This quarterly report on Form 10-Q includes our 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 May 4, 2009 and the twenty-six week period (also referred to as "six months," "six-month period" or "first half") that began February 2, 2009, both ending on August 2, 2009. This report discusses our results of operations for the period compared to the fiscal year 2009 thirteen-week second quarter that began on May 5, 2008 and the twenty-six week period that began on February 4, 2008, both ending on August 3, 2008; and our financial condition as of August 2, 2009.

References in this report to:

· the 2010 fiscal year or comparable terminology refer to the fiscal year that began February 2, 2009 and will end January 31, 2010; and

· the 2009 fiscal year or comparable terminology refers to the fiscal year that began February 4, 2008 and ended February 1, 2009.

In the fiscal year 2009 fourth quarter we reclassified shipping and warehousing costs from selling and administrative expenses to cost of sales in our condensed consolidated financial statements and accompanying notes. Accordingly, these costs have also been reclassified for prior periods to conform to the new method of presentation. We reclassified $4.2 million for the 2009 second quarter and $8.7 million for the 2009 first half.

Overview

We have seen a growing consumer preference for lower-priced, high-quality imported furniture products since 2001. Led by the change in consumer demand, from 2003 to 2008 we systematically increased our focus on high-quality imported home furnishings with a coordinated exit from domestic wood furniture manufacturing. We closed our last domestic wood manufacturing plant during the fiscal year 2008 first quarter and completed the sale of all wood furniture manufacturing assets no longer needed in the business in December 2007. As a result, we have replaced a domestic operating model for wood furniture, which had high overhead and high fixed costs, with a low overhead, variable cost import model. We are now focused on imported wood and metal furniture, as well as both domestically produced and imported upholstered home furnishings. Maintaining domestic upholstered furniture manufacturing allows us to offer four to six week turnaround on orders for custom leather and fabric upholstered seating and remains an important part of our strategy.

Since the fall of 2006, our business has been impacted by low levels of consumer confidence and a weakening housing market. By late 2008, this malaise, exacerbated by weak credit markets, had spread to the broader U.S. economy. As a result, the residential home furnishings industry has seen an unprecedented decline in demand for its products. Steepening year-over-year declines in net sales have continued through the fiscal year 2010 second quarter.

Results of operations for the fiscal 2010 second quarter and first half reflect the continuing deterioration in the retail environment for home furnishings. Discretionary purchases of furniture, particularly at the upper-middle price points where we compete, have been highly affected by low consumer confidence. Current economic factors, such as rising unemployment and a difficult housing and mortgage market, have resulted in a weak retail environment. We believe however, that our business model provides us with flexibility to adjust to changing market conditions by controlling inventory purchases from suppliers. We also believe that the current economic downturn is temporary and upon economic recovery, we will be well positioned to respond quickly to increased demand.

Following are the principal factors that impacted the Company's results of operations during the three and six-month periods ended August 2, 2009:

· Net sales declined by $18.7 million, or 28.9%, to $46.0 million during the fiscal year 2010 second quarter compared to net sales of $64.6 million during the fiscal year 2009 second quarter. For the first half of fiscal year 2010 sales declined $37.6 million, or 27.7% to $98.0 million, compared to $135.7 million in first half of fiscal year 2009. This decline reflects the continuing year-over-year declines in incoming order rates we have experienced in all operating units since the fiscal 2006 third quarter, resulting from the industry-wide slow down in business at retail.

· Gross margins in our upholstery units declined due to higher fixed costs as a percent of net sales.

· Selling and administrative expenses decreased in absolute terms compared to the fiscal year 2009 periods, but increased as a percent of net sales due to the effect of the fixed nature of certain selling and administrative costs on the lower net sales reported in fiscal year 2010.

· Operating loss for the fiscal year 2010 second quarter was $499,000 or 1.1% of net sales, compared to operating income of $3.1 million, or 4.8% of net sales, in the fiscal year 2009 second quarter principally due to lower net sales and higher fixed operating and domestic upholstery overhead costs as a percent of net sales.

· For the first half of fiscal year 2010, the operating loss was $1.1 million, or 1.2% of net sales, compared to operating income of $7.1 million, or 5.2% of net sales, in the first half of fiscal year 2009 principally due to lower net sales, higher fixed operating and domestic upholstery overhead costs as a percent of net sales and an impairment charge of $613,000 related to the Bradington-Young trade name.

