This quarterly report on Form 10-Q includes the Company's unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as "three months," "three-month period," "quarter" or "quarterly period") that began August 4, 2008 and thirty-nine week period (also referred to as "nine months" or "nine-month period") that began February 4, 2008, both ended on November 2, 2008. This report discusses the Company's:
· results of operations for these periods compared to the fiscal 2008 thirteen-week third quarter that began July 30, 2007 and the thirty-nine week period that began January 29, 2007, both ended on October 28, 2007; and

· financial condition as of November 2, 2008.

References in this report to the 2009 fiscal year, or comparable terminology, refer to the Company's fiscal year that began February 4, 2008 and will end February 1, 2009.

Overview

Hooker Furniture Corporation is a home furnishings design, marketing and logistics company with world-wide sourcing capabilities. With the closing of its last domestic wood furniture plant during the fiscal 2008 first quarter, the Company is now focused on imported wood and metal and domestically-produced and imported upholstered home furnishings.

Results of operations for the thirteen and thirty-nine week periods ended November 2, 2008 continue to reflect the weak retail environment for home furnishings that has carried over from last year. Discretionary purchases of furniture, particularly at the upper-middle price points where the Company competes, are significantly affected by consumer confidence.

Current economic factors, such as the significantly weakened and volatile securities markets, high food costs, lower consumer confidence, a weak housing market and reduced availability of consumer credit have all contributed to cause an extremely weak retail environment for home furnishings. The Company continues to believe, however, that its current business model, resulting from the elimination of significant fixed overhead through recent restructurings, provides the flexibility necessary to adjust to changing market conditions by controlling inventory purchases from suppliers. The Company expects that the current economic malaise could last for another 9-12 months. The Company also continues to believe that upon recovery, it will be well positioned to respond quickly to increased demand.

During the 2009 fiscal third quarter, the Company continued to address profitability by:
· increasing selling prices on most of its products;

· deferring, reducing or eliminating certain spending plans; and,

· reducing its work force by approximately 80 employees.

Principally as a result of higher net sales in the 2009 third quarter and these actions, operating margins improved to 6.8% of net sales during the 2009 third quarter compared to 4.8% for the 2009 second quarter and 5.2% for the 2009 first half.

Following are the principal factors that impacted the Company's results of operations during the three and nine-month periods ended November 2, 2008 as compared with the same prior year periods:

· Net sales declined principally due to:

o the industry-wide slow down in business at retail,

o the Company's exit from domestic wood furniture manufacturing, and

o overall lower average selling prices resulting primarily from the mix of products shipped,

however, the sales decline was partially offset by an increase in selling prices on most of the Company's products effective September 1, 2008.

· Lower gross profit margins resulting from:

o the rising cost of imported wood products and higher raw material costs for upholstered products; and

o increased overhead absorption as a percentage of net sales for domestically-produced upholstered furniture.

· Higher selling and administrative expenses to support new businesses (Sam Moore upholstered seating and Opus Designs youth bedroom furniture) and expanded warehousing and distribution. In addition, selling and administrative expenses increased as a percentage of net sales principally through the effect of lower sales for both fiscal 2009 periods.

Results of Operations

The following table sets forth the percentage relationship to net sales of
certain items included in the consolidated statements of operations.

                                              Thirteen Weeks Ended               Thirty-Nine Weeks Ended
                                        November 2,         October 28,      November 2,        October 28,
                                            2008               2007              2008               2007
Net sales                                      100.0 %             100.0 %          100.0 %            100.0 %
Cost of sales                                   71.3                68.2             71.0               69.4
Gross profit                                    28.7                31.8             29.0               30.6
Selling and administrative expenses             22.7                20.7             23.7               20.6
Restructuring (credit) charge                   (0.8 )               0.5             (0.4 )              0.3
Operating income                                 6.8                10.6              5.7                9.6
Other income, net                                0.1                 0.4              0.2                0.5
Income before income taxes                       6.9                11.0              5.9               10.1
Income taxes                                     2.6                 3.9              2.2                3.7
Net income                                       4.3                 7.1              3.7                6.4

Fiscal 2009 Third Quarter Compared to the Fiscal 2008 Third Quarter

Net sales for the fiscal year 2009 third quarter declined $14.8 million, or 17.6%, to $69.0 million compared to $83.8 million for the fiscal 2008 third quarter, due principally to:
· lower unit volume attributed to:

o the continued industry-wide slow down in business at retail; and

o lower shipments of discontinued domestically-produced wood furniture; and

· lower average selling prices principally due to:

o the higher proportion of lower-priced imported products shipped; and

o higher sales discounts extended to dealers to promote and stimulate sales.

