Business context and reporting period
Hooker Furniture Corporation designs and sources residential casegoods and upholstered furniture, primarily for North American retailers. This unaudited Form 10-Q covers the 13 weeks and 39 weeks ended October 31, 2010, compared with periods ended November 1, 2009. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 FY2011 | Q3 FY2010 | 39 weeks FY2011 | 39 weeks FY2010 |
|---|---|---|---|---|
| Net sales | $55.7 | $52.6 | $160.5 | $150.6 |
| Gross profit / margin | $12.3 / 22.0% | $12.7 / 24.1% | $36.0 / 22.4% | $33.6 / 22.3% |
| Operating income / margin | $1.7 / 3.0% | $1.8 / 3.4% | $4.9 / 3.1% | $0.7 / 0.4% |
| Net income | $1.2 | $1.0 | $3.4 | $0.04 |
| Diluted EPS | $0.11 | $0.09 | $0.32 | $0.00 |
- Quarterly sales rose 6.0%; nine-month sales rose 6.5%, mainly on higher unit volume. Upholstery growth led: nine-month upholstery sales increased to $56.7 million from $46.1 million, while casegoods sales declined slightly to $103.8 million from $104.5 million.
- Quarterly gross margin fell 2.1 percentage points, mainly because of higher freight costs on imports. Nine-month gross margin was nearly flat; improved upholstery efficiencies and lower discounting helped offset freight and the fire-related charge.
- Nine-month operating income improved substantially, reflecting lower selling and administrative expenses, higher upholstery utilization, and no repeat of the prior-year impairment charge. Quarterly operating income declined modestly.
- Operating cash flow was a use of $13.4 million versus cash provided of $32.9 million in the prior-year period, principally reflecting a $19.4 million inventory increase. Investing activities used $0.9 million; dividends used $3.2 million. Cash declined $17.5 million to $20.5 million from January 31, 2010.
- At October 31, 2010, total assets were $153.8 million, working capital was $90.5 million, and the current ratio was 5.6:1. Inventory was $55.6 million, up about 54% from fiscal year-end, as the company prepared for higher orders and sought to improve service levels.
- No long-term debt or revolver borrowings were outstanding. The $15 million revolving facility had $13.1 million available after $1.9 million of standby letters of credit; any principal drawn is due March 1, 2011. The company also reported $14.6 million available to borrow against life-insurance cash value, with no loans outstanding. It was in compliance with credit covenants.
Changes, outlook, risks, and unusual items
- Management described the outlook for the balance of fiscal 2011 as cautiously optimistic, while expecting retail furniture conditions to remain weak. New-product response and showroom attendance were encouraging, but economic uncertainty, supply-chain challenges, and competition could hinder recovery. No specific sales or earnings guidance was provided.
- Order backlog was 5.7 weeks of sales at quarter-end, down from 6.6 weeks at the prior quarter-end and 8.2 weeks at the first-quarter end. Management cited easing supply and transportation delays and continued monitoring of orders and inventory.
- Upholstery operating losses improved year over year but remained significant: 2.8% of sales in the quarter and 4.0% for the first nine months. Management cited manufacturing inefficiencies, lower production levels, and slower-than-expected savings from improvement initiatives.
- After quarter-end, the company announced consolidation of Bradington-Young’s Cherryville operations into Hickory. It expected about $1.5 million of pretax charges in fiscal Q4, including $1.1 million of asset impairment and approximately $312,000 of severance and benefits, and anticipated about $1 million in annual operating-cost savings. Completion was expected by mid-January 2011.
- A March 2010 warehouse fire produced a $2.2 million casualty loss and $1.7 million insurance recovery in the first half; the net $0.5 million insurance deductible was charged to cost of sales. The claim was reported closed after final insurance payment.
- A supplier ceased operations and defaulted on bank notes after the company’s $600,000 standby letter of credit was drawn in 2009. The company had reimbursed the provider, recorded pledged collateral at an estimated $300,000 net realizable value, and initiated foreclosure proceedings after quarter-end. Recovery remains a risk.
- Key risks identified include weak consumer confidence and housing markets, price competition, import and freight costs, supply or distribution disruptions, currency movements, and domestic manufacturing costs. The company said its disclosure controls were effective and that there were no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated inventory converts into sales without increased discounting or further pressure on cash flow.
- Whether freight costs moderate and gross margins recover, particularly in casegoods and upholstery.
- Actual Q4 consolidation charges, completion timing, operational disruption, and realization of the expected $1 million annual savings.
- Liquidity needs and refinancing or renewal plans for the revolving facility, whose maturity is March 1, 2011.
- Outcome and recoverable value of the supplier collateral foreclosure proceedings.
- Whether weak consumer demand, supply-chain conditions, and competition materially affect the cautious outlook.