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             Twenty-Six Weeks Ended
                                            August 2,         August 3,       August 2,         August 3,
                                              2009              2008            2009              2008
Net sales                                        100.0 %           100.0 %         100.0 %           100.0 %
Cost of sales                                     78.9              78.1            78.7              77.3
Gross profit                                      21.1              21.9            21.3              22.7
Selling and administrative expenses               22.3              17.5            21.9              17.7
Restructuring and asset impairment
(credit) charge                                   (0.1 )            (0.4 )           0.6              (0.2 )
Operating (loss) income                           (1.1 )             4.8            (1.2 )             5.2
Other (expense) income, net                                          0.3                               0.3
(Loss) income before income taxes                 (1.1 )             5.1            (1.2 )             5.5
Income tax (benefit) expense                      (0.1 )             1.9            (0.2 )             2.0
Net (loss) income                                 (1.0 )             3.2            (1.0 )             3.5

Fiscal 2010 Second Quarter Compared to Fiscal 2009 Second Quarter

Net sales for the fiscal year 2010 second quarter declined to $46.0 million compared to $64.6 million for the fiscal 2009 second quarter, principally due to lower unit volume attributed to the continued industry-wide slow down in business at retail. Every previously existing product line and category reported lower sales in the 2010 second quarter compared to the 2009 second quarter. These shortfalls were partially offset by sales of our new Envision product line, which was recently introduced to address the needs of a younger consumer.

Unit volume decreased for Hooker imported and domestically produced wood and metal furniture, Bradington-Young domestic leather upholstered furniture and Sam Moore domestic and imported upholstered furniture compared to the fiscal 2009 second quarter. Sales of imported wood and metal furniture and upholstery declined approximately 32% from the prior year quarter, while domestic upholstery sales declined approximately 21% in the same period. Unit volume of Bradington-Young imported upholstery increased slightly during the quarter.

Overall, average selling prices were virtually unchanged during the fiscal year 2010 second quarter compared to the fiscal year 2009 second quarter as heavy discounting largely offset selling price increases implemented in September 2009 in response to cost increases for imported finished goods and raw materials. Imported wood and metal furniture average selling prices decreased slightly as a result of higher discounting and a higher proportion of lower-priced youth and Envision furniture sold, while selling prices of imported upholstery declined significantly due to heavier discounting and the mix of products shipped. The average selling prices for domestic leather upholstered furniture decreased slightly mostly due to aggressive discounting. Overall domestic upholstery prices also declined due to the mix of leather and fabric products shipped. The substantial decline in imported leather upholstery prices was due to the mix of products shipped and higher discounting on slower-moving products.

Overall, gross profit margin decreased to 21.1% of net sales in the fiscal year 2010 second quarter compared to 21.9% in the fiscal year 2009 second quarter, mainly as a result of higher production costs as a percentage of net sales due to significantly lower unit volume for domestically produced upholstered products. While gross margins for wood and metal furniture improved significantly in the fiscal year 2010 second quarter compared to the fiscal 2009 second quarter, margins for upholstered furniture declined due to higher fixed costs as a percent of sales resulting from lower sales.

Selling and administrative expenses decreased to $10.3 million for the fiscal year 2010 second quarter, compared to $11.3 million for the fiscal year 2009 second quarter. The decrease in spending was principally due to lower selling expenses attributed to lower sales volume as well as to certain cost reduction initiatives undertaken in response to lower sales volume. However, selling and administrative expenses increased as a percentage of net sales, from 17.5% for the fiscal year 2009 second quarter to 22.3% for the fiscal year 2010 second quarter due to lower net sales.

During the 2010 first quarter we evaluated the carrying value of our trade names and determined that the Bradington-Young trade name was impaired compared to the adjusted carrying value we recorded for that trade name as of February 1, 2009. As a result, we recorded an intangible asset impairment charge of $673,000 ($419,000 or $0.04 per share, after tax) during the 2010 first quarter. During the 2010 second quarter, we discovered an error in the calculation of the impairment charge recorded in the 2010 first quarter and consequently recorded an impairment credit of $60,000 during the 2010 second quarter.

As a result of the factors discussed above, we realized an operating loss for the fiscal year 2010 second quarter of $499,000, or 1.1% of net sales, compared to operating income of $3.1 million, or 4.8% of net sales, in the fiscal year 2009 second quarter.