Excluding discontinued domestically-produced wood furniture, net sales declined 16.3% year-over-year.

Third quarter 2009 unit volume decreased compared to the same 2008 period across most all wood and upholstery product categories, but increased for:
· youth bedroom products due to the acquisition of the Opus Designs product line in December 2007; and

· upholstered seating manufactured by Sam Moore.

Overall average selling prices decreased during the fiscal 2009 third quarter compared to the fiscal 2008 third quarter principally due to the higher proportion of imported products shipped. Average selling prices also declined for:
· imported wood furniture and upholstered seating manufactured or imported by Sam Moore due to increased shipments of lower-priced products (such as Opus Designs youth bedroom furniture sold at more moderate price points in the case of wood furniture) and higher sales discounts; and

· domestically-produced wood furniture principally due to aggressive discounting on those discontinued products.

These declines were partially offset by higher average selling prices for upholstered furniture manufactured or imported by Bradington-Young due to an overall increase in per unit selling prices implemented to compensate for cost increases received from suppliers.

Gross profit margin decreased to 28.7% of net sales in the fiscal 2009 third quarter compared to 31.8% in the fiscal 2008 third quarter, principally as a result of:
· an increase in the delivered cost of imported wood furniture as a percentage of net sales coupled with higher sales discounts to stimulate sales, partially offset by a price increase on most products;

· higher raw material and overhead costs as a percentage of net sales for domestically-produced upholstered furniture; and

· substantial discounts on discontinued domestically-produced wood furniture.

Higher costs for raw materials, fuel, offshore labor and ocean freight, along with weakness of the dollar, negatively impacted the Company's gross profit margin during the fiscal 2009 third quarter. Since the spring, the Company has experienced cost increases for imported furniture from its offshore suppliers, as well as for transportation, raw materials for its upholstered furniture and other operating expenses. Early in the third quarter 2009 the Company implemented price increases for most of its products intended to offset these cost increases and to improve margins. The impact of these price increases is reflected in improved gross margin for the 2009 third quarter compared to the 2009 second quarter.

Selling and administrative expenses decreased to $15.7 million for the fiscal 2009 third quarter, compared to $17.3 million for the fiscal 2008 third quarter. The decrease in spending during the 2009 third quarter was principally the result of:
· lower selling expenses as a result of lower sales;

· a decline in legal and professional fees; and

· lower compensation and benefits expense, which the Company implemented in response to lower sales and profitability.

These cost decreases were partially offset by:
· the costs to operate two new distribution centers during the current year quarter, one located in California, which opened in January 2008 and one in China, which opened in May 2008, both of which are owned and operated by third parties.

· higher allowances for doubtful accounts. As a result of the difficult retail furniture environment, write offs compared to the prior period and the risk of higher credit defaults has increased. Consequently, the Company has increased its allowance for doubtful accounts as a percentage of outstanding accounts receivable.

Selling and administrative expenses increased as a percentage of net sales to 22.7% for the fiscal 2009 third quarter compared to 20.7% for the fiscal 2008 third quarter, principally through the effect of lower net sales in the current year quarter.

During the 2009 third quarter, the Company recorded a restructuring credit of $561,000 ($350,000 after tax , or $0.03 per share) for previously accrued health care benefits that are not expected to be paid for terminated employees at the former Roanoke and Martinsville, Va. manufacturing facilities. In the 2008 third quarter, the Company recorded restructuring charges of $419,000 ($260,000 after tax, or $0.02 per share) principally for asset impairment and disassembly costs related to the closure of the Martinsville, Va. manufacturing facility.

As a result of the above, operating income for the fiscal 2009 third quarter decreased to $4.7 million, or 6.8% of net sales, compared to $8.9 million, or 10.6% of net sales, in the fiscal 2008 third quarter.

Other income, net was $36,000, or 0.05% of net sales, for the fiscal 2009 third quarter compared to $309,000, or 0.4% of net sales, for the fiscal 2008 third quarter. This decline was largely due to a decrease in interest income in the fiscal 2009 third quarter, due to lower cash and cash equivalent balances and lower rates of return earned on those balances, partially offset by a decrease in interest expense as a result of lower debt levels.

