Business context and reporting period
Hooker Furniture Corporation’s unaudited Form 10-Q covers the 13 weeks ended November 3, 2013 (fiscal 2014 third quarter) and the 39 weeks ended that date, compared with periods ended October 28, 2012. The company sells casegoods and upholstered furniture and has launched H Contract, serving senior-living facilities, and Homeware, a direct-to-consumer online brand. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 FY2014 | Q3 FY2013 | 39 weeks FY2014 | 39 weeks FY2013 |
|---|---|---|---|---|
| Net sales | $59.1 | $56.8 | $170.7 | $158.7 |
| Gross profit / margin | $13.6 / 23.0% | $13.6 / 23.9% | $40.8 / 23.9% | $35.7 / 22.5% |
| Operating income / margin | $3.2 / 5.3% | $3.8 / 6.7% | $9.0 / 5.3% | $7.6 / 4.8% |
| Net income | $2.1 | $2.4 | $5.9 | $4.9 |
| Diluted EPS | $0.20 | $0.23 | $0.55 | $0.46 |
| Operating cash flow | — | $9.8 | $0.9 | |
| Capital expenditures | — | $2.6 | $3.9 |
At November 3, 2013, cash was $29.9 million, current assets $110.6 million, current liabilities $17.0 million, and working capital $93.6 million; the working-capital ratio was 6.5 to 1. Total assets were $158.8 million and shareholders’ equity was $133.9 million. No revolving-facility borrowings were outstanding. The $15.0 million unsecured facility had $12.9 million available after $2.1 million of standby letters of credit. The company reported compliance with its financial covenants.
Cash and cash equivalents increased $3.6 million during the nine months. Operating cash flow improved year over year, supported in part by collections and inventory reductions. The company paid $3.2 million in dividends during the period and declared a further $0.10-per-share quarterly dividend after quarter-end.
Changes versus comparable periods
- Third-quarter sales increased 4.1%, but net income fell 13.1% and diluted EPS declined from $0.23 to $0.20. Gross profit was nearly unchanged; margin declined 0.9 percentage points, while operating margin fell 1.4 points.
- For the first nine months, sales rose 7.6%, operating income 18.4%, and net income 20.3%. Gross margin improved 1.4 percentage points. Higher average selling prices drove much of the sales increase; year-to-date upholstery volume also grew.
- Q3 casegoods sales increased 3.3% and upholstery sales 5.5%. Casegoods operating income declined to $2.6 million from $3.2 million; upholstery operating income was $0.5 million versus $0.6 million. Year-to-date upholstery operating income improved to $2.0 million from $0.7 million.
- Quarterly results were pressured by heavier casegoods discounting to clear slow-moving inventory, higher domestic upholstery manufacturing costs, and start-up expenses for new initiatives. Nine-month gross profit benefited from lower casegoods distribution costs and improved upholstery cost absorption.
Outlook, commentary, risks and unusual items
- Management expressed longer-term optimism but cautioned that the recovery in furniture demand was inconsistent and that rising mortgage rates or slowing home sales could hurt near-term results. Management reported increased demand entering the final fiscal quarter compared with the prior year.
- Elevated casegoods promotional discounting was expected through fiscal year-end, with a return to normal levels by the end of fiscal 2015’s first quarter. The company was exiting youth furniture; related inventory had fallen from $7.5 million to about $3.0 million, and the exit was expected to be mostly complete by fiscal year-end. Discounts may continue to weigh on margins.
- Sam Moore’s production capacity and workforce ramp-up had created training and overtime costs and a quarter-end order backlog 40% above the prior-year level. Management said capacity had reached a point above the order rate and expected lower training and overtime costs, but noted that upholstery profitability depends on sales growth and maintaining margins. Leather and other raw-material inflation remained a challenge; further price increases were planned, with uncertain demand effects.
- H Contract and Homeware generated start-up costs of about $1.6 million pre-tax ($1.0 million after tax, or $0.10 per share) in the first nine months. Management expected their full-year FY2014 impact to be $0.12–$0.15 per share. It forecast H Contract could contribute to consolidated operating profitability in FY2015 and Homeware by FY2016’s fourth quarter; both forecasts are uncertain.
- The company expected $0.7–$0.8 million of capital expenditures in the remainder of FY2014 and about $2.5 million of additional ERP implementation spending over the remainder of the project in FY2014 and FY2015. ERP implementation, import and supplier disruptions, foreign exchange, competition, consumer demand, and domestic labor and material costs were identified as risks.
- The quarter included a $48,000 reserve for an uncertain state tax position. The Q3 effective tax rate was 33.1%, versus 36.2% a year earlier, primarily reflecting permanent tax benefits in relation to lower pre-tax income.
Important facts for investors to verify
- Whether casegoods clearance discounting ends on schedule and how it affects margins, inventory, and the planned exit from youth furniture.
- Whether Sam Moore resolves production constraints, reduces backlog and training costs, and sustains upholstery segment profitability.
- Actual sales, costs, and path to profitability for H Contract and Homeware versus management’s forecasts and stated start-up-cost estimates.
- ERP project spending, timing, implementation risks, and eventual operating savings.
- Whether demand and pricing support management’s outlook amid housing, consumer-confidence, input-cost, currency, and competitive risks.