Other (expense) income, net amounted to a $26,000 expense for the fiscal year 2010 second quarter compared to income of $168,000 for the fiscal year 2009 second quarter. This decline was the result of a decrease in interest income, due to lower rates of return earned on cash and cash equivalent balances and lower finance charges due to lower accounts receivable balances partially offset by slightly lower interest expense due to lower term loan balances, in the fiscal year 2010 second quarter.

We recorded an income tax benefit of $62,000 for the second quarter of fiscal 2010, and tax expense of $1.2 million for the second quarter of fiscal 2009. The effective tax rate decreased to 11.8% for the second quarter of fiscal 2010, from 37.0% in the second quarter of fiscal 2009. The reduction in the effective tax rate is primarily a result of the decrease in taxable income in relation to the relatively fixed permanent favorable tax adjustments for life insurance and charitable contributions and the accrual of potential interest and penalties related to changes in the timing of deductions in prior periods.

Fiscal year 2010 second quarter net loss was $463,000, or $0.04 per share, compared to net income of $2.1 million, or $0.18 per share, in the fiscal year 2009 second quarter.

Fiscal 2009 First Half Compared to the Fiscal 2008 First Half

Net sales for the fiscal year 2010 first half declined $37.6 million, or 27.7%, to $98.0 million compared to $135.7 million for the fiscal 2009 first half, largely due to lower unit volume attributed to the continued industry-wide slow down in business at retail.

First half 2010 unit volume decreased compared to the same 2009 period across all previously existing wood and upholstery product categories. These declines were partially offset by sales of our new Envision product line, which was recently introduced to address the needs of a younger consumer.

Overall average selling prices increased slightly during the 2010 first half compared to the 2009 first half due to selling price increases implemented in September 2009 in response to higher costs for imported finished goods and raw materials which were only partly offset by aggressive discounting. The average selling prices for imported wood furniture increased moderately due to price increases. Domestic leather upholstery selling prices increased due to price increases implemented in 2009 to counter higher material costs. These price increases were partially offset by lower overall average selling prices for upholstery due to heavy discounting and the higher proportion of imports and fabric upholstered products in the first half of 2010 compared to the same period in 2009.

Gross profit margin decreased to 21.3% of net sales in the fiscal 2010 first half compared to 22.7% in the fiscal 2009 first half, primarily as a result of higher production costs and discounting for upholstered products as a percentage of sales.

In the first six months of fiscal 2010, selling and administrative expenses decreased $2.6 million, or 10.9%, to $21.4 million compared with $24.0 million in the fiscal 2009 six-month period. The decreased spending is largely due to lower selling expense attributed to lower sales volume, and reduced salaries and benefits due to staff reductions since last year, lower bonuses and severance payments in the 2009 first half. As a percentage of net sales, selling and administrative expenses increased to 21.9% in the fiscal 2010 first six months from 17.7% in the fiscal 2009 six-month period.

During the 2010 first half, Hooker recorded a charge of $613,000 related to impairment of the Bradington-Young trade name, compared to a $258,000 restructuring credit in the first half of fiscal 2009 to reverse previously accrued health care benefits for former manufacturing employees terminated when our wood furniture plants were closed.

As a result of these factors, we realized an operating loss of $1.1 million, or 1.2% of net sales, for the first six months of fiscal 2010 compared to operating income of $7.1 million, or 5.2% of net sales, in the first six months of fiscal 2009.

Other (expense) income, net amounted to a $29,000 expense for the fiscal 2010 first half, compared to income of $355,000, for the fiscal 2009 six-month period. This decrease was principally the result of a decrease in interest income earned on lower cash and cash equivalent balances.

We recorded an income tax benefit of $236,000 for the first six months of fiscal 2010 and $2.7 million of tax expense for the first six months of fiscal 2009. The effective tax rate was 20.4% for the first six months of 2010 and 37.0% for the corresponding period of fiscal 2009. The reduction in the effective tax rate is primarily a result of the decrease in taxable income in relation to the relatively fixed permanent favorable tax adjustments for life insurance and charitable contributions, and the accrual of potential interest and penalties related to changes in the timing of deductions in prior periods.

We recognized a net loss of $919,000, or $0.09 per share for the 2010 six-month period compared to net income of $4.7 million, or $0.41 per share, in the fiscal 2009 six-month period. As a percent of net sales, the 2010 first-half loss is 1.0% compared to 2009 six-month net income of 3.5% of net sales.

