Business context and reporting period
Hooker Furniture Corporation’s unaudited Form 10-Q covers its fiscal 2015 third quarter and first nine months, ended November 2, 2014, compared with the periods ended November 3, 2013. The company markets residential casegoods and upholstery and operates three reported segments: Casegoods, Upholstery, and All other, which includes H Contract and Homeware. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $63.2 | $59.1 | $179.4 | $170.7 |
| Gross profit / margin | $16.0 / 25.4% | $13.6 / 23.0% | $45.3 / 25.2% | $40.8 / 23.9% |
| Operating income / margin | $4.9 / 7.7% | $3.2 / 5.3% | $12.5 / 7.0% | $9.0 / 5.3% |
| Net income | $3.2 | $2.1 | $8.3 | $5.9 |
| Diluted EPS | $0.30 | $0.20 | $0.77 | $0.55 |
| Operating cash flow | Not separately stated for the quarter | $15.8 | $9.8 |
Q3 sales rose 6.8% and net income rose 51.4% year over year; nine-month sales rose 5.1% and net income rose 39.6%. Higher average selling prices drove sales growth, despite lower casegoods unit volume. Consolidated gross margin improved in part from less casegoods discounting and improved material utilization and lower overhead at Sam Moore. The nine-month effective tax rate was 34.9%, versus 34.0%; Q3 rates were 35.5% and 33.1%, respectively.
Financial position, cash flow and liquidity
At November 2, 2014, cash was $33.3 million, up from $23.9 million at fiscal year-end; current assets were $115.2 million and current liabilities $17.1 million. Net working capital was $98.0 million, compared with $94.1 million, while the working-capital ratio declined to 6.7 from 8.3. Total assets were $165.7 million and shareholders’ equity $140.0 million.
Nine-month operating cash flow of $15.8 million funded $2.5 million of capital expenditures, $3.2 million of cash dividends, $0.8 million of life-insurance premiums and a $9.4 million increase in cash. No revolving-credit borrowings were outstanding. The $15.0 million unsecured facility had $13.1 million available after $1.9 million of standby letters of credit; it matures July 31, 2018. The company reported compliance with its financial covenants. The filing reports no funded debt outstanding at quarter-end.
Material changes and segment results
- Casegoods Q3 sales increased 7.0%; segment operating income rose 41.0% to $4.2 million, with a 10.6% operating margin. Nine-month operating income rose 37.0% to $11.3 million.
- Upholstery Q3 sales increased 3.0%; segment operating income was $0.9 million, up from $0.5 million. Nine-month sales rose 4.1%, while operating income increased 4.4% to $2.1 million.
- All other sales increased from a small base, but the segment remained loss-making: operating loss was $0.2 million for Q3 and $0.9 million year to date, improved from the prior year. H Contract was profitable for the nine-month period; Homeware was not yet profitable.
- Management began separately reporting H Contract and Homeware as All other in Q3; prior comparative segment information is presented in the new format. The company also presented cash flows using the indirect method, recasting prior-period figures.
Outlook, risks and unusual items
Management said nine-month orders increased year over year and Q3 order momentum strengthened, particularly in casegoods. It expected potential improvement in the late-fall and early-winter retail selling season, citing product introductions, inventory availability and the new Vietnam container-direct program. It did not provide consolidated full-year revenue or earnings guidance. Management’s segment expectations included Sam Moore achieving operating profitability in FY2015 and a low-single-digit margin in FY2016, and Bradington-Young reaching mid-to-high-single-digit operating margins in FY2016; both depend on operating and demand conditions.
Key risks include consumer demand and economic conditions, offshore sourcing and shipping disruptions, supplier and labor-cost inflation, and execution of the ERP implementation. A potential U.S. West Coast port strike could cause congestion and higher freight costs; a cited $1,000-per-container surcharge, if reinstated, was estimated to raise shipping costs 25–30%. The company also could not determine whether Chinese accent chests it imports might be subject to anti-dumping duties or estimate potential assessments, interest or penalties.
The Cloverleaf warehouse sale generated a $34,000 gain recognized in Q1; $302,000 of remaining gain was deferred pending principal payments on the buyer’s mortgage note. The note was carried at approximately $1.6 million initially and $1.575 million at quarter-end. Unrecognized tax benefits that could affect the effective tax rate were $419,000. The board declared a $0.10-per-share dividend on December 1, 2014, payable December 29, 2014.
Most important facts for investors to verify
- Whether stronger orders and higher selling prices translate into sustained sales growth, especially given lower casegoods unit volume and the nonbinding nature of casegoods orders until shipment.
- Whether gross-margin gains and the casegoods margin improvement are sustainable, and whether leather, labor, freight and other sourcing costs pressure margins.
- Sam Moore’s return to operating profitability, Bradington-Young’s margin trajectory, and the pace at which Homeware and H Contract approach profitability.
- ERP implementation timing, costs and operational effects, including the planned end of receivables factoring as domestic upholstery systems come online.
- Any port disruption or anti-dumping duty developments, and the potential effect on costs, deliveries, liquidity and results.
- Working-capital and cash-flow trends, covenant compliance, and the company’s ability to fund capital spending and dividends without borrowing.