HG Holdings, Inc. (STLY)·Q3 2017 Earnings Summary

Executive Summary

• Q3 2017 revenue fell sequentially to $10.4M (-10.2% q/q) and declined 5.5% y/y, while gross margin improved materially y/y to 22.4% on lower discounting; net loss was $0.3M versus breakeven in Q2 .
• Management “missed its goal of slight profitability” due to lingering customer confidence issues tied to past sourcing delays; October turned slightly profitable as stock availability normalized (88% of orders shipped in <2 days), pointing to potential near-term recovery .
• Liquidity tightened: cash fell to $1.24M at quarter-end with inventories elevated ($25.4M), prompting revolver usage; lender waived fixed-charge covenant and capped borrowings at $2.0M through Feb 28, 2018 .
• Strategic catalyst: on Nov 20, the company agreed to sell substantially all assets for $11.5M cash, a $4.6M note, and 5% equity in the buyer’s parent; board may consider a special dividend or buyback post-close (expected Q1 2018) .

What Went Well and What Went Wrong

What Went Well

• Normalization of service levels: “over ninety percent” of product lines were in stock/in-transit, with 88% of orders fulfilled in under two days, helping October sales rise ~8% y/y .
• Gross margin expansion: Q3 gross margin rose to 22.4% from 16.6% y/y on reduced discounting, despite lower sales and under-absorption of fixed overhead .
• SG&A discipline: Q3 SG&A was $2.7M (25.7% of sales), down significantly vs. $3.8M (34.5%) in Q3 2016, driven by cost reductions and lower marketing expense .

What Went Wrong

• Demand impact from prior sourcing issues and macro events: Q3 sales declined 10.2% q/q and 5.5% y/y as customer order rates lagged due to waning confidence and hurricane-related uncertainty .
• Short-term cash strain: rapid restocking pushed inventories higher ($25.4M), pressuring cash and necessitating revolver draws; availability was ~$3.4M at quarter-end (max $4.0M) .
• Licensing headwind: Coastal Living® license will not be renewed at year-end 2017; sales under the license were ~$10.0M in 2016 and $8.2M in the first nine months of 2017, creating potential future volume risk .

Financial Results

Quarterly performance (oldest → newest):

Notes: Q2 EPS presented as “-” in company tables (net income of $14k implies ~$0.00 EPS) . SG&A % in the 8-K Q3 press release references 25.6%; the 10-Q presents 25.7% due to rounding/reporting conventions .

Year-over-year comparison (Q3 2017 vs Q3 2016):

Liquidity snapshot and balance sheet highlights:

KPIs and operating metrics:

Guidance Changes

Earnings Call Themes & Trends

No Q3 2017 earnings call transcript was available; themes are derived from the Q3 press release and 10-Q.

Management Commentary

• “The company missed its goal of slight profitability for the quarter…stock availability positions…have been dramatically improved…sales grew approximately 8% in October over the prior year same period.” – Glenn Prillaman, President & CEO .
• “As a result of the relatively quick change in stock availability…current inventory levels are abnormally high placing a short-term strain on cash…We are utilizing our revolver to support the business during this lag...” – Glenn Prillaman .
• “We continue to see the signs of an inflection point in the recovery of our business with another quarter of sequential improvements in sales, gross profits and income.” – Glenn Prillaman (Q2) .
• “We are beginning to see the signs of an inflection point…customers’ confidence demonstrated by increasing order rates…” – Glenn Prillaman (Q1) .

Q&A Highlights

No Q3 2017 earnings call transcript was available to extract Q&A themes. Clarifications from filings include: expected CDSOA proceeds ($369k) in Q4 2017 ; revolver waiver and availability ($3.4M, max $4.0M) ; and Coastal Living® license non-renewal with planned category continuity via Butterbay Hill .

Estimates Context

• Wall Street consensus EPS and revenue estimates via S&P Global were unavailable for Q3 2017 due to access limitations. Values from S&P Global could not be retrieved; thus, no beat/miss analysis versus consensus is provided.*
• Internal targets indicated “slight profitability” for the remainder of 2017, which was missed in Q3 but achieved in October on a monthly basis per management commentary .

Key Takeaways for Investors

• Sequential revenue decline and a small net loss reflect demand drag from prior sourcing issues; improving service levels and October profitability suggest near-term recovery potential as retailer confidence returns .
• Gross margin expansion vs. last year is a structural positive, but Q4 margin faces pressure from inventory-clearing discounting; monitor sell-through and markdown cadence .
• Liquidity is tight due to elevated inventories, with revolver usage and covenant relief in place; watch cash conversion, borrowing caps ($2.0M through Feb 2018), and working capital discipline .
• Strategic asset sale (expected Q1 2018) offers a potential catalyst for capital return (special dividend/buyback) and re-deployment of NOLs; closing and financing execution are key .
• Licensing transition away from Coastal Living® introduces volume risk; management’s new product introductions aim to mitigate category exposure .
• One-off CDSOA funds (~$369k) in Q4 provide a modest earnings tailwind but are not recurring .
• Near-term trading: stock likely sensitive to transaction milestones, liquidity updates, and Q4 margin print; medium-term thesis hinges on successful operational normalization and strategic reallocation post-transaction .

Footnote: *Estimates from S&P Global could not be retrieved at this time; consensus comparison is therefore unavailable.