Business context and reporting period
Hooker Furniture Corporation designs, sources, markets and distributes residential casegoods and upholstered furniture, with domestic upholstery manufacturing. This Form 10-K covers the 52 weeks ended January 29, 2012 (fiscal 2012), with comparison to fiscal 2011. It also provides unaudited quarterly data; the fourth quarter ended January 29, 2012.
Financial results and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $222.5 million | $215.4 million |
| Gross profit / margin | $48.9 million / 22.0% | $46.9 million / 21.8% |
| Operating income / margin | $6.7 million / 3.0% | $4.1 million / 1.9% |
| Net income | $5.1 million | $3.2 million |
| Diluted EPS | $0.47 | $0.30 |
| Operating cash flow | $32.3 million | $(15.5) million |
Casegoods sales rose 3.3% to $147.9 million; upholstery sales rose 3.2% to $74.6 million. Casegoods generated $10.6 million operating income, while upholstery recorded a $4.0 million operating loss. Upholstery’s operating loss narrowed from $5.3 million in fiscal 2011.
Fiscal fourth-quarter sales were $54.4 million versus $55.0 million a year earlier. Net income was $628,000, or $0.06 per share, compared with a net loss of $182,000, or $0.02 per share. Fourth-quarter results included a $1.8 million non-cash trade-name impairment charge.
At year-end, cash was $40.4 million, working capital was $89.5 million and the current ratio was 7.0:1. Inventory fell to $34.1 million from $57.4 million, contributing $23.3 million to operating cash flow. There was no revolving-credit borrowing outstanding; $13.1 million remained available, subject to $1.9 million of letters of credit. Long-term debt was zero. The $15 million revolving facility was scheduled to expire July 31, 2013. Dividends were $0.40 per share for the year.
Changes versus the prior period
- Sales increased 3.3%, with modest unit-volume and average-selling-price increases in both segments.
- Gross margin improved 0.2 percentage points. Casegoods margin declined to 25.4% from 26.3%, partly due to discounting to reduce excess inventory; upholstery margin improved to 15.2% from 12.8%.
- Operating margin rose to 3.0% from 1.9%, despite higher intangible impairment charges. Excluding restructuring and impairment charges, management reported operating margins of 3.8% and 2.8%, respectively.
- Operating cash flow swung to $32.3 million from a $15.5 million use, mainly reflecting inventory reduction; fiscal 2011 cash use had included inventory investment.
- Cash increased by $23.7 million. Selling and administrative expense declined by $647,000, while income-tax expense increased by $959,000 and the effective tax rate rose to 27.2% from 22.3%.
Outlook, commentary and risks
Management entered fiscal 2013 with “cautious optimism,” expecting consumer confidence and furniture demand to improve, but noted continued housing-market weakness, global uncertainty and rising petroleum costs. For fiscal 2013’s first quarter, management expected lower sales but better profitability, citing operational improvements, reduced discounting and more favorable freight rates.
Management’s priorities included achieving upholstery profitability, sustaining casegoods growth and implementing the ERP system. It forecast $3.5–$5.5 million of fiscal 2013 capital expenditures, including $1.5–$2.0 million for ERP and about $1 million for a showroom, plus $6–$8 million to build inventory. ERP implementation was expected at the casegoods division in fiscal 2013’s first half and at upholstery in late fiscal 2013 or early fiscal 2014; approximately $2 million had been spent, with about $6 million of additional project spending anticipated.
Supply-chain transition from China to Vietnam and Indonesia had delayed some new collections and hurt fiscal fourth-quarter sales. Management expected longer lead times and shipping delays to affect fiscal 2013’s first quarter and, to a diminishing extent, the second quarter. China represented about 90% of import purchases, and one Chinese factory represented about 51% of imported-product purchases; management estimated available inventory could cover roughly three months of demand, with up to three additional weeks available from Asian warehouses. Other principal risks include furniture-market cyclicality, price and raw-material inflation, competition, changing consumer tastes, currency and trade developments, ERP disruption, and potential further asset impairments.
Unusual items included the fiscal 2012 $1.8 million Bradington-Young trade-name impairment, following several years of upholstery losses, and a $181,000 warehouse sprinkler-malfunction casualty loss. Management expected Bradington-Young to contribute to consolidated profitability in fiscal 2013. The filing reports no pending legal proceedings considered material and says identified environmental matters are not expected to be material.
Important facts for investors to verify
- Whether upholstery can reach profitability, given its $4.0 million fiscal 2012 operating loss and dependence on improved volume and cost reductions.
- Whether sourcing shifts, concentrated China exposure and shipping delays resolve as expected, and whether they affect sales, costs or customer service beyond fiscal 2013’s first half.
- Whether inventory reduction was sustainable and whether the planned $6–$8 million inventory build supports growth without renewed excess stock or discounting.
- Whether ERP spending, implementation timing and operational risks remain within management’s expectations.
- Whether the Bradington-Young trade-name valuation and management’s fiscal 2013 profitability expectation are supported by actual operating performance.
- Cash-flow quality and obligations: fiscal 2012 operating cash flow benefited substantially from inventory reduction; disclosed contractual cash obligations totaled $18.1 million, including deferred-compensation payments.