Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: Fiscal 2014 first quarter, the 13 weeks ended May 5, 2013. Comparisons are to the 13 weeks ended April 29, 2012, except balance-sheet comparisons, which are to February 3, 2013. Dollar figures below are in millions unless noted.
Business context and results
Hooker markets residential casegoods and upholstery, including domestically produced custom upholstered furniture. The company reported two segments: casegoods and upholstery. Management cited improving housing and consumer confidence, while noting that home furnishings remain sensitive to discretionary spending and economic conditions.
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $56.295 | $51.730 | +8.8% |
| Gross profit / margin | $13.916 / 24.7% | $10.922 / 21.1% | Margin +3.6 pts |
| Selling and administrative expenses | $10.682 | $9.394 | +13.7% |
| Operating income / margin | $3.234 / 5.7% | $1.528 / 3.0% | +111.6% |
| Net income | $2.126 | $1.020 | +108.4% |
| Diluted EPS | $0.20 | $0.09 | +$0.11 |
| Operating cash flow | $3.993 | $11.061 | Down $7.068 |
Segments and material changes
- Casegoods: Sales rose 8.2% to $35.444 million; unit volume fell 4.7%, while average selling price increased 13.3%. Gross margin improved to 28.2% from 22.8%; operating income increased to $2.566 million from $1.376 million.
- Upholstery: Sales rose 9.8% to $20.851 million; unit volume increased 1.0% and average selling price rose 8.8%. Gross margin improved to 18.8% from 18.3%; operating income increased to $0.668 million from $0.152 million.
- Consolidated sales gains reflected higher average selling prices, including reduced casegoods discounting and a richer product mix. Management also cited increased sales volume, moderating product costs and lower domestic upholstery costs as a share of sales as factors supporting gross profit.
- Selling and administrative costs rose 13.7%, faster than sales, and increased to 19.0% of sales from 18.2%. Casegoods costs included start-up spending for H Contract and Homeware, higher bonus expense and other items; upholstery expenses declined.
Cash, liquidity and capital
- Cash increased $2.386 million during the quarter to $28.728 million. Operating activities provided $3.993 million; investing activities used $0.532 million and financing activities used $1.075 million, principally for dividends.
- Operating cash flow was lower than the prior-year quarter despite higher earnings. The filing attributes working-capital movements to, among other things, lower accounts payable and payments of accrued income taxes. Cash taxes paid were $2.115 million versus $0.014 million in the prior-year quarter.
- At May 5, 2013, current assets were $105.893 million and current liabilities were $13.069 million; working capital was $92.824 million and the current ratio was 8.1:1. Total assets were $152.760 million.
- No revolver borrowings were outstanding. Of the $15 million revolving facility, $13.2 million was available; $1.8 million of letters of credit was outstanding. The facility was scheduled to expire July 31, 2013, and the company was negotiating an extension or replacement, which management expected before expiration.
- Capital expenditures were $0.880 million in the quarter. The company expected $1.5 million to $3.5 million of capital expenditures for the remainder of FY2014, including $1.3 million to $1.8 million for upholstery ERP implementation. Approximately $4.3 million of additional spending was anticipated to complete the ERP project.
- Quarterly dividends declared were $0.10 per share. The board declared another $0.10 per-share dividend payable June 28, 2013. No shares were repurchased in the quarter; approximately $11.8 million remained under the repurchase authorization.
Outlook, risks and unusual items
- Management said demand early in Q2 was stronger than a year earlier and expressed optimism about the core business and new ventures, while noting that summer is traditionally the furniture industry’s slow season. This was commentary, not quantified sales or earnings guidance.
- H Contract launched early in Q2; Homeware was expected to launch in August 2013 on two major home-furnishings e-commerce websites. First-quarter start-up costs were approximately $0.440 million before tax ($0.294 million after tax, or $0.03 per share); management expected $0.12–$0.15 per share of such costs for FY2014.
- Management said further significant upholstery cost reductions would be challenging; future profit improvement would depend on growing sales while maintaining margins near current levels.
- ERP conversion in domestic upholstery began in Q1, with full implementation planned during FY2015. Management cited potential efficiencies and cost savings but said they were difficult to quantify before company-wide implementation; implementation could require significant resources and disrupt operations.
- Key disclosed risks include cyclical consumer demand, competition, imported-product and shipping costs or disruptions, foreign-exchange exposure, domestic manufacturing costs, new-business execution, and ERP implementation. The company does not use currency derivatives; supplier prices are generally negotiated in U.S. dollars for at least six months.
- The company reported compliance with its credit-facility financial covenants at quarter-end and expected continued compliance. It stated that it had resources to meet foreseeable business needs, but cash flow depends substantially on orders and operating performance.
Important facts for investors to verify
- Whether the revolving credit facility was extended or replaced before July 31, 2013, and the terms and availability of the new arrangement.
- Whether stronger early-Q2 demand continued through the traditionally slower summer season and translated into sustained sales and margins.
- Actual H Contract and Homeware launch performance, distribution, start-up costs and contribution to results relative to management’s estimates.
- ERP implementation timing, total cost, operational disruption and realized savings, particularly against the remaining $4.3 million expected project spending.
- Whether upholstery sales and margins can improve without further material cost reductions, and whether casegoods pricing and reduced discounting remain sustainable.
- Drivers of the year-over-year decline in operating cash flow and the company’s ability to maintain liquidity while funding capital expenditures and dividends.