Hooker Furniture Corporation — FY2011 Form 10-K
Business context and reporting period. The company designs, sources, markets, distributes and manufactures residential furniture, including imported casegoods and domestic and imported upholstery. The fiscal year covered was the 52 weeks ended January 30, 2011; comparisons are with the 52 weeks ended January 31, 2010.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $215.4 million | $203.3 million |
| Gross profit / margin | $46.9 million / 21.8% | $48.4 million / 23.8% |
| Operating income / margin | $4.1 million / 1.9% | $5.2 million / 2.6% |
| Net income | $3.2 million | $3.0 million |
| Diluted EPS | $0.30 | $0.28 |
| Cash from operations | $(16.0) million | $36.8 million |
| Cash and cash equivalents, year-end | $16.6 million | $38.0 million |
Sales grew 5.9%; casegoods sales rose 2.0% and upholstery sales rose 14.8%. Net income increased despite lower operating income, helped in part by a lower effective tax rate (22.3%, versus 40.9%). The company declared $0.40 per share in dividends for each year.
Operating cash outflow largely reflected a $21.3 million increase in inventory as the company built stock to support expected sales and service levels. Year-end inventory was $57.4 million, up from $36.2 million. Working capital was $89.3 million, and the current ratio was 6.1:1, compared with 6.6:1. No debt was outstanding at year-end. The company had $13.1 million available under its $15 million revolving facility after $1.9 million of letters of credit; the facility expires July 31, 2013. It also reported up to $15 million available to borrow against life-insurance cash value.
Material changes versus the prior year
- Gross margin fell 2.0 percentage points, primarily because of higher imported-product freight costs and a $500,000 net fire-related charge. Upholstery margins improved to 12.8% from 12.2%, while casegoods margins declined to 26.3% from 29.0%.
- Selling and administrative expenses declined $934,000 to $41.0 million, reflecting prior cost reductions and lower bad-debt expense, partly offset by higher commissions and design fees.
- Operating results included $1.4 million of restructuring charges for consolidating Bradington-Young operations in Hickory, North Carolina, and a $396,000 impairment of the Opus Designs trade name.
- Cash declined $21.4 million during the year, reversing the $26.2 million increase in FY2010. Operating cash flow swung from a $36.8 million inflow to a $16.0 million outflow.
Outlook, commentary and risks
Management said retail conditions remained weak but noted signs of improving demand. FY2011 incoming orders were down less than 1% year over year, with upholstery orders up 12.5%; fourth-quarter sales increased 4.3% year over year. The company expected FY2012 retail conditions to remain relatively weak and provided no specific revenue or earnings guidance. Planned FY2012 capital expenditures were $2.5 million to $4.7 million, including $1.9 million to $3.5 million for ERP implementation. The overall ERP project was expected to cost approximately $7.7 million, with casegoods implementation targeted for FY2012 fourth quarter and upholstery implementation during FY2013.
Management expected the Bradington-Young facility consolidation to save approximately $1 million annually beginning in FY2012. It continued to cite economic uncertainty, competitive pressure, supply-chain challenges and input-cost inflation as potential obstacles to recovery. Leather and fabric costs were rising, and further upholstery price increases might be needed.
- Supplier concentration: Imported products represented about 75% of sales; China accounted for about 98% of import purchases, and the largest Chinese factory represented about 47% of imported-product purchases. Management estimated inventory could cover roughly four months of a disruption, while selected-item delays could last up to six months.
- Other exposures: Risks include freight and transportation costs, U.S. dollar movements beyond negotiated supplier-price periods, changing consumer preferences, retailer/customer distress, and domestic upholstery capacity utilization.
- Unusual and contingent items: A distribution-center fire resulted in $2.208 million of casualty loss and $1.708 million of insurance recovery. The company had begun foreclosure proceedings over collateral connected with a failed supplier; the collateral was valued at $300,000. The filing reported no material pending litigation and no material environmental liabilities.
- The company was in compliance with its credit covenants at year-end. Management and the independent auditor reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Track whether sales growth converts into improved operating margins, particularly in upholstery, which still posted an operating loss of $5.3 million, or 7.3% of division sales.
- Assess inventory growth, sell-through and operating cash flow; verify that the higher inventory supports demand without creating excess or markdown risk.
- Monitor freight, leather and fabric costs, pricing actions and the extent to which cost increases can be passed on without damaging volume.
- Evaluate China and largest-factory sourcing concentration, alternative-source capacity, and delivery performance.
- Check ERP spending, implementation milestones and any operational disruption, and confirm realization of the expected $1 million annual consolidation savings.
- Review the full financial statements and notes for cash-flow details, the supplier-collateral recovery, deferred compensation obligations and assumptions underlying intangible-asset impairment tests.