Business context and reporting period
Hooker Furniture Corporation (NASDAQ: HOFT) designs, sources, markets and distributes residential casegoods and upholstery, including domestically manufactured custom upholstery. Its report covers the 52-week fiscal year ended February 2, 2014 (“FY2014”); the comparable FY2013 had 53 weeks, which limits direct year-over-year comparisons. The filing also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $228.3 million | $218.4 million |
| Gross profit / margin | $54.7 million / 24.0% | $52.5 million / 24.1% |
| Operating income / margin | $12.5 million / 5.5% | $12.9 million / 5.9% |
| Net income | $7.9 million | $8.6 million |
| Diluted EPS | $0.74 | $0.80 |
| Operating cash flow | $5.7 million | $(3.3) million |
Sales rose 4.5%, while net income fell 8.1%. Higher average selling prices in both segments supported sales; consolidated unit volume declined 2.0%. FY2014 had five fewer shipping days, but net sales per shipping day increased 6.6%. Higher startup, marketing and professional expenses contributed to lower operating income and earnings.
For the fourth quarter, sales were $57.6 million versus $59.6 million a year earlier; net income was $2.0 million versus $3.7 million, and diluted EPS was $0.19 versus $0.34.
At year-end, cash was $23.9 million, working capital $94.1 million and the working-capital ratio 8.3:1. Total liabilities were $20.7 million, primarily current operating liabilities and deferred compensation. No revolver borrowings were outstanding; $12.9 million remained available under the $15 million facility, with $2.1 million of letters of credit outstanding. The company reported compliance with its debt covenants. Dividends were $0.40 per share for the year.
Changes, outlook and risks
- Casegoods sales increased 3.0%, but segment operating income declined 11.4% to $10.6 million. Upholstery sales increased 7.4%; segment operating income nearly doubled to $1.9 million. Sam Moore remained unprofitable amid production-capacity and training challenges.
- H Contract and Homeware, launched during FY2014, added approximately $1.5 million in sales and incurred $2.1 million of pretax startup costs. Together they recorded a $1.5 million operating loss. Management expected H Contract to contribute positively to consolidated operating profitability in FY2015, while Homeware was expected to take longer to reach profitability; near-term results could remain at or below breakeven.
- Management gave no specific consolidated revenue or earnings guidance. It reported weaker early FY2015 demand than a year earlier, attributed partly to severe winter weather, while citing good inventory positions, increased upholstery capacity and a strong product line. Priorities include expanding lower-priced casegoods, managing costs and inventory, pricing to offset inflation, improving Sam Moore, and completing the upholstery ERP rollout. Planned FY2015 capital expenditures were $3–$4 million, including about $1.1 million for ERP.
- Material risks include dependence on imported goods: China represented 74% of import purchases, and one Chinese factory represented 57% of imported-product purchases. Other risks include freight or supplier disruption, currency and input-cost inflation, demand sensitivity to housing and consumer confidence, competition, ERP implementation, and the profitability and working-capital needs of new ventures. The company held about five months of relevant inventory in or in transit to U.S. warehouses, with up to three additional months available from its Asian warehouse.
- Subsequent events: the company entered a seven-year lease for its 628,000-square-foot Virginia distribution center, with expected aggregate rent of about $8.4 million, and sold a warehouse for $1.75 million, partly financed by a five-year note. It expected an approximately $0.3 million pretax gain in FY2015 Q1. Management said environmental matters were not expected to be material; it reported no material pending legal proceedings.
Important facts for investors to verify
- Assess results on a comparable shipping-day basis given FY2014’s one fewer week, and examine the fourth-quarter decline in earnings.
- Track whether casegoods profitability recovers and Sam Moore achieves targeted backlog and sustained profitability.
- Check whether H Contract and Homeware meet sales, operating-loss and working-capital expectations.
- Monitor China and largest-supplier concentration, inventory availability, and the ability to pass higher material, freight and import costs through to customers.
- Review ERP completion, the new distribution-center lease commitments and the terms and collectability of the seller-financed warehouse note.
Filing and controls
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective as of February 2, 2014.