Hooker Furniture Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the 13 weeks ended April 29, 2012; comparable period ended May 1, 2011. The company markets and distributes residential casegoods and upholstery, including domestically produced upholstery. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $51.7 | $58.4 | Down 11.4% |
| Gross profit / margin | $10.9 / 21.1% | $11.0 / 18.9% | Margin up 2.2 percentage points |
| Operating income / margin | $1.5 / 3.0% | $0.7 / 1.3% | Up $0.8 |
| Net income | $1.0 | $0.5 | Up 95% |
| Diluted EPS | $0.09 | $0.05 | Up $0.04 |
| Operating cash flow | $11.1 | $5.6 | Up $5.5 |
Casegoods sales fell 17.6% to $32.7 million, while upholstery sales rose 1.8% to $19.0 million. Casegoods operating income declined to $1.4 million from $1.8 million. Upholstery returned to operating profitability, earning $0.2 million versus a $1.1 million loss. Lower discounting and lower domestic upholstery costs improved consolidated gross margin, but lower sales left gross profit roughly flat. Selling and administrative expense declined to $9.4 million, although it increased as a share of sales to 18.2% from 17.6%.
Cash and cash equivalents were $48.0 million at quarter-end, up $7.6 million from January 29, 2012. Total assets were $152.8 million; current assets were $105.8 million and current liabilities $18.6 million, yielding working capital of $87.3 million and a 5.7-to-1 working-capital ratio. The ratio declined from 7.0-to-1 at fiscal year-end. The company had no revolver borrowings and reported $13.2 million of availability under its $15.0 million facility; $1.8 million of standby letters of credit were outstanding. Total liabilities were $25.7 million. Cash dividends paid were $1.1 million, and capital expenditures were $2.2 million.
Material changes and drivers
- Sales declined primarily because of lower unit volume, especially in casegoods. Out-of-stocks followed aggressive inventory reductions, while shifts from Chinese vendors to other Asian suppliers extended lead times and delayed shipments. Average selling prices increased in both segments, chiefly because discounting was lower.
- Operating results improved despite lower sales, with upholstery’s return to profitability a significant contributor. Management attributed the improvement to operational changes and cost reduction, as well as a modest upholstery sales increase.
- Operating cash flow benefited from lower receivables and inventory and higher trade payables. Inventory decreased by $3.6 million from fiscal year-end; trade payables increased by $4.2 million.
- The company spent more on capital expenditures than in the prior-year quarter, including investment in its business systems and facilities and a remodeled High Point showroom.
Outlook, risks and notable items
- Management expected sourcing-related lead-time and shipping delays to weigh on second-quarter sales and profits, with conditions expected to improve during the second half of fiscal 2013. It expected retail furniture demand to improve modestly by fall; no specific revenue or earnings guidance was provided.
- Management planned to continue cost control, refine pricing, manage inventory availability, diversify sourcing, pursue new products and distribution channels, and upgrade information systems. It expected $2–$4 million of capital spending for the remainder of fiscal 2013, including $1.5–$2.0 million for ERP implementation, and $6–$8 million of investment to build inventory.
- Domestic upholstery has higher fixed costs. Management cautioned that if sales—particularly domestically produced upholstery—do not increase sufficiently, capacity reductions may be required, potentially causing restructuring charges and near-term earnings and balance-sheet impacts.
- The board authorized up to $12.5 million of share repurchases; none occurred in the quarter. On May 18, 2012, the company amended its bank agreement, reducing the minimum tangible-net-worth covenant from $108 million to $95 million in connection with the repurchase plan. The company reported covenant compliance at April 29.
- The board declared a $0.10-per-share quarterly dividend payable August 31, 2012. The filing identifies risks including weak housing and consumer confidence, import sourcing and shipping disruptions, foreign-currency and imported-cost changes, competition, and ERP implementation risks. Management said disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether vendor transitions and shipping delays eased as expected in the second half of fiscal 2013, and whether casegoods in-stock availability recovered.
- Whether upholstery profitability was sustained and whether sales growth was sufficient to avoid capacity reductions or restructuring charges.
- How the proposed share repurchases, inventory build and ERP spending affected cash, covenant headroom and liquidity.
- Whether margin improvement from reduced discounting could be maintained without further weakening sales volume.
- The filing’s interim results are not necessarily indicative of full-year performance; management’s demand outlook is qualitative rather than quantified.