Hooker Furniture Corporation — Q1 FY2016 Form 10-Q
Reporting period: 13 weeks ended May 3, 2015 (February 2–May 3, 2015), compared with the 13 weeks ended May 4, 2014. The company designs, markets, and sources residential casegoods and upholstery, including domestically produced upholstered furniture; its newer initiatives are H Contract and Homeware. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $60.96 | $61.40 | Down 0.7% |
| Gross profit / margin | $16.38 / 26.9% | $15.61 / 25.4% | Margin up 1.5 percentage points |
| Operating income / margin | $5.24 / 8.6% | $4.24 / 6.9% | Up 23.5% |
| Net income | $3.47 | $2.80 | Up 23.8% |
| Basic and diluted EPS | $0.32 | $0.26 | Up $0.06 |
| Operating cash flow | $3.54 | $10.00 | Down $6.46 |
Gross-margin improvement reflected better upholstery operating efficiencies and lower medical-claims and contract-manufacturing costs, as well as less casegoods discounting and fewer returns and allowances. Selling and administrative expense declined 2.1% to $11.13 million. The effective tax rate was 35.4%, versus 34.6%.
Segments and material changes
- Casegoods: Sales rose 0.6% to $38.48 million; operating income increased 0.9% to $4.10 million, with a 10.7% margin. Lower unit volume was offset by higher average selling prices. Management cited delayed Asian supplier deliveries and inconsistent retail conditions.
- Upholstery: Sales fell 4.8% to $21.30 million, but operating income increased to $1.45 million from $0.53 million. Margin improvement reflected efficiencies and lower medical claims and contract-manufacturing costs. Leather prices and labor costs remain concerns.
- All other: Sales rose to $1.33 million; operating loss narrowed to $0.31 million. H Contract was close to operating profitability, while management expects Homeware to take longer to reach profitability.
Cash, liquidity, debt, and capital
- Cash was $40.53 million at May 3, up $1.87 million from February 1. Cash from operations was $3.54 million; capital expenditures were $0.43 million and cash dividends paid were $1.08 million.
- Current assets were $118.00 million and current liabilities $14.09 million; working capital was $103.91 million and the current ratio was 8.4 to 1.
- No revolving-credit borrowings were outstanding. The company had $13.5 million available under its $15 million unsecured facility, with $1.5 million committed to standby letters of credit. The facility matures July 31, 2018; the company reported compliance with its financial covenants.
- Management said available resources were sufficient for fiscal 2016 and the foreseeable future. It expected $2–$3 million of capital expenditures for the remainder of fiscal 2016.
Outlook, risks, and unusual items
- No formal full-year revenue or earnings guidance was provided. Management reported flat demand so far in fiscal 2016, but expressed longer-term optimism; it said a first-quarter price increase was expected to offset higher imported-product and ocean-freight costs.
- Priorities include improving new-initiative profitability, increasing upholstery capacity, maintaining casegoods availability, controlling costs, and completing the ERP rollout. Sam Moore went live on the ERP system at the start of Q2; Bradington-Young was expected to follow in the second half of fiscal 2016. Management expects efficiencies but said savings are difficult to quantify before full implementation.
- In February 2015, Customs and Border Protection assessed approximately $2.1 million in civil penalties and $0.5 million in duties over an import-duty dispute. The company contests the assessment and intends to defend itself; management did not expect a material adverse effect.
- Separately, potential antidumping duties on certain China-sourced accent chests remain uncertain; the company said it cannot determine applicability or estimate any exposure. Potential assessments, interest, and penalties could adversely affect results, liquidity, and prospects.
- Other stated risks include offshore sourcing and shipping disruptions, import-cost inflation, consumer-demand weakness, medical and raw-material costs, and ERP implementation risks. The company planned to end its upholstery factoring arrangement as ERP became operational; it anticipated possibly slower collections but no material liquidity effect.
- After quarter-end, the board declared a $0.10-per-share dividend, payable June 30, 2015. A $0.10-per-share dividend had also been declared for the reported quarter.
Important facts for investors to verify
- Whether sales and casegoods delivery trends improved after the reported supplier delays, and whether margin gains persisted.
- Progress and costs of the ERP rollout, the transition away from factoring, and the expected realization of operating efficiencies.
- Developments in the contested $2.6 million Customs assessment and any exposure relating to potential accent-chest duties.
- Whether import, freight, leather, labor, and medical-claims costs affected subsequent-period profitability and whether pricing offset cost increases.
- Whether H Contract and Homeware met management’s expectations for growth and progress toward profitability.