Hooker Furniture Corporation — Fiscal 2016 Third-Quarter 10-Q
Reporting period: The 13-week quarter and 39-week year-to-date period ended November 1, 2015, compared with periods ended November 2, 2014. Fiscal 2016 ends January 31, 2016. The company markets and sources residential casegoods and upholstery, including domestically produced upholstery; its segments are Casegoods, Upholstery, and All Other (H Contract and Homeware).
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $65.3m | $63.2m | $186.4m | $179.4m |
| Gross profit / margin | $18.2m / 27.8% | $16.0m / 25.4% | $50.6m / 27.2% | $45.3m / 25.2% |
| Operating income / margin | $6.6m / 10.2% | $4.9m / 7.7% | $17.7m / 9.5% | $12.5m / 7.0% |
| Net income | $4.6m | $3.2m | $12.0m | $8.3m |
| Diluted EPS | $0.43 | $0.30 | $1.11 | $0.77 |
Quarterly sales rose 3.4%, while net income increased 44.5%; year-to-date sales rose 3.9% and net income 45.4%. Gross-margin gains reflected less discounting, lower freight costs, improved product quality, upholstery operating efficiencies, lower medical claims expense, and increased All Other sales. Selling and administrative expense was 17.6% of sales in the quarter and 17.6% year to date, versus 17.6% and 18.3%, respectively, a year earlier.
Cash flow and liquidity: Year-to-date operating cash flow was $16.9m, compared with $15.8m. Investing cash use was $2.8m, including $2.2m of capital expenditures and $0.7m of life-insurance premiums; financing cash use was $3.2m, primarily dividends. Cash increased $10.8m to $49.5m. At November 1, working capital was $109.5m and the current ratio was 7.6:1. Total liabilities were $25.9m; there were no revolving-credit borrowings. The $15m unsecured facility had $13.3m available after $1.7m of standby letters of credit. The company reported covenant compliance.
Cash dividends declared were $0.10 per share in the quarter and $0.30 per share year to date. A further $0.10-per-share dividend was declared December 1, payable December 31, 2015.
Changes by business and versus prior period
- Casegoods: Q3 sales increased 3.5% to $41.2m, while unit volume fell 2.1%; year-to-date sales rose 5.3% to $117.0m. Higher average selling prices and lower discounting supported growth and margin improvement. Management cited soft retail demand, October market order generation, product availability and component outages as constraints.
- Upholstery: Q3 sales decreased 1.5% to $21.7m; year-to-date sales fell 2.4% to $63.7m. Despite lower sales, segment operating income improved to $1.3m in the quarter and $4.1m year to date, supported by efficiencies. BY sales grew, while Sam Moore and Hooker Upholstery faced sales and execution challenges.
- All Other: Q3 sales grew 48.3% to $2.4m and year-to-date sales grew 61.2% to $5.9m, but the segment remained small and reported operating losses of $0.03m for the quarter and $0.26m year to date. H Contract achieved operating profitability; Homeware’s loss narrowed.
Outlook, risks, and unusual items
- Management said demand had weakened more recently across Casegoods and Upholstery, including in October and November, and described October market order generation and retail conditions as challenging. It gave no quantified sales or earnings guidance. Management remained optimistic longer term and cited promotional activity, product launches, capacity, inventory availability, and cost control as priorities.
- Management expects $0.5m–$0.75m of capital expenditures for the remainder of fiscal 2016 and believes available resources can meet foreseeable requirements. Sam Moore’s ERP conversion was completed in the second quarter; BY’s conversion was expected in the first half of fiscal 2017. Management cautioned that conversion disruptions and costs remain possible.
- Homeware discontinued its direct-to-consumer business early in the quarter and is focusing on wholesale. Management expects Homeware to take longer than H Contract to reach scale and profitability.
- Key exposures include offshore sourcing, imported-product and freight costs, currency changes, vendor and shipping disruptions, domestic upholstery labor and material costs, cyclical consumer demand, and ERP implementation. Management said lower ocean freight costs had helped offset imported-product cost increases; future currency and cost effects remain uncertain.
- Contingencies: Customs and Border Protection assessed a civil penalty of approximately $2.1m and unpaid duties of approximately $0.5m relating to imported bedroom furniture. The company disputes liability and intends to defend the matter; management believes the outcome will not materially adversely affect financial position, results, or liquidity. Separately, possible antidumping duties on certain China-sourced accent chests remain uncertain; the filing says potential amounts cannot be estimated. A December 1, 2015 court decision remanded the issue to the Department of Commerce and was viewed by management as favorable, but did not resolve the risk.
- The effective tax rate fell to 30.6% in Q3 and 32.9% year to date, partly due to settlements of uncertain tax positions. Federal tax years 2014–2015 and state tax years 2012–2015 remained open to examination; a North Carolina state examination was underway.
Important facts for investors to verify
- Whether weaker recent demand, market conditions, and casegoods product availability affect subsequent-quarter sales and margins.
- Whether BY’s ERP implementation proceeds on schedule and whether Sam Moore sustains improved production and shipping performance.
- Progress toward H Contract growth and Homeware’s wholesale strategy, including the timing of profitability.
- Resolution and potential financial exposure from the customs penalty and possible accent-chest antidumping duties.
- Whether cash generation, dividends, and available credit remain adequate as receivables management shifts in-house and operating conditions change.