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HOFT > SEC Filings for HOFT > Form 10-Q on 8-Dec-2011All Recent SEC Filings

Show all filings for HOOKER FURNITURE CORP

Form 10-Q for HOOKER FURNITURE CORP


8-Dec-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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" "third quarter" or "quarterly period") that began August 1, 2011 and the thirty-nine week period (also referred to as "nine months," or "nine-month period") that began on January 31, 2011, both ended on October 30, 2011. This report discusses our results of operations for these periods compared to the fiscal year 2011 thirteen-week period that began August 2, 2010 and the thirty-nine week period that began February 1, 2010, both ended on October 31, 2010; and our financial condition as of October 30, 2011 compared to January 30, 2011.

References in this report to:

the 2012 fiscal year and comparable terminology mean the fiscal year that began January 31, 2011 and will end January 29, 2012; and

the 2011 fiscal year and comparable terminology mean the fiscal year that began February 1, 2010 and ended January 30, 2011.

Nature of Operations

Incorporated in Virginia in 1924, Hooker Furniture Corporation (the "Company", "we", "us", and "our") is a home furnishings marketing and logistics company offering worldwide sourcing of residential casegoods and upholstery, as well as domestically-produced custom leather and fabric upholstery. We are ranked among the nation's top 10 largest publicly traded furniture sources, based on 2010 shipments to U.S. retailers, according to Furniture/Today, a leading trade publication. We are a key resource for residential wood and metal furniture, commonly referred to as casegoods, and upholstered furniture. Our major casegoods product categories include home entertainment, home office, accent, dining and bedroom furniture under the Hooker Furniture and Envision brands, and youth furniture sold under the Opus Designs by Hooker brand. Our residential upholstered seating companies include Hickory, N.C.-based Bradington-Young, LLC, a specialist in upscale motion and stationary leather furniture, and Bedford, Va.-based Sam Moore Furniture LLC, a specialist in upscale occasional chairs with an emphasis on cover-to-frame customization. An extensive selection of designs and formats along with finish and cover options in each of these product categories makes us a comprehensive residential furniture resource, primarily for retailers targeting the medium and upper-medium price range. Our principal customers are retailers of residential home furnishings who are broadly dispersed throughout the United States and Canada, as well as an important, growing international customer base. Customers include independent furniture stores, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.

Overview

Consumer home furnishings purchases are driven by an array of factors, including general economic conditions such as:

consumer confidence;

fashion trends;

availability of consumer credit;

energy and other commodity prices; and

housing and mortgage markets;

As well as lifestyle-driven factors such as changes in:

disposable income;

housing changes; and

changes in family size.


Table of Contents

Our industry has been impacted by low levels of consumer confidence and a weak housing market since the fall of 2006. 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 experienced a significant decline in demand for its products. Discretionary purchases of furniture have been highly affected by low consumer confidence. Current economic factors, such as high unemployment and difficult housing and mortgage markets, have resulted in a weak retail environment for home furnishings and related purchases. Our domestic upholstery operations, which have significantly higher overhead and fixed costs than our import business, have been particularly affected by the decline in demand for home furnishings and continue to struggle to return to profitability. Our lower overhead, variable-cost import business has driven our profitability over the last few years and provides us with the flexibility to respond to changing demand by adjusting inventory purchases from suppliers.

Year-over-year quarterly net sales decreased in the fiscal year 2012 third quarter; however, net sales remained positive for the fiscal 2012 first nine-months with a 4.8% increase over the comparable prior year period. Casegoods net sales decreased approximately 3% from comparable the prior-year quarter, while upholstery net sales decreased approximately 2% from the prior-year quarter. For the fiscal 2012 nine-month period, casegoods net sales increased approximately 8%, while upholstery sales were flat, compared to the same prior-year period. The weak performance in upholstery net sales for the fiscal 2012 nine-month period followed an approximate 23% increase in upholstery net sales during the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010.

The following are the principal factors that impacted our results of operations during the three and nine-month periods ended October 30, 2011:

Net sales decreased 2.8% for the fiscal 2012 three-month period, primarily due to lower unit volume and increased 4.8% for the fiscal 2012 nine-month period, primarily due to increased unit volume .

