Hooker Furniture Corporation (now Hooker Furnishings Corp.) — Form 10-Q summary
Business context and reporting period
The filing covers the 13 weeks and 26 weeks ended August 4, 2013 (fiscal 2014 second quarter and first half), compared with periods ended July 29, 2012. The company sells casegoods and upholstered furniture; H Contract and Homeware results are included with casegoods. All dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | First half FY2014 | First half FY2013 |
|---|---|---|---|---|
| Net sales | $55.3 | $50.2 | $111.6 | $101.9 |
| Gross profit / margin | $13.3 / 24.0% | $11.3 / 22.5% | $27.2 / 24.3% | $22.2 / 21.8% |
| Operating income / margin | $2.6 / 4.8% | $2.3 / 4.6% | $5.9 / 5.3% | $3.9 / 3.8% |
| Net income | $1.7 | $1.5 | $3.8 | $2.5 |
| Diluted EPS | $0.16 | $0.14 | $0.35 | $0.23 |
- Q2 sales grew 10.2%; first-half sales grew 9.5%. First-half casegoods sales rose 8.2% and upholstery sales rose 11.7%.
- Q2 casegoods revenue was $34.8 million and operating income $1.8 million; upholstery revenue was $20.5 million and operating income $0.8 million, versus a $0.05 million upholstery operating loss a year earlier.
- Gross-margin improvement reflected higher selling prices, lower casegoods distribution costs, and lower upholstery manufacturing costs as a share of sales. First-half selling and administrative expense increased 16.2% to $21.3 million, including new-initiative start-up costs and higher compensation, compliance, and selling expenses.
- First-half operating cash flow was $6.6 million, down from $8.4 million. Investing cash outflow was $1.9 million and financing cash outflow $2.2 million, primarily dividends. Cash increased $2.6 million to $29.0 million.
- At August 4, cash was $29.0 million, current assets $108.4 million, and current liabilities $15.4 million; reported working capital was $93.0 million and the working-capital ratio 7.0:1. Total liabilities were $23.1 million, including $7.7 million of deferred compensation.
- No revolver borrowings were outstanding. The $15 million unsecured facility had $13 million available after $2 million of standby letters of credit. The amended facility matures July 31, 2018; the company reported compliance with its financial covenants.
Material changes and management commentary
- Q2 sales growth was driven by higher average selling prices in both segments and higher upholstery volume. First-half casegoods unit volume declined 2.4%, partly offset by a 10.3% increase in average selling price; consolidated first-half unit volume was flat.
- Management said casegoods orders in Q2 were approximately 11% higher year over year and planned continued discounting of older, slower-moving inventory, which could weigh on casegoods margins.
- Upholstery profitability improved with higher volume and cost controls. Sam Moore faced production-capacity and staffing challenges; its Q2-end order backlog was 75% above the prior-year level. Training and overtime costs were elevated, while management expected better capacity and labor efficiency to support future profitability.
- Leather, foam, and plywood costs were inflationary. A price increase took effect in Q2; management said leather prices appeared stable in the short term but acknowledged uncertainty about passing on price increases without affecting demand.
- H Contract launched early in Q2 and Homeware launched in August 2013 through e-commerce partners. First-half start-up costs were about $1.0 million before tax ($0.06 per share after tax); management expected these initiatives to reduce FY2014 net income by approximately $0.12–$0.15 per share.
- Management was optimistic about the longer-term outlook but cautioned that the recovery in furniture demand was uneven and that rising mortgage rates, slower new-home sales, and softer retail sales could hurt near-term results. It reported stronger demand entering the second half versus a year earlier.
Liquidity, investment, and other items
- First-half capital expenditures were $1.7 million. The company expected another $1.5–$2.0 million in capital spending during the rest of FY2014, including $0.7–$1.2 million for upholstery ERP implementation; approximately $3.7 million of additional ERP project spending was anticipated over the remainder of the project. Full implementation was targeted for fiscal 2015.
- The board declared a $0.10-per-share quarterly dividend after quarter-end, payable September 27, 2013. No shares were repurchased in the first half; approximately $11.8 million remained under the repurchase authorization.
- Interim results are not necessarily indicative of full-year results. Management identified risks including cyclical consumer demand, imported-product and raw-material costs, vendor and shipping disruptions, foreign exchange, domestic manufacturing costs, and ERP implementation.
Important facts for investors to verify
- Whether sales and order growth continued in the second half, particularly in casegoods, and whether promotional discounting eroded margins.
- Whether upholstery production constraints, the Sam Moore backlog, and related training and overtime costs improved as management expected.
- Whether new-initiative spending remained within the stated FY2014 earnings-impact estimate and generated meaningful orders or sales.
- ERP implementation progress, remaining costs, and any operational disruptions; also confirm liquidity and covenant compliance as investment spending continues.
- How raw-material inflation and price increases affected demand, gross margins, and cash generation.