Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended July 29, 2012; comparable periods ended July 31, 2011. The company markets imported casegoods and upholstery and domestically produced custom upholstery.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Net sales | $50.2 million | $55.6 million | $101.9 million | $114.0 million |
| Gross profit / margin | $11.3 million / 22.5% | $12.2 million / 21.9% | $22.2 million / 21.8% | $23.2 million / 20.4% |
| Operating income / margin | $2.3 million / 4.6% | $2.5 million / 4.5% | $3.9 million / 3.8% | $3.2 million / 2.8% |
| Net income | $1.5 million | $1.6 million | $2.5 million | $2.2 million |
| Diluted EPS | $0.14 | $0.15 | $0.23 | $0.20 |
| Operating cash flow | Not separately reported for the quarter | $8.4 million | $18.3 million |
- Revenue and margins: Q2 sales fell 9.7% year over year, chiefly from lower unit volume; average selling prices rose as discounting declined. First-half sales fell 10.6%. Gross margin improved in both periods, but lower sales reduced gross profit.
- Segments: Q2 casegoods sales declined 11.8% and upholstery sales declined 5.7%. First-half casegoods operating income was $3.7 million versus $4.6 million; upholstery returned to first-half operating profit of $0.1 million, improving $1.4 million year over year, despite a $0.05 million Q2 operating loss.
- Cash flow and liquidity: First-half operating cash flow was $8.4 million, down from $18.3 million. Cash increased $3.0 million to $43.3 million. Net working capital was $88.5 million, with a 5.9-to-1 current ratio, versus $89.5 million and 7.0-to-1 at fiscal year-end. The cash-flow decline occurred alongside significant working-capital movements, including inventory investment and changes in payables.
- Debt and capital allocation: No revolver borrowings were outstanding at quarter-end; $13.2 million remained available under the $15 million facility, with $1.8 million of standby letters of credit. The company paid $2.2 million in dividends and repurchased 22,400 shares for approximately $0.26 million under a $12.5 million authorization. Quarterly dividend declared was $0.10 per share.
- Investment: First-half capital expenditures were $2.9 million, principally for systems and facilities. Net property, plant and equipment was $22.6 million. The company reported a $0.6 million gain from the sale of property and equipment, including its former Cherryville upholstery facility.
Changes, outlook and risks
- Management attributed weak sales to aggressive prior inventory reductions that caused out-of-stocks, delayed collections and shipping following sourcing shifts from China to other Asian countries, and reduced discounting. It expected sourcing delays to ease in the second half of FY2013.
- Management expected retail furniture demand to improve modestly during the fall. It planned continued cost control, pricing and sourcing adjustments, improved availability of best sellers, new products and distribution channels, and upholstery cost reduction. Further upholstery capacity reductions may be needed if sales do not increase and could trigger restructuring charges and affect cost absorption.
- The new ERP system began operating for casegoods and imported upholstery early in the third quarter. Domestic upholstery conversion was planned to begin late in the fourth quarter, with implementation expected late in FY2014’s fourth quarter. Management cited possible disruption and implementation costs as risks.
- Imported finished goods represented about 73% of first-half sales. East and Gulf Coast port labor negotiations had been suspended; the contract was due to expire September 30, 2012. A strike beginning October 1 could disrupt inventory flows. The company increased orders and expected roughly twice normal inventory receipts in the six weeks before that date, but warned a prolonged strike could adversely affect results and financial position.
- Management expected $1.5–$2.5 million of capital expenditures and $2–$4 million of inventory investment during the remainder of FY2013. It stated liquidity should be sufficient for foreseeable needs. The company was in compliance with its credit covenants; the minimum tangible-net-worth covenant had been reduced from $108 million to $95 million.
- Other risks include weak housing and consumer confidence, global economic conditions, competition, foreign-exchange and imported-cost exposure, supplier and transportation disruption, and domestic manufacturing costs. The company did not use derivatives to manage currency risk. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory availability and Asian sourcing lead times improved as management expected, and whether sales recovered.
- Whether upholstery maintained first-half profitability and avoided further capacity reductions or restructuring charges.
- How the ERP rollout affected operations, costs and customer service, particularly during domestic upholstery implementation.
- Whether port labor disruptions occurred and whether the company’s inventory build protected deliveries without creating excess inventory.
- Whether operating cash flow recovered and planned inventory, capital spending, dividend and share-repurchase commitments remained supportable by liquidity and covenant headroom.