The Company recorded income tax expense of $1.8 million for the fiscal 2009 third quarter and $3.3 million for the fiscal 2008 third quarter. The effective tax rate increased to 37.7% for the fiscal 2009 third quarter from 35.9% for the fiscal 2008 third quarter. The effective rate increase in the fiscal 2009 third quarter is principally due to lower non-taxable income from corporate-owned life insurance and higher state income tax expense attributed to California state income taxes incurred as a result of the new west coast distribution center which opened in January 2008.

Fiscal year 2009 third quarter net income was $3.0 million, or $0.27 per share, compared to net income of $5.9 million, or $0.48 per share, in the fiscal 2008 third quarter. The decrease in earnings per share resulting from lower net income was mitigated by a decrease in weighted average shares outstanding resulting from the repurchase of 2.5 million shares of common stock since February 2007.

Fiscal 2009 First Nine-Months Compared to the Fiscal 2008 First Nine-Months

Net sales for the fiscal year 2009 first nine months declined $29.9 million, or 12.7%, to $204.7 million compared to $234.5 million for the fiscal 2008 first nine months, principally due to:
· lower unit volume attributed to:

o the continued industry-wide slow down in business at retail; and

o lower shipments of discontinued domestically-produced wood furniture; and

· lower average selling prices principally due to:

o the higher proportion of lower-priced imported products shipped; and

o aggressive discounting on discontinued domestically-produced wood furniture.

These factors were partially offset by the addition of net sales from upholstered seating specialist Sam Moore. Net sales for Sam Moore amounted to $20.1 million during the 2009 first nine months compared to $13.9 million for the 2008 six-month period following its acquisition at the end of April 2007.

During the first nine months of 2009 unit volume decreased compared to the same 2008 period across all wood and upholstery product categories with the exception of youth bedroom products, due to the acquisition of the Opus Designs product line in December 2007, and Sam Moore upholstered products.

Overall average selling prices decreased during the fiscal 2009 first nine months compared to the fiscal 2008 first nine months principally due to the higher proportion of imported products shipped and aggressive discounting on discontinued domestically-produced wood furniture. Average prices for imported wood furniture declined due to the increased shipments of lower-priced products (such as Opus Designs youth bedroom furniture, which is sold at more moderate price points) and higher sales discounts intended to stimulate sales. The generally lower selling prices of Sam Moore products decreased the average selling price for upholstered products; however, average selling prices increased slightly for upholstered furniture manufactured or imported by Bradington-Young due to an overall increase in per unit selling prices implemented to offset cost increases for imported products, and for raw materials, fuel and transportation.

Gross profit margin decreased to 29.0% of net sales in the fiscal 2009 first nine months compared to 30.6% in the fiscal 2008 first nine months, principally as a result of:
· an increase in the delivered cost of imported wood and upholstered furniture as a percentage of net sales;

· substantial discounts on discontinued domestically-produced wood furniture; and

· higher raw material and overhead costs as a percentage of net sales for domestically-produced upholstered furniture.

In the first nine months of fiscal 2009, selling and administrative expenses increased by $55,000, or 0.1%, and approximated $48.4 million in each period. As a percentage of net sales, selling and administrative expenses increased to 23.7% in the fiscal 2009 first nine months from 20.6% in the fiscal 2008 nine-month period principally through the effect of lower net sales in the current year. Selling and administrative spending was impacted by:
· selling and administrative expenses incurred at Sam Moore, which was acquired at the end of the first quarter of fiscal 2008;

· costs to operate two new third-party distribution centers during the 2009 first nine-months, one located in California, which opened in January 2008, and one in China, which opened in May 2008;

· higher allowances for bad debts; and

· start-up advertising and promotional spending to market Opus Designs youth bedroom furniture.

These cost increases were partially offset by lower selling expenses for Hooker imported wood and Bradington-Young upholstered furniture and lower legal and professional expenses. Also, in the fiscal 2008 nine-month period the Company recognized a gain on the settlement of a corporate-owned life insurance policy in connection with the death of a former executive of the Company, which reduced selling and administrative expenses.

During the 2009 first nine months, the Company recorded a restructuring credit of $819,000 for previously accrued health care benefits that are not expected to be paid for terminated employees at the former Roanoke and Martinsville, Va. manufacturing facilities.