Gross margins:

o increased compared to the fiscal 2011 third quarter, primarily due to lower freight costs, partially offset by increased product discounting and casualty loss expense related to a sprinkler malfunction at one of our warehouses during the third quarter; but

o decreased compared to the fiscal 2011 nine-month period, primarily due to increased product discounting and higher returns and allowances and, to a lesser extent, the previously mentioned casualty loss.

Selling and administrative expenses decreased in both absolute terms and as a percentage of sales compared to both fiscal year 2011 periods, primarily as a result of:

decreased salaries and other employee related expenses;

lower advertising supplies expense and sample expense;

lower contributions expense related to product donations;

lower bad debt expenses; and

lower depreciation and amortization expense;

partially offset by:

higher sales commissions due to higher sales in the fiscal 2012 nine-month period;

A charge to write-down leasehold improvements related to relocating and consolidating our showroom space; and

higher ERP-related expenses.


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Results of Operations

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

                            Thirteen Weeks Ended               Thirty-Nine Weeks Ended
                      October 30,         October 31,      October 30,        October 31,
                          2011               2010              2011               2010
    Net sales                100.0 %             100.0 %          100.0 %            100.0 %
    Cost of sales             76.5                78.0             78.6               77.3
    Casualty loss                -                   -                -                1.4
    Insurance
    recovery                     -                   -                -               (1.1 )
    Total cost of
    sales                     76.5                78.0             78.6               77.6
    Gross profit              23.5                22.0             21.4               22.4
    Selling and
    administrative
    expenses                  18.5                19.0             17.8               19.4
    Operating
    income                     5.0                 3.0              3.5                3.1
    Other income,
    net                        0.2                 0.1              0.1                0.1
    Income before
    income taxes               5.2                 3.0              3.7                3.1
    Income tax
    expense                    1.0                 0.9              1.0                1.0
    Net income                 4.2                 2.1              2.6                2.1

Fiscal 2012 Third Quarter Compared to Fiscal 2011 Third Quarter

Net sales for the fiscal year 2012 third quarter decreased $1.6 million, or 2.8%, to $54.2 million from $55.7 million for the fiscal 2011 third quarter. The decrease was principally due to lower unit volume and increased discounting, partially offset by higher average selling prices, which resulted primarily from the mix of products sold.

Consolidated unit volume for the fiscal 2012 third quarter decreased approximately 11.0% compared to the fiscal 2011 third quarter, with leather upholstery and casegoods unit volumes decreasing approximately 24.0% and 10.0%, respectively. These decreases were partially offset by an upholstered fabric unit volume increase of 5.0%.

Overall, average selling prices increased approximately 6.0% during the fiscal year 2012 third quarter compared to the fiscal year 2011 third quarter, primarily due to price increases implemented in late fiscal 2011 and in the first nine months of fiscal 2012 and, to a lesser extent, the mix of products shipped, partially offset by increased product discounting. Upholstered fabric, upholstered leather and casegoods average selling prices for the fiscal 2012 third quarter increased approximately 9.0%, 7.0%, and 6.0% respectively, compared to the same prior-year period, primarily due to the previously mentioned price increases.

Overall, gross profit margin increased to 23.5% of net sales in the fiscal 2012 third quarter compared to 22.0% in the fiscal 2011 third quarter. The increase was mainly the result of lower freight costs, partially offset by increased product discounting, due to a continuing effort to reduce overstocked inventory. Product discounting in the fiscal 2012 third quarter increased to 10.2% of net sales, or $5.5 million, compared to 8.3% of net sales, or $4.6 million, in the comparable prior-year period. Casegoods gross margin increased to 28.2% of net sales in the fiscal 2012 third quarter as compared to 25.9% of net sales for the fiscal 2011 third quarter, primarily due to decreased freight costs, partially offset by increased levels of product discounting and returns and allowances. Gross margins for upholstered furniture were essentially flat at 14.6% in the 2012 fiscal third quarter and 14.5% in the comparable 2011 fiscal period, primarily due to cost reduction efforts and higher fabric upholstery selling prices implemented during the fiscal 2011 fourth quarter and the fiscal 2012 first quarter, partially offset by increased raw material costs, the effect of reduced volume on overhead absorption and casualty loss expense of $181,000 related to a sprinkler malfunction at one of our warehouses during the third quarter.


