Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 1, 2011 (fiscal 2012 first quarter), compared with the thirteen weeks ended May 2, 2010. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and results
The company markets residential casegoods and upholstery, including imported furniture and domestically produced custom upholstery. It reported one operating segment and provided divisional detail for casegoods and upholstery. Management described demand as constrained by a weak housing market, unemployment and subdued consumer confidence.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $58.393 | $51.353 |
| Gross profit / margin | $11.033 / 18.9% | $11.769 / 22.9% |
| Operating income / margin | $0.747 / 1.3% | $1.706 / 3.3% |
| Net income | $0.523 | $1.074 |
| Basic and diluted EPS | $0.05 | $0.10 |
| Operating cash flow | $5.595 | $2.277 |
Sales rose 13.7%, while consolidated unit volume increased nearly 20%. Casegoods sales increased from $32.6 million to $39.7 million; upholstery sales were approximately $18.7 million in both periods. Gross margin fell 4.0 percentage points. Casegoods gross margin declined to 21.7% from 28.8%, while upholstery gross margin was broadly stable at 12.9% versus 12.7%. Upholstery reported an operating loss of $1.1 million, compared with a $1.0 million loss.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $19.993 million at May 1, 2011, up from $16.623 million at January 30, 2011.
- Operating cash flow of $5.595 million included a $7.997 million cash benefit from lower inventory, partly offset by changes in receivables and payables. Capital expenditures were $0.969 million; dividends paid were $1.078 million.
- Current assets were $104.555 million and current liabilities were $15.860 million; working capital was $88.7 million and the current ratio was 6.6:1. Inventory declined $8.0 million to $49.441 million.
- No revolving-credit borrowings were outstanding. The $15.0 million facility had $13.1 million available, with $1.9 million committed to standby letters of credit; any principal is due July 31, 2013. The company also reported up to $14.9 million available to borrow against company-owned life insurance cash value.
- Other than deferred compensation obligations, the company reported no long-term debt. It was in compliance with its credit covenants at quarter-end.
Material changes and unusual items
- Higher sales reflected increased order rates and casegoods volume, but average selling prices declined approximately 4%, mainly due to discounting and product mix. Discounting increased to $3.9 million from $1.4 million; returns and allowances rose to $1.4 million from $0.674 million.
- Management attributed lower gross margin to discounting to reduce excess inventory, higher freight costs and increased returns and allowances. Selling and administrative expenses increased $0.223 million to $10.286 million, but fell as a share of sales to 17.6% from 19.6%.
- Current-quarter selling and administrative expense benefited from a $0.610 million gain on company-owned life insurance following the death of a former executive; the company also recorded a $1.2 million receivable for related insurance proceeds.
- The prior-year quarter included a $2.025 million casualty loss and a $1.525 million insurance recovery in cost of sales, a net $0.5 million charge. It also included $0.5 million of insurance proceeds in cash flows.
- The effective tax rate decreased to 34.7% from 37.5%, partly due to tax deductions for appreciated-property contributions and tax treatment of a distribution from a former captive insurance arrangement.
Outlook, risks and contingencies
Management was cautiously optimistic about the remainder of fiscal 2012 and expected growth through continued market-share gains, while noting that the prior-year comparison was affected by import production and shipping bottlenecks. No specific sales or earnings guidance was provided. Management expected discounting to remain at similar levels in Q2 and, to a lesser extent, Q3, and anticipated higher imported-product and domestic raw-material costs. It planned to control costs, adjust pricing, manage inventory, pursue new channels and products, and streamline domestic upholstery operations. Capital expenditures of $2.0–$4.0 million were expected for the remainder of fiscal 2012.
Key risks cited include weak consumer confidence and housing conditions, intense price competition, foreign-exchange and China-related cost exposure, freight and supply disruptions, commodity and labor cost increases, domestic upholstery underutilization, and execution risks involving growth and the enterprise resource planning system. The company stated it did not use derivatives to manage foreign-currency exposure. A $0.10-per-share quarterly dividend was declared after quarter-end, payable August 26, 2011.
Most important facts for investors to verify
- Whether sales growth can continue as discounting, lower average selling prices and weak end-market demand pressure profitability.
- Whether casegoods margin recovers and domestic upholstery losses narrow.
- Whether inventory reduction and operating cash generation are sustainable rather than primarily working-capital timing effects.
- Actual freight, import, currency and raw-material cost trends, and the extent to which pricing can offset them.
- Progress against the stated $2.0–$4.0 million remaining-year capital expenditure range and compliance with credit covenants.