A company that has recently shown up on my radar is Hooker Furnishings Corp. (HOFT, Financial). This enterprise designs, markets and sources home furnishings. After rising from around $14 per share in April 2020, the stock recently peaked at $40 a share in June of this year before falling back to around $26 per share in October. Following these declines, the shares appears to be cheap.
A quick glance shows the stock is trading at a forward price-earnings multiple of 9.4 for 2022, falling to 7.4 for 2023. This is based on Wall Street analysts' current growth estimates, which are calling for earnings growth of 83% in the current financial year, followed by growth of 27% in fiscal 2023. These growth figures also imply the shares are selling at a PEG ratio of 0.3.
The stock also looks cheap based on other metrics. It is selling at a price-book value of 1.2 and a price-tangible book value of 1.3. The price-sales ratio is 0.5, and the enterprise value/Ebitda ratio is 5.3.
These metrics appear to show the stock is undervalued compared to its growth potential, and there are other factors that investors might need to consider.
Cash, inventory and the holiday season
At the end of its last fiscal quarter, the company's cash balance stood at $37 million. That is around 10% of its current market capitalization of $316 million. This suggests that if one were to subtract cash from Hooker's valuation, it would be even cheaper than the metrics above infer.
It seems like there is a good chance Wall Street's lofty growth estimates are on the money. Looking through the company's latest investor update, management noted that in June, the group experienced the largest inflow of "written orders since April 2016."
New product launches have also gone down well. The so-called Commerce & Market collection, with pricing, scale and styling targeting millennials, was one of Hooker's "largest accent furniture launches in our company's history."
On top of these factors, at the end of the third quarter, order backlogs in all three of the company's divisions were at historical highs and increased 73% compared to the prior-year period.
The update also provides investors with some insight into Hooker's current cash balance:
"Cash and cash equivalents stood at $37 million at fiscal 2022 second quarter-end, a decrease of $28 million compared to the balance at fiscal 2021 year-end due primarily to a $33 million increase in inventory as we continue to build inventories to meet increased customer demand and prepare for the holiday selling season."
One of the issues with valuing retail businesses is valuing inventory, and this is a prime example. Hooker has had to spend a significant sum increasing its inventory ahead of the holiday season. The value of this inventory is only going to be worth as much as buyers are willing to pay. The group has valued it at $33 million, but it could be worth much less in a firesale. Some investors may prefer to discount it appropriately based on these factors.
Another factor to consider is the treatment of cash on the balance sheet. As we enter the critical holiday season, cash will decrease and inventories will increase. Therefore, using the cash balance in a valuation at this point could be just as unreliable as using it after the holiday season, when the figure is likely to be inflated. Investors may be better off using an average for the year as a whole.
This is only a short look at what could be a potentially interesting value opportunity. Hooker has a strong balance sheet and appears to be experiencing a significant increase in the demand for its products. It may be worth taking a closer look at this enterprise.
