Hooker Furniture Corporation (NASDAQ: HOFT) — FY2013 Form 10-K
Business and period: The company designs, sources, markets and distributes residential casegoods and upholstery, including domestically manufactured custom upholstered furniture. Its reportable segments are casegoods and upholstery. This summary covers the 53 weeks ended February 3, 2013; the comparable prior fiscal year had 52 weeks. The filing is an annual report, not a standalone quarterly filing.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $218.4 million | $222.5 million |
| Gross profit / margin | $52.5 million / 24.1% | $48.9 million / 22.0% |
| Operating income / margin | $12.9 million / 5.9% | $6.7 million / 3.0% |
| Net income | $8.6 million | $5.1 million |
| Diluted earnings per share | $0.80 | $0.47 |
| Cash from operating activities | $(3.3) million | $32.3 million |
- Annual sales fell 1.9%; average net sales per shipping day declined 3.8%, despite the extra fiscal week. Casegoods sales fell 4.6% to $141.1 million; upholstery sales increased 3.6% to $77.3 million.
- Gross margin improved mainly because discounting declined and domestic upholstery manufacturing costs were lower as a percentage of sales. Operating income rose substantially, including the upholstery segment’s return to annual operating profitability: $987,000 versus a $4.0 million operating loss.
- Cash and cash equivalents were $26.3 million at year-end, down from $40.4 million. The operating cash outflow reflected, in particular, a $15.7 million inventory increase as the company restocked. Capital expenditures were $4.1 million; dividends paid were $5.4 million.
- Working capital was $92.2 million, with a 6.3:1 current ratio. Total assets were $155.8 million and shareholders’ equity was $131.0 million.
- No revolver borrowings were outstanding; $13.2 million was available under the $15 million facility after $1.8 million of letters of credit. The facility was due to expire July 31, 2013, and the company was negotiating an extension or replacement. It reported compliance with its covenants.
- The company declared dividends of $0.40 per share for FY2013 and repurchased 57,700 shares for $671,000, with $11.8 million remaining under the authorization.
Fourth-quarter context
In FY2013’s fourth quarter, sales were $59.6 million and net income was $3.7 million, or $0.34 per share. In the prior-year fourth quarter, sales were $54.4 million and net income was $628,000, or $0.06 per share; that quarter included a $1.8 million pretax impairment charge for the Bradington-Young trade name. The filing’s quarterly table does not provide a clear fourth-quarter operating cash-flow value.
Changes, outlook and material risks
- Drivers and execution: Out-of-stock positions—following aggressive inventory reductions—and supplier transitions away from some Chinese vendors delayed products and hurt casegoods sales, particularly in the first half. Reduced discounting supported margins but also contributed to lower unit volume. The company exited eight underperforming suppliers and reported a 25% reduction in casegoods returns and allowances expense.
- Outlook: Management expected retail furniture demand to improve modestly in FY2014, citing improving housing, consumer confidence and retail indicators but continued consumer hesitation and economic uncertainty. No specific earnings or revenue guidance was provided.
- Growth initiatives: Planned launches included H Contract, serving upscale senior living facilities, and Homeware, modular furniture intended for online and catalog sales. The company also expanded its retailer web-commerce support program. These plans involve execution and demand uncertainty.
- ERP: The system went live for casegoods and imported upholstery in FY2013; implementation for domestic upholstery was underway, with completion targeted for FY2015. The company reported approximately $6.8 million spent on the first phase and anticipated about $4.5 million in additional project spending.
- Sourcing and logistics: Imported products represented about 73% of sales. China supplied approximately 80% of import purchases, and the largest directly sourced Chinese factory accounted for about 50% of worldwide imported-product purchases. Supplier transitions, shipping delays, tariffs, foreign-exchange movements and port disruptions could affect availability, costs, margins and liquidity. A Hong Kong dockworker strike was ongoing near the report date; management identified Yantian as an alternative port.
- Other exposures: Domestic upholstery results remain sensitive to volume and fixed-cost absorption; further capacity reductions could bring near-term restructuring or impairment charges. Management reported no material pending legal proceedings and considered environmental matters immaterial to financial position and results.
- Unusual items: FY2012 included the $1.8 million Bradington-Young trade-name impairment; no impairment charge was recorded in FY2013. FY2013 also had a higher effective tax rate, 33.6% versus 27.2%, principally because favorable permanent tax differences were smaller relative to higher income.
Most important facts for investors to verify
- Whether operating cash flow recovers as inventory is converted to sales, and whether the year-end inventory build reflects demand and appropriate product mix.
- Whether the credit facility was extended or replaced before its July 31, 2013 expiration, and on what terms.
- Progress, remaining cost and operational impact of the domestic-upholstery ERP rollout.
- Whether supplier diversification reduces concentration and delivery risk without increasing costs or causing further stockouts.
- Whether upholstery profitability and casegoods sales momentum persist, and whether new product and channel launches generate profitable demand.