Hooker Furniture Corporation — Q1 FY2015 Form 10-Q
Reporting period: Thirteen weeks ended May 4, 2014; comparable period ended May 5, 2013. Dollar amounts are in millions unless noted. The filing identifies the registrant as Hooker Furniture Corporation.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $61.4 | $56.3 | +9.1% |
| Gross profit / margin | $15.6 / 25.4% | $13.9 / 24.7% | Margin +0.7 percentage points |
| Operating income / margin | $4.2 / 6.9% | $3.2 / 5.7% | Income +31.2% |
| Net income / margin | $2.8 / 4.6% | $2.1 / 3.8% | Income +31.9% |
| Basic and diluted EPS | $0.26 | $0.20 | +$0.06 |
| Operating cash flow | $10.0 | $4.0 | +$6.0 |
| Capital expenditures | $1.0 | $0.9 | +$0.1 |
Casegoods sales rose 10.1% to $39.0 million; upholstery sales rose 7.3% to $22.4 million. Casegoods operating income increased 44.7% to $3.7 million, while upholstery operating income declined 20.5% to $0.5 million. The upholstery segment remained profitable overall, although Sam Moore was not profitable on an operating basis during the quarter.
Cash and cash equivalents were $31.7 million at May 4, up $7.8 million from fiscal year-end. Net working capital was $95.6 million and the current ratio was 7.9-to-1. The company had no revolver borrowings, $13.3 million of available capacity under its $15 million unsecured facility, and $1.7 million of standby letters of credit. Total liabilities were $22.0 million. The company declared and paid quarterly dividends of $0.10 per share; a further $0.10 dividend was declared after quarter-end.
Material changes and management commentary
- Sales growth reflected higher casegoods volume, including container-direct shipments, and gains at Sam Moore; consolidated average selling prices were essentially flat. Both H Contract and Homeware contributed sales, unlike the prior-year quarter.
- Gross margin improved mainly from lower casegoods warehouse and distribution costs and higher sales volume. Increased casegoods discounting to reduce slow-moving inventory and higher Sam Moore labor and benefit costs partly offset the improvement.
- Selling and administrative expense rose 6.4% to $11.4 million, but declined to 18.5% of sales from 19.0%. New-venture costs, ERP project costs, employee benefits, commissions, and bad-debt expense contributed to higher spending.
- Cash generation benefited in part from a $5.4 million inventory reduction. Management said the reduction reflected efforts to liquidate slow-moving stock and align inventory with expected demand.
- The Cloverleaf warehouse sale closed during the quarter. The company recognized a $34,000 gain using installment accounting and deferred a further $302,000 of gain for recognition as principal payments are received. A $1.575 million mortgage note receivable was recorded.
Outlook, risks and contingencies
- Management said first-quarter orders increased year over year but were weaker than expected for the spring selling period. It cited uneven retail demand and a housing recovery that was improving but slower than expected, and said it was less bullish than at the start of the quarter.
- Management expected H Contract to broaden its customer base and contribute to operating profitability in FY2015. Homeware was performing close to expectations, but management said it would take longer to reach scale and profitability. Together, the initiatives added about $910,000 of sales and incurred $357,000 of operating losses in the quarter; management expected them to reduce FY2015 net income by $0.02–$0.04 per share.
- Management expected $2.0–$3.0 million of capital expenditures for the remainder of FY2015, including about $800,000 for upholstery ERP implementation. It expected ERP implementation to be completed during FY2015, with potential efficiencies and savings not yet quantified.
- Vietnam unrest had delayed some shipments by an estimated 7–14 days. The company said available inventory was sufficient to mitigate the delay and did not then expect a material Q2 impact, but future disruption remained uncertain.
- A possible U.S. West Coast port strike could cause surcharges exceeding $1,000 per container and increase shipping costs by an estimated 25–30% during a disruption.
- The company could not determine whether Chinese accent chests it imports would be subject to anti-dumping duties, or estimate potential duties. Any assessment, including possible interest and penalties, could adversely affect results, liquidity, or financial condition.
- Other risks include offshore sourcing and freight disruptions, furniture-market cyclicality, raw-material and labor cost pressures, foreign exchange exposure, execution of new businesses and ERP implementation, and uncertain tax positions. The effective tax rate increased to 34.6% from 33.6%; unrecognized tax benefits were $323,000.
Most important facts for investors to verify
- Whether sales and order trends, particularly in casegoods, continued after the quarter amid management’s concerns about retail demand.
- Whether Sam Moore improved production efficiency, lead times, and profitability, and whether leather-cost pressures affected Bradington-Young margins.
- Whether H Contract and Homeware met management’s growth expectations and remained within the projected $0.02–$0.04 FY2015 EPS impact.
- Whether Vietnam sourcing, port disruption, or potential anti-dumping duties caused additional delays or costs.
- Whether the company completed ERP implementation on schedule and within the anticipated capital spending range, and whether the Cloverleaf note is collected as contracted.