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Selling and administrative expenses decreased both in absolute terms and as a percentage of net sales in the fiscal 2012 third quarter compared to the same prior-year period. Selling and administrative expenses were 18.5% of net sales, or $10.0 million in the fiscal 2012 third quarter compared to 19.0% of net sales, or $10.6 million in the comparable prior-year period. The decreases were primarily due to:

Lower advertising supplies expense and sample expense due to cost cutting measures;

Lower contribution expense due to decreased levels of furniture donations;

Lower bad debt expense due to adjustments in our accounts receivables reserves to reflect favorable collection trends;

Lower salary expense, due to realignments in our officer group; and

Lower depreciation and amortization expense primarily due to decreased information systems spending on our legacy systems in anticipation of our current Enterprise Resource Planning (ERP) project.

These decreases in expenses were partially offset by a charge to write down leasehold improvements related to relocating and consolidating our showroom space at the International Home Furnishings Center, higher sales commissions primarily due to commission adjustments and higher ERP-related expenses.

Operating profitability increased for the fiscal 2012 third quarter to $2.7 million, or 5.0% of net sales, compared to $1.7 million, or 3.0% of net sales for the fiscal 2011 third quarter, primarily reflecting higher gross margins and lower selling and administrative expenses.

We recorded income tax expense of $563,000 for the fiscal 2012 third quarter compared to $522,000 for the prior year third quarter. The effective tax rates for the fiscal 2012 and 2011 third quarters were 20.0% and 30.8%, respectively. Our effective tax rate was atypically low during the fiscal 2012 third quarter compared to the same prior-year period, primarily due to the following percentage point changes in our effective tax rate:

A decrease of 6.1% due to higher non-taxable life insurance proceeds being received in the third quarter of fiscal 2012;

A decrease of 2.2% due to a favorable provision-to-return reconciling item (the actual federal income tax rate for our fiscal 2011 tax return was 34%, rather than the projected 35%);

A decrease of 2.1% due to the accrual of a non-taxable distribution from our captive insurance arrangement; and

An increase of 2.0% related to the refund of an IRS penalty in fiscal 2011 that was not repeated in fiscal 2012.

Fiscal year 2012 third quarter net income was $2.3 million, or $0.21 per share, compared to $1.2 million, or $0.11 per share, in the fiscal year 2011 third quarter.

Fiscal 2012 First Nine Months Compared to Fiscal 2011 First Nine Months

Net sales for the fiscal year 2012 first nine months increased $7.7 million, or 4.8% to $168.1 million from $160.5 million for the fiscal 2011 first nine months. This increase was principally due to higher unit volume and slightly higher average selling prices, partially offset by increased product discounting and returns and allowances.

Consolidated unit volume for the fiscal 2012 first nine months increased 4.7% compared to the fiscal 2011 first nine months, with casegoods unit volume leading the way with a 7.2% increase and upholstered fabric furniture showing a unit volume increase of 5.2%. Upholstered leather unit volume decreased 6.2%.

Overall, average selling prices increased less than 1.0% during the fiscal year 2012 first nine months compared to the fiscal year 2011 first nine months, primarily due to the impact of price increases implemented during the 2012 fiscal year and, to a lesser extent, the mix of products shipped, offset by higher product discounting. Upholstered fabric furniture and casegoods average selling prices increased 6.2% and approximately 1%, respectively. Upholstered fabric furniture average selling prices increased primarily due to price increases implemented during the fiscal 2011 fourth quarter and the fiscal 2012 first quarter, while casegoods average selling prices increased primarily due to price increases implemented during the 2012 fiscal year. Upholstered leather furniture average selling prices decreased 1%, primarily due to increased product discounting.


Table of Contents

Overall, gross profit margin decreased to 21.4% of net sales in the fiscal 2012 first nine months compared to 22.4% in the fiscal 2011 first nine months. The decline was mainly the result of:

increased product discounting, due to a focused effort to reduce overstocked inventory;

increased returns and allowances; and

higher freight costs during the fiscal 2012 first nine months;

partially offset by lower upholstery manufacturing costs due to overhead reduction efforts during the fiscal 2012 first nine months.

