Hooker Furniture Corporation — Q2 FY2016 Form 10-Q
Reporting period: Thirteen weeks and six months ended August 2, 2015, compared with periods ended August 3, 2014. Balance-sheet comparisons are with February 1, 2015. The company designs, markets and sources casegoods and upholstered furniture, with additional H Contract and Homeware businesses. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Net sales | $60.1 | $54.9 | $121.1 | $116.3 |
| Gross profit / margin | $16.1 / 26.8% | $13.7 / 24.9% | $32.5 / 26.8% | $29.3 / 25.2% |
| Operating income / margin | $5.9 / 9.7% | $3.4 / 6.2% | $11.1 / 9.2% | $7.7 / 6.6% |
| Net income | $3.9 | $2.3 | $7.4 | $5.1 |
| Diluted EPS | $0.36 | $0.21 | $0.69 | $0.47 |
| Operating cash flow | Not presented by quarter | $9.0 | $17.8 |
- Q2 sales rose 9.6% and net income rose 73.3% year over year. First-half sales increased 4.1% and net income increased 46.0%.
- For the first half, casegoods sales were $75.8 million, upholstery sales $42.0 million and all-other sales $3.5 million. Casegoods and all-other growth offset lower upholstery sales.
- Gross margin improvement reflected better casegoods product quality, lower discounting and returns, upholstery operating efficiencies, and growth at H Contract. Selling and administrative expenses were nearly flat in Q2 and down 1.1% for the first half.
- First-half operating cash flow was $9.0 million, down from $17.8 million. Cash increased $5.0 million to $43.6 million after $1.9 million of investing outflows and $2.2 million of dividends paid.
- At August 2, cash was $43.6 million; current assets were $122.8 million and current liabilities $16.5 million. Working capital was $106.3 million and the current ratio 7.4:1. Inventory was $47.0 million.
- No revolving-credit borrowings were outstanding. The $15 million unsecured facility had $13.5 million available after $1.5 million in standby letters of credit; maturity is July 31, 2018. The company reported compliance with its financial covenants. Total liabilities were $25.5 million.
Material changes and management commentary
- Casegoods Q2 sales rose 12.8%, helped by improved product availability and higher unit volume. Upholstery sales declined 0.9% in Q2 and 2.9% for the first half; Sam Moore’s discontinued low-margin programs and ERP-related implementation challenges weighed on sales. Management said those challenges had stabilized by quarter-end.
- Upholstery operating income improved to $1.3 million in Q2 from $0.7 million, and to $2.8 million for the first half from $1.3 million, supported by process, materials and labor efficiencies and lower medical claims.
- All other reported its first quarterly operating profit, $0.1 million, but remained a small part of the business. H Contract was profitable in Q2 and the first half. Homeware’s operating loss narrowed; the company closed its direct-to-consumer business early in Q3 and is concentrating on wholesale.
- Sam Moore’s factoring relationship ended as its ERP system became operational. Management expects to end Bradington-Young’s factoring arrangement in late FY2016 or early FY2017 and anticipates collections could slow somewhat, but does not expect a material liquidity impact.
- The board declared a $0.10 per-share quarterly dividend on September 3, payable September 30, 2015. The company expects $1.0–$2.0 million of capital expenditures during the remainder of FY2016.
Outlook, risks and contingencies
- Management reported increased demand across segments and optimism about longer-term prospects, but gave no quantified sales or earnings guidance. It expects to offset most imported-product price increases and rising ocean freight costs through pricing, while noting possible effects on volume and margins.
- Priorities include improving upholstery capacity and profitability, maintaining casegoods availability, expanding distribution, growing new businesses, controlling costs and completing the ERP rollout. Bradington-Young’s ERP implementation was expected in late FY2016 or early FY2017; company-wide savings remain difficult to quantify.
- Key risks include dependence on offshore sourcing, China-related cost and currency changes, freight and supply disruptions, consumer demand and competition, raw-material and labor inflation, and ERP implementation risks. Management noted uncertainty about the effect of China’s currency devaluation on consumer confidence and demand.
- Potential anti-dumping duties on certain imported Chinese accent chests remain uncertain and unquantified; the company could not determine whether its products are covered. Separately, Customs assessed approximately $2.1 million in civil penalties and $0.5 million in duties relating to imported bedroom furniture. The company disputes liability and intends to defend the matter; management did not expect the ultimate disposition to materially harm consolidated financial position, results or liquidity.
- A settlement of an uncertain tax position contributed to a lower effective tax rate: 33.4% versus 34.4% in Q2 and 34.3% versus 34.5% for the first half. Certain federal and state tax years remain open to examination, including an ongoing North Carolina examination.
- Management said interim results may not indicate full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether stronger casegoods demand and improved product availability persist, and whether upholstery sales and margins continue recovering.
- Whether ERP implementation at Bradington-Young proceeds as planned and whether expected efficiencies materialize without further disruption.
- How the transition away from factoring affects collections, working-capital needs and liquidity.
- Whether import-cost inflation, freight costs, currency movements or potential duties pressure margins or sales.
- Developments in the Customs penalty and duty dispute and the unresolved accent-chest duty exposure.
- Whether Homeware’s wholesale strategy and H Contract’s growth improve the all-other segment’s contribution.