During the first nine months of fiscal 2008, the Company recorded aggregate restructuring charges (net of restructuring credits) of $763,000 ($473,000 after tax, or $0.04 per share) consisting of:

· $893,000 for additional severance and related benefit costs, asset impairment, disassembly and exit costs associated with the closing of the Martinsville, Va. domestic wood manufacturing facility in March 2007; net of

· a restructuring credit of $130,000 principally for previously accrued health care benefits for the Pleasant Garden, N.C. facility that are not expected to be paid.

As a result of the above, the Company's operating income for the first nine months of fiscal 2009 decreased to $11.8 million, or 5.8% of net sales, compared to operating income of $22.6 million, or 9.6% of net sales, in the first nine months of fiscal 2008.

Other income, net decreased $759,000 to $391,000, or 0.2% of net sales, for the first nine months of fiscal 2009 from $1.2 million, or 0.5% of net sales, for the fiscal 2008 nine-month period. This decrease was principally the result of a decrease in interest income earned on lower cash and cash equivalent balances.

The Company recorded income tax expense of $4.5 million for the first nine months of fiscal 2009 and $8.7 million for the first nine months of fiscal 2008. The effective tax rate was 37.3% for the first nine months of fiscal 2009 and 36.5% for the first nine months of fiscal 2008. The effective rate increased in the first nine months of fiscal 2009 principally due to lower non-taxable income from corporate-owned life insurance and higher state income tax expense attributed to the opening of the new California distribution center in January 2008.

Net income for the 2009 first nine months declined to $7.6 million, or $0.68 per share, from $15.1 million, or $1.19 per share, in the fiscal 2008 nine-month period. As a percent of net sales, net income declined to 3.7% in the 2009 nine-month period compared to 6.4% for the fiscal 2008 nine-month period.

Outlook

Over the course of the last several months, the economy has worsened with continued news reports of business closings, cutbacks and layoffs across many industries, including the home furnishings industry. Additionally, consumer confidence is reported to be extremely low. With continued instability in the financial and credit markets in spite of government intervention and the changing political landscape, prospects for a near-term economic recovery appear dim.

Historically the Company has experienced an improvement in order rates following the Labor Day holiday. Consistent with this pattern, the Company experienced a modest increase in incoming order rates during the fiscal 2009 third quarter compared to the 2009 second quarter. Additionally, while attendance at the recently completed October 2008 High Point, N.C. furniture market was significantly lower than at the last several semi-annual markets, order writing for the Company at that market was generally consistent with recent markets. The Company attributes this to the appeal of its new product introductions at that market and the acceptance of these and other products by national account buyers in attendance. However, in spite of these positive points, year-over-year incoming order rates have declined significantly over the past two months. While the Company anticipates that overall retail conditions will continue to be sluggish for the next several quarters, it remains optimistic about its business model and prospects for the future.

The Company has taken steps in the following areas to address sales growth and profitability over the near term in the face of the weak sales environment:
· a concerted effort to gain broader access to national markets through targeted sales programs and the development of proprietary products;

· the pursuit of additional distribution channels that the Company believes will over time generate additional sales growth;

· continued market penetration of the Company's newly- acquired youth bedroom line, Opus Designs by Hooker;

· measures to defer, reduce or eliminate certain spending plans;

· reducing employment levels to align with the reduced volume of incoming business;

· continued refinements in managing the Company's supply chain, warehousing and distribution operations, including the addition of distribution centers in California and China to continue to improve service and delivery and reduce freight costs for the Company's dealers in the western U.S., enhancing the value of the Company's products to these dealers;

· reductions in inventory purchasing rates in the late third and fourth quarters to reflect expected business conditions; and

· evaluation of the Company's domestic upholstery manufacturing work schedules and facilities for optimal capacity utilization and operating efficiency.

The Company believes that these initiatives will help mitigate the effects of poor economic conditions on our sales and profitability.

Financial Condition, Liquidity and Capital Resources

Balance Sheet and Working Capital

As of November 2, 2008, assets totaled $160.9 million, decreasing from $175.2 million at February 3, 2008, primarily due to decreases in cash and cash equivalents and accounts receivable, partially offset by an increase in inventory and cash surrender value of life insurance policies. The Company's long-term debt, including current maturities, decreased to $5.9 million at November 2, 2008, from $7.9 million at February 3, 2008, as a result of scheduled debt repayments. Shareholders' equity at November 2, 2008 decreased to $131.1 million, compared to $140.8 million at February 3, 2008, due to common stock repurchases and dividends paid, partially offset by net income earned for the period.