Woodleaf Closing

On July 16, 2009, we decided to transition production from our Bradington-Young Woodleaf, North Carolina frame manufacturing plant (a leased facility) to Bradington-Young's Cherryville, North Carolina facility by the end of December 2009. On July 17, 2009, we met with the Woodleaf employees and announced our plans to sell the frame production operation, including the associated machinery and equipment, as an on-going business. However, if this initiative is not successful we plan to close the Woodleaf operation, sell the machinery and equipment that cannot be utilized at our other plants and vacate the leased facility by the end of calendar year 2009. We expect that exiting the Woodleaf operation and moving frame production to Cherryville will reduce fixed overhead costs by approximately $350,000 to $550,000 annually (or about $0.02 to $0.03 per share after tax) following the completion of the transition period. In connection with exiting this operation, we expect to record accelerated depreciation of about $100,000 ($0.01 per share after tax) primarily over the 2010 third and fourth quarters.

If we are unsuccessful in finding a buyer for the business, and as a result must close the operation, we expect to record restructuring charges of about $140,000 pretax (or about $0.01 per share after tax) during the 2010 third quarter, which ends November 1, 2009, principally for severance and related employee benefits that would be provided to the terminated Woodleaf employees.

We are actively seeking a buyer for the operation; however no offers have been received to date.

Outlook

We believe that the worst global recession since the 1930s may be over. Asia's economy has bounced back more quickly as have those of Japan, Germany, and France. Here in the U.S., the housing markets have shown signs of stabilizing, job losses are slowing, and most economists expect output to continue to expand. The question remains as to what kind of recovery we are going to experience. The deep post-war recessions rebounded quickly. However, those were caused by high interest rates; this one was due to financial collapse. As borrowers rebuild their balance sheets and financial systems are repaired, growth may be slow and choppy, and easily derailed. We enter this period with cautious optimism. We believe that we are well positioned with our product, inventory availability, and business model to take advantage of any upturn in the economy. That optimism, however, is tempered with the fact that we may be in for a bumpy ride and that continued attention to cost control is necessary.

The year over year declines in quarterly incoming orders, which began in the Fall of 2006, continued during the fiscal year 2010 second quarter. While we expect general retail conditions to remain weak, we expect to see the typical seasonal improvement in business during the second half of 2010. We are optimistic about the sales opportunities of our Envision products which were introduced in April to address the needs of a younger, less-affluent consumer. That product will debut on retail sales floors during the third quarter. However, we have not yet seen a rebound in big-ticket consumer products such as furniture, so we remain cautious in our planning and continue to take actions to address challenges to our profitability. Some of those actions are:

· deferring, reducing or eliminating certain spending plans;

· continuing to refine the management of our supply chain, warehousing and distribution operations; and

· adjusting our inventory levels to reflect current business conditions and lower sales volumes.

Our domestic upholstery manufacturing operations have been particularly impacted by the prolonged sales downturn due to higher fixed overhead costs as a percentage of our reduced net sales. To mitigate the impact of these sales declines we are:

· pursuing additional distribution channels and offering an array of new products and designs that we believe will generate additional sales growth;

· taking actions to streamline our domestic upholstery operations, improve efficiency and reduce overhead; and,

· continuing to evaluate our manufacturing capacity utilization, work schedules and operating costs to better match costs to current sales volume levels.

Financial Condition, Liquidity and Capital Resources

Balance Sheet and Working Capital

As of August 2, 2009, assets totaled $151.2 million, decreasing slightly from $153.5 million at February 1, 2009, principally due to decreases in inventories, accounts receivable and intangible assets, partially offset by increases in cash and cash equivalents, cash surrender value of life insurance policies and prepaid expenses and other current assets. Shareholders' equity at August 2, 2009 decreased to $125.6 million, compared to $129.7 million at February 1, 2009, due to dividends paid or accrued and the net loss for the first half of fiscal year 2010. Long-term debt, including current maturities, decreased to $3.8 million at August 2, 2009 from $5.2 million at February 1, 2009, as a result of scheduled debt repayments. Current liabilities increased $3.7 million primarily due to short-term borrowings related to our accounts receivable factoring arrangement, discussed below.

Working capital (current assets less current liabilities) decreased by $5.4 million, or 6.0%, to $85.8 million as of August 2, 2009, from $91.3 million at the end of fiscal 2009, as a result of a $3.7 million increase in current liabilities and a $1.7 million decrease in current assets. Our working capital ratio (the relationship between our current assets and current liabilities) was 5.4:1 at August 2, 2009 compared to 6.8:1 at February 1, 2009.

