Government Shutdown? Growth Scare? Hookers? Hooker Furnishings $HOFT

Probably Not a Value Trap

The S&P 500 is in the 99th percentile for the longest rallies without a 5% pullback. So many historical trends have been broken in these last few years, I don’t put much confidence in the idea that we must have a selloff. But a lot of market participants sound like Shaggy and Scooby slowly exploring a haunted mansion, and all it would take is for some masked figure to poke their head from around the corner, and Zoinks, Shaggy and Scooby will panic sell into a 5% drawdown or worse.

So just who might the masked villain in the haunted mansion be? I can think of three possible shocks, Jerome Powell not cutting interest rates in October, the Supreme Court ruling against Trump’s tariffs, and the impending government shutdown on Wednesday. Any of those three actions, while not likely to significantly affect long term economic growth, could result in a short term growth scare. This is an environment where most economic data is giving mixed signals, it wouldn’t take much to give the market a reason to sell off when the market is looking for a reason.

If you want to skip the macro musings, just jump down to the next bold line:

The big event next week is the potential government shutdown on Wednesday. For a bill to pass the Senate, it needs 60 votes to get past the filibuster, and that means that nine Democrat senators have to join with Republicans. Chuck Schumer seems to want to take the opportunity to make demands, but Trump has directed all administrative agencies to prepare a list of nonessential personnel who could be fired to forward to the Office of Personnel Management. And Trump has funding for most of his agenda secured through the past budget reconciliation. While DHS’ paychecks would be delayed, the border security efforts would continue even during a government shutdown. It would seem to be a tactical blunder on the side of the Democrats to give Trump the political capital to enact his agenda even further. Does Schumer really want to shut down a government, which is already running a massive deficit, if he doesn’t get more spending passed? I can’t even begin to predict the actions of politicians, but it’s hard for me to see Schumer walking into this quagmire.

What I can say is that firing a couple hundred thousand federal employees would make the jobs data look worse. And the subsequent decrease in consumer spending while three million federal paychecks are suspended will make the economy look worse. All of this would occur while the government data offices are not reporting data, which makes the fear in the market worse. In past instances, a government shutdown did lead to a market correction. But in this instance, isn’t the market already more worried about the deficit than they are about a shutdown? If the market weren’t already so jittery, I would predict that a shutdown would be bullish. But it won’t take much for Scooby and Shaggy to say Zoinks and scramble to the kitchen to make a sandwich.

Goldman Sachs, JP Morgan, and Morgan Stanley all predict rate cuts in both October and December based on the newly revised jobs data. But does Jerome Powell have one last surprise in store for the market? This past week, the down days in the market seemed to have been mostly related to data releases that shook confidence in the October rate cut. I think there are decent odds that as soon as the Federal Reserve broadcasts no cut for October, the market can have the 5% selloff that everyone is paranoid about.

But perhaps the biggest shock to the market would be the Supreme Court overturning Trump’s tariffs. The narrative is finally penetrating that the tariffs are raising significant revenue, and even the non partisan congressional budget office has acquiesced that Trump’s budget doesn’t increase debt by $3 trillion, but rather it lowers debt by $300 billion. If the Supreme Court were to rip away the tariff component of the budget, the market might indeed have a conniption.

Regarding the tariffs, I know that there is an argument that removing tariffs would be good for the market. But maybe it isn’t so simple. Trump has three laws at his disposal from which to enact the tariffs, and if the weakest of those is struck down, the tariffs will come back in another fashion. Trump has expended a lot of political capital in trying to reverse offshoring, and he won’t be abandoning that agenda easily. In the meantime, what will have been lost is the small amount of certainty that the market has regained since the Liberation Day shock.

Uncertainty paralyzes business decisions, and in my mind it’s a lot like when a crocodile grabs a gazelle who was trying to drink at a watering hole. The rest of the herd scatters immediately, and it takes a long time for the gazelles to slowly come back and drink from that watering hole again. With uncertainty, the negative effects are severe and felt immediately, but it’s much harder to notice business confidence returning slowly over time. The last thing the market needs right now is to be whipsawed around again by the Supreme Court. The consensus prediction seems to be that Roberts and Coney-Barrett will side with the Democrats to overturn the tariffs. But lawyers always have a way to wriggle their way out of a jam. Trump has asked the Supreme Court to examine 28 cases, he has lost 2, won 20, and several are still pending.

When things are so uncertain, I like to focus on what I know, and what I do know is that President Trump will be choosing a chairman for the Federal Reserve by May, and afterward, interest rates will be cut. The safest bet is that the housing market will unfreeze, because both Trump and Bessant have told us that this is their priority. I still maintain that the homebuilders are a mixed bag, because of the confounding effects of population loss from self-deportations, already over 2 million people, versus the extreme shortage of homes under 1,500 sqft. But whatever happens to the homebuilders, any housing transactions, whether new or existing, drive furniture sales. Furniture sales are tightly connected to housing transactions, even more so than mattresses. It’s not only the case that people replace furniture when they move to a new home, but furniture transactions are often financed and benefit directly from rate cuts.