Working capital decreased by $11.7 million, or 11.7%, to $90.6 million as of November 2, 2008, from $102.3 million at the end of fiscal 2008, the net result of a $14.5 million decrease in current assets and a $2.8 million decrease in current liabilities. The decrease in current assets is mainly due to decreases of $20.7 million in cash and cash equivalents and $412,000 in accounts receivable, partly offset by an increase of $5.5 million in inventories. Accounts receivable decreased principally due to lower sales.

Cash and cash equivalents declined by $20.7 million to $12.4 million as of November 2, 2008 from $33.1 million on February 3, 2008. The Company used $14.1 million of cash to repurchase approximately 800,000 shares of its common stock during the 2009 nine-month period under authorizations approved by its board of directors since late last year. Repurchases under those authorizations were completed early in the 2009 third quarter. The Company also used $5.5 million of cash to fund an increase in inventory levels accounts during the 2009 nine-month period.

Inventories increased 10.8%, to $56.0 million as of November 2, 2008, from $50.6 million at February 3, 2008, largely due to:
· an increase in imported wood furniture inventory in preparation for the fall selling season;

· lower sales than anticipated in the summer and early fall; and

· an increase in raw materials related to Bradington-Young's leather upholstery lines.

The decrease in current liabilities is attributed to decreases of $2.4 million in accounts payable.

Cash Flows - Operating, Investing and Financing Activities

During the nine months ended November 2, 2008, cash generated from operations ($743,000) and expenditures of $20.7 million of cash and cash equivalents funded the purchase and retirement of common stock ($14.1 million), payment of cash dividends ($3.4 million), scheduled principal payments on long-term debt ($2.0 million), capital expenditures to maintain and enhance the Company's business operating systems and facilities ($1.8 million) and additional expenditures in connection with the acquisition of the Opus Designs youth bedroom line ($181,000).

During the nine months ended October 28, 2007, cash generated from operations ($32.7 million), expenditures of $9.9 million of cash and cash equivalents and proceeds from the sale of property, plant and equipment ($2.1 million) funded the purchase and retirement of common stock ($26.8 million), the acquisition of Sam Moore Furniture ($10.6 million), payments of cash dividends ($3.8 million), principal payments on long-term debt ($1.9 million) and capital expenditures to maintain and enhance the Company's business operating systems and facilities ($1.5 million).

Cash generated from operations during the first nine months of fiscal 2009 decreased to $743,000 compared with $32.7 million generated during the nine-month period ended October 28, 2007. The decrease was primarily due to a decrease in cash received from customers, higher payments made to suppliers and employees and a decrease in interest income, net partially offset by a decrease in income tax payments. The decline in cash received from customers is primarily attributed to lower net sales.

Payments to suppliers and employees increased as a result of higher inventory purchases and Sam Moore operating costs. Inventory levels in early fiscal 2008 were higher than the comparable 2009 levels, consequently purchases during fiscal 2008 were lower as the Company reduced inventories to more appropriate levels. Also, payments to suppliers and employees for the 2008 first nine months only included the operating costs of Sam Moore for the six-month period following its acquisition in April 2007.

The Company used $1.9 million of cash for investing activities during the first nine months of fiscal year 2009 compared to $10.0 million during the nine-month period ended October 28, 2007. The Company invested $1.8 million to purchase property, plant and equipment and made additional payments of $181,000 in connection with its acquisition of Opus Designs during the fiscal 2009 nine-month period. During the nine-month period ended October 28, 2007, the Company invested $10.6 million (net of cash acquired) for the acquisition of the assets of Sam Moore Furniture and invested $1.5 million to purchase property, plant and equipment, partially offset by $2.1 million of cash proceeds of sales of machinery and equipment related to the closure of the Martinsville, Va. manufacturing facility.

The Company used $19.5 million of cash for financing activities during the first nine months of fiscal 2009 compared to $32.5 million in the nine-month period ended October 28, 2007. During the first nine months of fiscal year 2009, the Company used $14.1 million to purchase and retire common stock, paid cash dividends of $3.4 million and made scheduled principal repayments of $2.0 million on the Company's term loan. During the fiscal year 2008 nine-month period, the Company purchased and retired $26.8 million of common stock, paid . . .