilization of its ERP system. For the nine-month period, net sales decreased by $10.6 million, or 10.8% due to the same factors. Bradington-Young, HF Custom and Shenandoah have been operating on a reduced production schedule since summer of this year to align with lower backlog levels, leading to decreased unit volumes at these divisions for both the third quarter and the nine-month period.

Consolidated gross profit and margin decreased in both the third quarter and nine-month period of fiscal 2025, primarily due to lower overall net sales and increased ocean freight costs at Hooker Branded, partially offset by increased gross margin at Home Meridian.

• The Hooker Branded segment’s gross profit and margin decreased in both periods, impacted by lower net sales, higher product costs driven by increased ocean freight costs, and reduced margins on discounted products. Additionally, the prior year quarter's gross margin was elevated by the combination of lower freight costs and higher selling prices, significantly impacting the year-over-year comparison. Warehousing and distribution expenses increased by 180 and 150 bps compared to both the previous year’s periods, respectively, due to the decreases in net sales.
• The Home Meridian segment’s gross profit decreased in both the third quarter and nine-month period of fiscal 2025, primarily driven by lower net sales. Despite decreased net sales, Home Meridian achieved a gross margin of 20.5%, its highest level since the acquisition in 2016. The restructuring efforts over recent years to support sustained profitability at Home Meridian have shown meaningful results, including significantly reduced allowances, improved product margins, and lower fixed costs across nearly all areas of this segment. For the nine-month period, gross profit and margin benefited from strong sales and profitability in the hospitality business during the second quarter. These favorable variances were partially offset by unfavorable customer mix, which included higher volume but lower margin accounts.
• The Domestic Upholstery segment’s gross profit decreased in both periods due to lower net sales. While gross margin remained relatively flat in the third quarter, it decreased by 300 bps in the nine-month period of fiscal 2025. In the third quarter, direct material costs decreased by 150 bps primarily due to lower purchased inventory costs at Sunset West, partially offset by increased fabric costs at Shenandoah and higher freight expenses across four divisions. Direct labor costs decreased by 60 bps due to reduced headcount and working hours. For the nine-month period, direct material and direct labor costs remained unchanged as a percentage of net sales. Indirect costs increased by 40 and 120 bps in the third quarter and nine-month period, respectively, due to lower net sales and production inefficiencies, partially mitigated by decreased indirect labor and benefits costs. Warehousing and distribution expenses increased by 200 and 150 bps in these periods, respectively, primarily driven by higher rent expenses related to the redeploying of a portion of the Georgia warehouse to support Sunset West's East Coast expansion, as well as increased labor costs at this division.
• All Other recorded approximately $470,000 in restructuring costs, primarily due to BOBO inventory write-downs and warehouse closure expenses, as a result of the consolidation of BOBO business into Hooker Branded operations.

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms in the fiscal 2025 third quarter and the nine-month period due to a $2.6 million restructuring costs and a $2.4 million bad debt expense recorded in the third quarter. S&A increased as a percentage of net sales due to lower net sales and these charges.

• The Hooker Branded segment’s S&A expenses increased by $1.6 million or 770 bps compared to the third quarter of the previous year. Approximately $950,000 restructuring costs, primarily severance costs, were recorded in the third quarter. Additional contributing factors included higher compensation costs due to wage inflation and investment in talent, as well as increased IT-related expenses. For the nine-month period, S&A expenses increased due to these same factors, along with increased professional service expenses to support strategic growth initiatives, increased showroom expenses, higher bad debt and banking expenses, and compliance costs. Despite decreases in net sales in both periods, commissions did not decrease significantly due to higher commission rates in the contract and interior design channels.
• The Home Meridian segment’s S&A expenses increased by $1.8 million or 690 bps during fiscal 2025 third quarter, primarily driven by the $2.4 million bad debt expense resulting from the bankruptcy of a major customer, and to a lesser extent, $233,000 in severance costs. Excluding these costs, S&A expenses would have been lower than in the previous year’s third quarter due to the cost reduction initiatives including personnel changes and reduced spending, as well as lower selling costs on decreased net sales. For the nine-month period, S&A expenses were essentially flat as the increase in bad debt expense was offset by cost savings and lower selling costs on reduced net sales. S&A expenses increased by 390 bps over the nine-month period due to decreased net sales.
• The Domestic Upholstery segment’s S&A expenses increased both in absolute terms and as a percentage of net sales during the third quarter and the nine-month period of fiscal 2025, primarily due to approximately $560,000 in severance costs recorded in the third quarter. This increase was largely offset by reductions in compensation expenses, driven by lower medical claims and bonus accruals, as well as decreased selling costs due to lower net sales and other cost-saving initiatives. S&A expenses increased for the nine-month period also due to higher professional services expenses incurred earlier in the year.
• Approximately $850,000 restructuring costs, primarily severance costs, were recorded in All Other resulting from the consolidation of BOBO business.

See Note 8 to our Condensed Consolidated Financial Statements for additional information.

The Company reported operating losses in the fiscal 2025 third quarter and the nine-month period due to the $3.1 million in restructuring costs, $2.4 million in bad debt, and $2.0 million in intangible asset impairment, as well as low sales volume.

We recorded income tax benefit of $2.8 million for the fiscal 2025 third quarter, compared to $2.0 million income tax expense in the comparable prior year quarter. The effective tax rates for the fiscal 2025 and 2024 third quarters were 40.7% and 22.4%, respectively. The increase in the fiscal 2025 third-quarter effective tax rate was primarily due to the annualization method, which resulted in the recognition of income tax benefits from previous quarters. For the fiscal 2025 nine-month period, we recorded income tax benefit of $3.6 million compared to the income tax expense of $2.6 million for the previous year’s comparable period. The effective tax rates for the fiscal 2025 and 2024 nine-month periods were 26.0% and 22.0%, respectively.

