HOOKER FURNISHINGS Corp quarterly report, Q2 FY2015

Business context and reporting period

Hooker Furniture Corporation’s fiscal 2015 second quarter comprised the 13 weeks ended August 3, 2014; the first half comprised the 26 weeks ended that date. The filing compares results with periods ended August 4, 2013. The company markets residential casegoods and upholstery, and its reported casegoods segment also includes its newer H Contract and Homeware initiatives.

Financial performance

Q2 sales declined 0.8%, while net income rose 34.8%. First-half sales increased 4.2%, net income rose 33.1%, and diluted EPS increased from $0.35 to $0.47. The Q2 effective tax rate was 34.4% versus 35.5%; the first-half rate was 34.5% in both years.

For the first half, operating cash flow was $17.8 million, compared with $6.6 million a year earlier. Investing used $2.6 million, including $2.0 million of capital expenditures; dividends paid were $2.2 million. Cash increased $13.1 million to $36.9 million. At August 3, 2014, working capital was $96.1 million and the current ratio was 7.8:1. The company had no revolver borrowings and $13.3 million available under its $15 million facility, with $1.7 million of letters of credit outstanding. It reported compliance with its financial covenants.

Material changes and segment results

• Q2 casegoods sales declined 2.4%, while upholstery sales increased 2.1%. Consolidated unit volume fell 3.5%; higher upholstery average selling prices partly offset the decline.
• Q2 casegoods operating income rose 48.8% to $2.7 million, driven by improved gross margin and lower selling and administrative costs. Upholstery operating income fell 12.9% to $0.7 million.
• First-half casegoods sales rose 3.9% and segment operating income increased 46.4% to $6.4 million. Upholstery sales rose 4.7%, but segment operating income declined 16.2% to $1.3 million.
• Consolidated margin improvement reflected lower casegoods cost of sales, including less discounting and product-mix effects. Increased returns and allowances partly offset these gains. First-half selling and administrative expense increased in dollars but declined as a share of sales, to 18.6% from 19.1%.
• Cash and working capital improved versus fiscal year-end, aided by lower receivables and inventory. Inventory declined as the company liquidated slow-moving goods and aligned stock with expected demand.

Outlook, commentary, risks and unusual items

Management said first-half orders exceeded the prior year but were weaker than expected after the Spring market, with particularly weak casegoods retail demand in Q2. It anticipated stronger retail sales in the Fall selling season and cited best-seller inventory, new products, and channel initiatives as potential supports. No consolidated revenue or earnings forecast was provided.

• Management expected Sam Moore to be profitable for fiscal 2015, following a profitable Q2 but an operating loss for the first half; future improvement depends on sustained orders and execution. Leather input costs were rising, creating pressure to preserve value and margins.
• H Contract was near operating break-even for the first half. Homeware was performing approximately as expected, but management said it would likely take longer to reach profitability. Together, the initiatives generated $2.1 million of first-half sales and $677,000 of operating losses; management expected a fiscal 2015 net-income impact of $0.04–$0.06 per share.
• The company expected $1.0–$2.0 million of additional capital spending in the remainder of fiscal 2015, including about $600,000 for upholstery ERP implementation. ERP implementation and the planned move away from receivables factoring may entail execution and collection-timing risks.
• A possible West Coast port disruption could cause congestion and surcharges at other ports. Management estimated proposed charges could exceed $1,000 per container and increase shipping costs 25%–30% during a disruption, potentially harming earnings, liquidity, and financial condition.
• Possible anti-dumping duties on certain China-sourced accent chests remained uncertain. The company could not determine whether its products would be covered or estimate potential duties; assessments, interest, or penalties could adversely affect results.
• The Cloverleaf warehouse sale generated a $34,000 gain recognized in Q1; a further $302,000 gain was deferred and is to be recognized as principal payments are received on the buyer’s mortgage note. The note had a reported carrying value of $1.575 million at quarter-end.
• The board declared a $0.10-per-share dividend on September 2, 2014, payable September 30 to shareholders of record September 15.

Important facts for investors to verify

1. Whether casegoods demand, orders, and container-direct shipments strengthen during the Fall selling season as management expected.
2. Progress on Sam Moore profitability, upholstery margins, leather-cost mitigation, and H Contract and Homeware losses against management’s stated expectations.
3. Potential port congestion costs and any U.S. customs or anti-dumping duty exposure for imported accent chests.
4. ERP implementation timing and costs, the transition away from factoring, and any resulting effects on collections and working capital.
5. Cash generation, inventory levels, revolver availability, covenant compliance, and realization of the deferred Cloverleaf sale gain.