Business context and reporting period
Hooker Furniture Corporation is a home-furnishings marketing and logistics company with casegoods and upholstered-furniture segments. This Form 10-Q covers the 13 weeks and 39 weeks ended October 28, 2012 (fiscal 2013 third quarter and first nine months), compared with periods ended October 30, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
- Third quarter: Sales were $56.8 million, up 4.8%; gross profit was $13.6 million (23.9% margin, versus 23.5%); operating income was $3.8 million (6.7% margin, versus 5.0%); and net income was $2.4 million, or $0.23 per diluted share, versus $2.3 million and $0.21.
- First nine months: Sales were $158.7 million, down 5.6%; gross profit was $35.7 million (22.5% margin, versus 21.4%); operating income was $7.6 million (4.8% margin, versus 3.5%); and net income was $4.9 million, or $0.46 per diluted share, versus $4.4 million and $0.41.
- Cash flow: Nine-month operating cash flow was $0.9 million, down from $22.2 million. Investing cash use was $4.3 million, including $3.9 million of capital expenditures; financing cash use was $3.9 million, including $3.2 million in dividends and $0.7 million in share repurchases. Cash declined $7.3 million to $33.1 million.
- Balance sheet: At October 28, cash was $33.1 million, current assets $106.0 million, current liabilities $16.8 million, and equity $128.2 million. Working capital was $89.2 million and the current ratio was 6.3:1. The company had no revolving-credit borrowings; $13.2 million was available on its $15.0 million facility, with $1.8 million of standby letters of credit outstanding. Facility principal, if borrowed, was due July 31, 2013.
- The board declared a $0.10-per-share quarterly dividend payable December 28, 2012. The company had approximately $11.8 million remaining under its $12.5 million share-repurchase authorization.
Material changes versus the prior comparable period
- Third-quarter sales rose as higher average selling prices more than offset a 7.1% consolidated unit-volume decline. Casegoods sales increased 2.9%, while upholstery sales increased 8.5%.
- Nine-month sales fell mainly because casegoods unit volume declined 22.2%; consolidated unit volume declined 18.2%. Higher selling prices partly offset the volume pressure.
- Gross margin improved in both periods, helped by less discounting and lower upholstery manufacturing costs as a share of sales; higher costs on some imported products partly offset the gains. Nine-month gross profit dollars were slightly lower because sales declined.
- Upholstery returned to nine-month operating profitability: $0.7 million operating income versus a $2.1 million loss a year earlier. Casegoods operating income declined to $7.0 million from $8.0 million for the nine months.
- The third-quarter effective tax rate was 36.2%, versus an unusually low 20.0% a year earlier; the nine-month rate was 36.2% versus 27.9%. Prior-year tax benefits included non-taxable insurance proceeds and distributions, inventory donations, and an IRS penalty refund.
- Inventory increased to $38.9 million from $34.1 million at January 29, 2012, while accounts receivable increased to $29.5 million from $25.8 million. Management attributed the inventory rise to restocking and receivables to higher sales.
Outlook, commentary and risks
- Management expected retail furniture demand to improve modestly for the remainder of fiscal 2013, citing improving housing and retail indicators but continued consumer caution, unemployment, and economic uncertainty. The filing gives no specific earnings or sales guidance.
- The transition of some sourcing from China to other Asian countries neared completion in the third quarter. Out-of-stocks and shipping delays had hurt first-half sales and profitability but were improving; vendor performance and product quality also improved.
- Management said upholstery profitability reflected operational improvements, but Sam Moore faced elevated costs from starting and ramping sofa production. If upholstery sales do not continue to increase, further capacity reductions may be needed; these could entail restructuring charges and create cost-absorption challenges.
- The new ERP system went live for casegoods and imported upholstery early in the quarter. Management did not expect a material impact on fourth-quarter results; domestic upholstery conversion was expected to begin late in fiscal 2013, with full implementation planned for late fiscal 2014. Implementation costs and disruption remain risks.
- About 73% of nine-month sales were imported finished goods. A potential East and Gulf Coast port strike following the labor agreement’s December 29, 2012 extension deadline could disrupt inventory flows and adversely affect results.
- Other disclosed risks include weak discretionary demand, competition and pricing, foreign-exchange and imported-product cost changes, supplier or transportation disruptions, domestic manufacturing costs, and ERP implementation. Management reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether casegoods availability and the sourcing transition continue to recover, and whether higher prices can be sustained without further volume weakness.
- Whether upholstery profitability persists as sofa production ramps and manufacturing costs normalize; monitor any capacity actions or restructuring charges.
- Why operating cash flow fell sharply year over year, and whether inventory and receivables convert to cash as expected.
- Whether the port labor negotiations and ERP rollout proceed without material disruption or added costs.
- Whether dividends and planned repurchases remain consistent with cash generation, capital spending, and credit-facility covenant requirements.