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Outlook

Over the last few months, the key economic indicators that impact furniture sales have been trending positively:

• Interest rates, which drive home mortgage rates, were cut by the Federal Reserve in September and November.
• Since summer, inflation has been cooling to levels closer to the Federal Reserve’s 2% target: at 2.9% in July, 2.5% in August, 2.4% in September and 2.6% in October.
• In November, a leading real estate industry group stated its belief that the worst of the US housing inventory shortage is ending and forecasted an approximate 10% increase in home sales for 2025, with mortgage rates stabilizing around 6%.
• Consumer sentiment rose in November to 71.8, its highest level since April, and the stock market continues near all-time highs.

While the macro-economic outlook is improving, we continue to focus on the controllables and improvements already underway. Our balance sheet, financial condition and seasoned management team should well equip us to navigate any remaining challenges as we focus on maximizing efficiencies with the cost reductions while simultaneously investing in expansion strategies that will position us for revenue and profitability growth when demand fully returns.

Financial Condition, Liquidity and Capital Resources

Cash Flows – Operating, Investing and Financing Activities

During fiscal 2025 nine-month period, we used existing cash and cash equivalents on hand and $936,000 life insurance proceeds to fund $7.4 million in cash dividends to our shareholders, $2.8 million for further development of our cloud-based ERP system, $2.7 million capital expenditures and $387,000 in life insurance premiums on Company-owned life insurance policies.

In comparison, during the fiscal 2024 nine-month period, we used a portion of the $48.8 million cash generated from operations and $444,000 life insurance proceeds to fund $11.7 million share repurchases, $7.2 million in cash dividends to our shareholders, $5.7 million capital expenditures including investments in our new showrooms, $3.8 million for development of our cloud-based ERP system, $2.4 million on the BOBO acquisition, and $378,000 in life insurance premiums on Company-owned life insurance policies.

Liquidity, Financial Resources and Capital Expenditures

Our financial resources include:

• 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 most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for inventory, lease payments and payroll), 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 mid-summer because of inventory build-up for the traditional fall selling season. Long term cash requirements relate primarily to funding lease payments and repayment of long-term debt.

Loan Agreements and Revolving Credit Facility

On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) to replenish cash used to make the Sunset Acquisition. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”). Details of the individual credit facilities provided for in the Amendment are as follows:

• Unsecured Revolving Credit Facility. Under the Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00%. The interest rate will be adjusted on a monthly basis. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;
• 2022 Secured Term Loan. The Amendment provided us with an $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and
• 2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to make monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed. As of October 27, 2024, $4.0 million was outstanding under the Unsecured Term Loan and $18 million was outstanding under the Secured Term Loan.

We incurred $37,500 in debt issuance costs in connection with our term loans. As of October 27, 2024, unamortized loan costs of $20,625 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

The Amendment also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

• Maintain a ratio of funded debt to EBITDA not exceeding:
• 2.25:1.0 through July 30, 2024; and
• 2.00:1.00 thereafter.
• 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.

The Existing Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The Existing Loan Agreement does 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 Existing Loan Agreement.

Due to our first nine months results, we were not in compliance with the Existing Loan Agreement’s basic fixed charge ratio covenant in the first three fiscal 2025 quarterly periods. Additionally, we were not in compliance with the Funded Debt to EBITDA Ratio in the third quarter. However, subsequent to the end of all three quarterly periods, we obtained covenant waivers from BofA. Subsequent to the fiscal 2025 third quarter end, we finalized a new credit facility with BofA. Consequently, we expect to be in compliance with our revised financial covenants in our fiscal 2025 fourth quarter and for the foreseeable future. We refer you to the discussion in Note 14 Subsequent Events.

As of October 27, 2024, we had $28.3 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $6.7 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 27, 2024. There were no additional borrowings outstanding under the Existing Revolver as of October 27, 2024.

Capital Expenditures

We expect to spend approximately $600,000 to $700,000 in capital expenditures over the remainder of fiscal 2025 to maintain and enhance our operating systems and facilities, excluding any possible spending decreases resulting from the cost reduction plan discussed above.

Enterprise Resource Planning Project

During calendar 2021, our Board of Directors approved an upgrade to our current ERP system and implementation efforts begun shortly thereafter. The ERP system went live at Sunset West in December 2022 and in the legacy Hooker divisions in early September 2023. Due to our cost reduction initiatives, we have temporarily paused the ERP project in the Home Meridian segment. We do not anticipate further significant ERP spending in fiscal 2025.

Dividends

On December 2, 2024, our board of directors declared a quarterly cash dividend of $0.23 per share which will be paid on December 30, 2024, to shareholders of record at December 13, 2024.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2024 Annual Report.

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 our revolving credit facility, the Secured Term Loan and the Unsecured Term loan bear interest based on BSBY plus 1.00%, BSBY plus 0.90% and BSBY plus 1.40%, respectively. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of October 27, 2024 other than standby letters of credit in the amount of $6.7 million. As of October 27, 2024, $22.0 million was outstanding under our term loans. A 1% increase in the BSBY rate would result in an annual increase in interest expenses on our terms loans of approximately $212,000.

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.

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 October 27, 2024. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of October 27, 2024 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 SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

During fiscal 2024 second quarter, we closed on the acquisition of substantially all of the assets of BOBO Intriguing Objects (“BOBO"). As permitted by SEC guidance for newly acquired businesses, we excluded BOBO’s operations from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ending January 28, 2024. We are in the process of implementing our internal control structure at BOBO and expect that this effort will be completed in fiscal 2025.

There have been no changes in our internal control over financial reporting during the fiscal quarter ended October 27, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.