I was more than a year early looking for a furniture company, I never anticipated that Jerome Powell would use Quantitative Tightening focusing on Mortgage Backed Securities into a frozen housing market for such an extended period of time. Two of my previous picks, Conn’s and The Container Store both went bankrupt. I promised that the next time I looked at furniture, it would have a better balance sheet.

Today’s Undervalued Small Cap:

That’s where Hookers come in. Hooker Furnishing (HOFT), only has $5 million of long term debt on their balance sheet, offset by $42 million in receivables and $58 million of inventory. They don’t have much cash on hand, but they do have an undrawn $41 million credit line. They are a furniture manufacturer and importer with a focus on the luxury end of the market. While their overall furniture market share ranges between 1% and 1.7%, in the luxury furniture market, they have grown from about 3.6% market share in 2015, peaked at 8.3% share in 2019, and are now at about 4.5% share of the $9.7 billion annual US luxury furniture market.

While I am enthusiastic about the theme of the K-shaped economy, I am horribly out of my element in attempting to judge luxury brands. I have no idea if Hooker’s Beaumont collection is any good, or if the Chatelet collection will resonate with millennials. Is Melange going to be a winner with Gen Z? I don’t know. Is Ciao Bella what Gen X is hungry for? You are asking the wrong person. I can only trust that the same management team who fought for and won 8.3% market share in 2019 still has their wits about them as the cycle turns in their favor. I’ll leave it up to the reader if you find Hookers compelling.

Midwestern Boomer?

Management blamed the decline in market share post Covid on the supply chain crisis. Larger competitors like Ashley’s and Rooms to Go, who combined make up about 25% of the total furniture market, could more easily respond to supply chain challenges due to their scale. There is also an argument that fashion shifted somewhat away from Hooker and toward more minimalist designs, although I am so far outside of my circle of competence that I am unable to judge. And now, Hooker finds themselves more susceptible to tariffs than their competitors, although management assures us that they have a plan in place to mitigate the impact of tariffs.

Midcentury Gen X?

Hooker is accelerating their exit from China, currently about 30% of production, and redirecting that production toward Vietnam and Indonesia. For the future they are exploring diversifying toward vendors in Mexico to enjoy lower rates than in Southeast Asia. Eventually the focus will move to more domestic US manufacturing, but those changes take time. Another strategy to mitigate the impact of tariffs is to focus on other methods of operational cost cutting, absorbing the tariffs but getting leaner in other areas. Management is undertaking an effort to remove over $10 million of annual fixed costs out of their cost structure. Not bad for a $121 million market cap company.

The Minimal Millennial?

I am less interested in the actions management is taking today, and more interested in the enormous macro tailwinds they are going to enjoy. Don’t misunderstand me, I am always grateful if management is hustling. But the sitting president is a luxury real estate developer, and he is going to make luxury real estate boom at some point over the next three years. Luxury furniture is a great way to get exposure to that. In fact it has already begun, Hooker’s backlog is up 22% year over year as of their last earnings call.

Nouveau Riche?

The stock price is already up off of the April lows, but HOFT still sits at a price to sales ratio of 0.32x. In strong years, they are routinely able to trade at a price to sales ratio over 0.60x, and they are down from past peak revenue by about half. A return to past peak revenue on the rate cutting tailwinds and a return to a 0.60x price to sales multiple would bring the share price from $11.27 where it closed on Friday to $34.81. Ethan Allen (ETD) trades at a price to sales of 1.2x today, so there is room for the share price to reach $70 if HOFT could trade up to ETD’s multiples. And the two companies are not so different.

What kind of end table defines me as a person?

Both Ethan Allen and Hooker pay a dividend, Hooker has made it 20 years without a dividend cut, and over the last five years has averaged a 7.5% annual dividend growth rate. The current yield on Hooker is 8.1%, and the current yield on Ethan Allen is 5.7%. Ethan Allen hasn’t cut their dividend in 25 years, and the average growth rate for the last five years is 8.2% annualized. With trailing twelve month revenues of $376 million for Hooker and $614 million for Ethan Allen, the two companies seem far too similar to trade at such a dissimilar multiple. I won’t put a $70 price target on Hooker, but it is certainly a possibility.

Hooker even has some recent insider buying from the CEO and the CFO, but the purchases were too small to take them seriously. Management owns a little over 2% of the company. A descendent of the founder, Henry T. Hooker, still sits on the board, but as an Independent director. There is no large anchoring shareholder to prevent management from making mistakes, but their history of capital allocation is decent. The last acquisition spree in 2016 was highly accretive.

Hooker isn’t a sexy company, furniture sales is a pretty boring business. And there are probably a few more tariff impacts to flow through for a couple more quarters, the stock price could give up its recent gains. But Hooker is a boring business that’s about to get an incredible secular tailwind, they have no debt, and they pay an 8.1% dividend while you wait for the sector to rebound. You can buy it today at $11.27, and if Hooker doesn’t retake lost market share, it will probably be a reasonably safe two year double. If they do retake lost market share, it will probably be a reasonably safe two year triple. And if management pulls a rabbit out of their hat, or the company gets some retail attention, over the next two or three years, it could even be a five bagger or better.

Hooker Furnishings (HOFT) $11.27: $34.81 by the end of 2028