Product discounting increased to $17.8 million, or 10.6% of net sales in the fiscal 2012 first nine months compared to $13.0 million, or 8.1% of net sales, in the same prior-year period. Returns and allowances increased to $3.8 million, or 2.3% of net sales, in the fiscal 2012 first nine months from $2.8 million, or 1.8% of net sales, in the comparable prior-year period. Casegoods gross margins decreased to 24.8% of net sales in the fiscal 2012 first nine months as compared to 27.2% of net sales for the fiscal 2011 first nine months, primarily due to increased levels of product discounting, higher freight costs and increased returns and allowances. Fiscal 2011, first nine-months' results include a charge to cost of sales of $500,000, which represents our insurance deductible for a casualty loss related to a distribution center fire during the fiscal 2011 first half. Gross margin for upholstered furniture in the fiscal 2012 first nine months increased to 14.7% of net sales compared to 13.7% of net sales for the same prior-year period, primarily due to upholstery division cost reduction efforts and higher average selling prices for fabric upholstery in the fiscal 2012 first nine months. The upholstery margin increase was partially offset by a charge to cost of sales of $181,000 for a casualty loss related to a sprinkler malfunction at one of our warehouses.

During the fiscal 2012 second quarter, we ended our relationship with the Chinese factory that was our worst performing supplier in quality terms and have stepped up our quality auditing processes at our other Asian suppliers' operations.

Selling and administrative expenses decreased both as a percentage of net sales and in absolute terms to 17.8% of net sales, or $30.0 million, for the fiscal 2012 first nine months from 19.4% of net sales, or $31.1 million in the fiscal 2011 first nine months. These decreases were primarily due to:

Lower salary related costs, due to:

o an insurance gain of $610,000 on Company-owned life insurance due to the death of a former executive during the fiscal 2012 first quarter;

o realignments in our officer group; and

o the reversal of an accrual for long term incentive bonuses during the first quarter of fiscal 2012; and

Lower bad debt expense due to adjustments in our accounts receivable reserves to reflect favorable collection trends;

Lower depreciation and amortization expense primarily due to decreased information systems spending on our legacy systems in anticipation of our current ERP project; and

Lower advertising supplies expense and sample expense, due to cost cutting measures.

These decreased expenses were partially offset by higher sales commissions due to increased sales and by a $233,000 charge to write down leasehold improvements related to the relocation and consolidation of our showroom space at the International Home Furnishings Center.

As a result, we realized operating income for the fiscal year 2012 first nine months of $5.9 million, or 3.5% of net sales, compared to operating income of $4.9 million, or 3.1% of net sales, in the fiscal year 2011 first nine months.


Table of Contents

We recorded income tax expense of $1.7 million in the first three quarters of fiscal 2012 compared to $1.6 million for the same period last year. The effective income tax rates for the first three quarters of fiscal years 2012 and 2011 were 27.9% and 31.9%, respectively. Our effective tax rate decreased during the fiscal 2012 first three quarters compared to the same prior-year period, primarily due to the following percentage point changes in our effective tax rate:

A decrease of 1.8%, due to more non-taxable life insurance proceeds being received in fiscal 2012 than in fiscal 2011;

A decrease of 1.4%, due to the accrual of a non-taxable distribution from our captive insurance arrangement;

A decrease of 1.0%, due to a favorable provision-to-return adjustment for fiscal 2011 to recognize our actual federal income tax rate of 34% compared to the projected 35%; and

An increase of 1.2%, related to the refund of an IRS penalty in fiscal 2011 that was not repeated in fiscal 2012.

Net income for the first nine months of fiscal 2012 was $4.4 million, or $0.41 per share, compared to $3.4 million, or $0.32 per share, in the fiscal year 2011 first nine months.

Although we report operating results in one operating segment on a consolidated basis, we are providing the following information for our two divisions because we believe it helps supplement the information provided in our financial statements:

                                                    Thirteen Weeks Ended                                                        Thirty-Nine Weeks Ended
                                   October 30, 2011                       October 31, 2010                      October 30, 2011                      October 31, 2010
                                               % of Division                          % of Division                         % of Division                         % of Division
                           Millions of $         Net Sales        Millions of $         Net Sales        Millions of $        Net Sales        Millions of $        Net Sales
Net Sales
 Casegoods                           35.5                                   36.7                                  111.7                                 103.8
 Upholstery                          18.7                                   19.0                                   56.4                                  56.7
 Total                               54.2                                   55.7                                  168.1                                 160.5