The decrease in current assets is principally due to decreases of $18.7 million in inventories and $7.1 million in accounts receivable, partially offset by increases of $23.5 million in cash and cash equivalents and $625,000 in prepaid expenses and other current liabilities. Accounts receivable decreased primarily due to lower sales.

Inventories decreased 31.1%, to $41.5 million as of August 2, 2009, from $60.2 million at February 1, 2009, mainly due to lower imported wood inventories, resulting from reduced purchases of finished goods inventory in response to lower incoming order rates. Upholstery inventories have declined 19% since February 1, 2009, also in response to lower incoming order rates.

The increase in current liabilities is attributed to a short term borrowing of $2.7 million related to our accounts receivable factoring arrangement and the reclassification of the balance of our term debt ($787,000) from long term to current.

· Shortly after the close of the second quarter we amended our credit agreement with Bank of America and repaid the outstanding term debt under our credit facility. As a result, we reclassified the remaining long term portion ($787,000) of our term debt as current as of August 2, 2009. For additional information regarding the amendment of the credit agreement, see "Amendment of Credit Agreement and Repayment of Term Loan" below.

· We factor substantially all of our upholstery accounts receivable. Typically, the factor provided us with credit and collections services. Under our factoring agreement, we were entitled to borrow against invoices submitted to the factor for collection. Prior to July 15, 2009, the factor took ownership of invoices when we submitted the invoices to them, without recourse, ensuring our cash flow on approved invoices. In the event of bankruptcy or other liquidity shortfalls by the factor, our ability to collect funds from the factor could have been impaired. In response to that risk that the factor would be forced to seek bankruptcy protection, on July 21, 2009 we borrowed $4.5 million, the maximum amount available under our factoring arrangement. The factor continued to collect accounts receivable and applied the collections to the outstanding advance balance, leaving a loan balance of $2.7 million as of August 2, 2009. We believe that borrowing these funds was a prudent approach to minimize the risk of loss or reduced liquidity in the event of a bankruptcy filing by the factor, which appeared to be a significant risk at that time. Subsequent to the end of the quarter, the factor announced that its efforts to refinance through a tender offer of secured notes were successful, thus reducing the imminent threat of bankruptcy. We expect the factor to collect the remaining $2.7 million before the end of our 2010 third quarter; and we expect to repay the funds borrowed from the factor once those accounts receivable are collected. On July 16, 2009 we modified our agreement with the factor to reduce future exposure by retaining ownership of our accounts receivable submitted to the factor for collection.

Cash Flows - Operating, Investing and Financing Activities

During the six months ended August 2, 2009, cash generated from operations ($26.0 million), short-term borrowing against our factored receivables ($4.5 million) and proceeds received on certain life insurance policies ($986,000) funded an increase in cash and cash equivalents ($23.5 million), payment of cash dividends ($2.2 million), repayment of borrowing against our factored receivables as they were collected by our agent ($1.8 million), scheduled principal payments on long-term debt ($1.4 million), premiums paid on life insurance policies ($1.3 million) and capital expenditures to maintain and enhance our business operating systems and facilities ($1.1 million).

During the six months ended August 3, 2008, cash generated from operations ($2.8 million) and a decrease in cash and equivalents ($17.3 million) funded the purchase and retirement of common stock ($14.1 million), payment of cash dividends ($2.3 million), scheduled principal payments on long-term debt ($1.3 million), capital expenditures to maintain and enhance our business operating systems and facilities ($1.3 million), life insurance premiums paid ($1.2 million) and additional expenditures in connection with the acquisition of the Opus Designs youth bedroom line ($181,000).

We used $1.6 million of cash for investing activities during the first six months of fiscal year 2010 compared to $2.3 million during the six-month period ended August 3, 2008. During the fiscal year 2010 six-month period, we used $1.1 million to purchase property, plant and equipment, paid premiums of $1.3 million and received proceeds of $986,000 from company-owned life insurance. In the fiscal year 2009 six-month period, we used $1.3 million to purchase property, plant and equipment and paid premiums of $1.2 million and received proceeds of $357,000 from company-owned life insurance.

We used $927,000 of cash for financing activities during the first six months of fiscal year 2010 compared to $17.7 million in the six-month period ended August 3, 2008. During the first six months of fiscal year 2010, we received $4.5 million from short-term borrowing against our factored accounts receivable, paid cash dividends of $2.2 million, repaid $1.8 million of the loan against our factored receivables as the receivables were collected by our agent and made . . .