Gross Profit
 Casegoods                           10.0               28.2 %               9.5               25.9 %              27.6              24.7 %              28.2              27.2 %
 Upholstery                           2.7               14.6 %               2.8               14.5 %               8.3              14.7 %               7.8              13.7 %
 Total                               12.7               23.5 %              12.3               22.0 %              35.9              21.4 %              36.0              22.4 %

Operating Income (Loss)
 Casegoods                            3.5                9.8 %               2.2                6.0 %               8.0               7.2 %               7.2               6.9 %
 Upholstery                          (0.8 )             -4.0 %              (0.5 )             -2.8 %              (2.1 )            -3.7 %              (2.3 )            -4.0 %
 Total                                2.7                5.0 %               1.7                3.0 %               5.9               3.5 %               4.9               3.1 %

Outlook

Our import casegoods and upholstery businesses continue to recover from the dramatic loss of volume resulting from the recession beginning in 2008. Recovery in our domestic upholstery manufacturing operations, which led our recovery in fiscal 2011, has slowed in fiscal 2012. We are cautiously optimistic on the remainder of fiscal year 2012 and expect net sales to continue to increase year-over-year through market share gains and improving consumer demand. However, competition for consumer discretionary dollars remains intense, as declining home values, high unemployment, high consumer debt loads and rising inflation continue to stifle consumer confidence.

We expect our margins for fiscal 2012 to be adversely impacted by:

higher than typical levels of product discounting as we rationalize our product offerings and sell excess inventory;

higher prices for imported goods from Asia, primarily due to wage inflation in China and the strengthening Chinese currency; and

higher prices on many raw materials used in domestic manufacturing, including increased leather costs and increased prices for other commodities, such as cotton and steel.


Table of Contents

In light of current conditions, we continue to focus on:

controlling costs;

adjusting our product pricing on our main-line products in order to improve margins;

achieving proper inventory levels, while optimizing product availability on best-selling items;

sourcing product from more competitive locales and from more quality conscious sourcing partners;

pursuing additional distribution channels and offering an array of new products and designs, which we believe will help generate additional sales; and

upgrading and refining our information systems capabilities to support our business.

Our domestic upholstery operations have high fixed costs, which are typical of most domestic manufacturing operations. They have been particularly affected by the prolonged sales downturn. To mitigate the impact of these sales declines, in addition to the initiatives mentioned above, we have continued to streamline our domestic upholstery operations, by improving efficiency, reducing overhead and evaluating our operating costs and capacity to better match costs to current sales volume levels. Continued significant cost reductions in our upholstery operations will be a challenge. We are focused on finding additional ways to increase sales volume, with an emphasis on expanding the depth and breadth of our product line. If we are unable to increase sales to the extent necessary, capacity reductions in our domestic upholstery operations will be necessary. If undertaken, these capacity reductions will result in restructuring charges which will lower our consolidated net earnings in the short-term (for the quarterly and annual periods in which we recognize the expense) and will adversely affect our consolidated balance sheets at these same dates.

Financial Condition, Liquidity and Capital Resources

Balance Sheet and Working Capital

Net working capital (current assets less current liabilities) increased by $1 million or about 1.0%, to $90.3 million as of October 30, 2011, from $89.3 million at the end of fiscal 2011. This net increase reflects an increase of $793,000 in current assets and a decrease of $215,000 in current liabilities. Our working capital ratio (the relationship between our current assets and current liabilities) improved to 6.3:1 at October 30, 2011 compared to 6.1:1 at January 30, 2011. Other than obligations for deferred compensation, we had no long-term debt at either October 30, 2011 or January 30, 2011.

The increase in current assets was principally due to a $16.1 million increase in cash, partially offset by a decrease of $14.5 million in inventories. Inventories decreased as a result of a focused effort to reduce excess and obsolete inventory levels, primarily in the second quarter, and due to increased sales. The increase in cash and cash equivalents primarily reflects the reduction in inventories.

The decrease in current liabilities was primarily due to a $632,000 decrease in accounts payable, a $203,000 decrease in accrued wages, salaries and benefits, partially offset by an increase of $619,000 in income taxes payable, reflected under other accrued expenses.

Cash Flows - Operating, Investing and Financing Activities

During the nine months ended October 30, 2011, cash generated from operations of . . .

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