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HOFT > SEC Filings for HOFT > Form 10-K on 19-Apr-2013All Recent SEC Filings

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Form 10-K for HOOKER FURNITURE CORP


19-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. All references to the Company in this discussion refer to the Company and its consolidated subsidiaries, unless specifically referring to segment information. Unless otherwise indicated, amounts shown in tables are in thousands, except for share and per share data.

Our fiscal years end on the Sunday closest to January 31, in some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. For example, the 2013 fiscal year that ended on February 3, 2013 was a 53-week fiscal year. Our quarterly periods are based on thirteen-week "reporting periods" (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted above.

The financial statements filed as part of this annual report on Form 10-K include the:

fifty-three week period that began January 30, 2012 and ended on February 3, 2013 (fiscal 2013);

fifty-two week period that began January 31, 2011 and ended on January 29, 2012 (fiscal 2012); and

fifty-two week period that began February 1, 2010 and ended on January 30, 2011 (fiscal 2011).

Nature of Operations

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-upholstered furniture. We were incorporated in Virginia in 1924 and are ranked among the nation's top 10 largest publicly traded furniture sources, based on 2011 shipments to U.S. retailers, according to a 2012 survey published by 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 brand. Our residential upholstered seating companies include Hickory, N.C.-based Bradington-Young (acquired in 2003), a specialist in upscale motion and stationary leather furniture and Bedford, Va.-based Sam Moore Furniture (acquired in 2007), a specialist in upscale occasional chairs, settees, sofas and sectional seating 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 resource for residential furniture retailers, primarily targeting the upper-medium price range. Our principal customers are retailers of residential home furnishings that are broadly dispersed throughout the United States. Our customers also include home furniture retailers in Canada and in over 20 other countries internationally. Our customers include independent furniture stores, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.


Table of Contents

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;

household formation and turnover; and

family size.

The residential home furnishings industry experienced a significant and persistent decline in demand for its products from 2008 to 2010. Current economic and economic-related factors, such as high unemployment, relatively weak consumer confidence and changing consumer priorities have resulted in a somewhat depressed retail environment for discretionary home furnishings and related purchases. The extended weakness in housing and housing-related industries is beginning to show signs of sustained recovery; however, we expect any recovery in home furnishings to be slow and inconsistent due to the relatively high cost and postponable nature of many home furnishing product purchases.

Results for our domestic upholstery operations, which have significantly higher overhead and fixed costs than our import operations, have been particularly affected by the decline in demand for home furnishings and, except for the first, third and fourth quarters of fiscal 2013, have experienced operating losses since our fiscal 2009 second quarter. Extensive cost reduction efforts over that time have mitigated the losses and have resulted in our upholstery segment returning to operating profitability for fiscal 2013.

Our lower overhead, variable-cost import operations have driven our profitability over the last few years and provide us with the flexibility to respond to changing demand by adjusting inventory purchases from suppliers. Our import model also requires that we transition sourcing among suppliers, often located in different countries or regions, when quality concerns or inflationary pressures diminish the value proposition offered by our current suppliers.

The following are the primary factors that affected our consolidated results of operations for fiscal 2013.

Out-of-stock positions on several key imported items, groups and collections negatively impacted sales and profitability, especially during the first half of fiscal 2013;

The sourcing transition from some of our vendors in China to vendors in other Asian countries resulted in longer lead times. Related shipping delays negatively impacted sales and profitability in the first-half of fiscal 2013, and to a lesser extent during the second half of fiscal 2013;

Decreased product discounting negatively impacted sales and unit volume in both segments, but drove gross margin improvement. Product discounting and sales volume was higher in the comparable prior-year periods in order to reduce excess and slow-moving inventory;

Selling and administrative expenses decreased in absolute terms during fiscal 2013 and were flat as a percentage of net sales due to the factors described below; and

Our upholstery segment returned to operating profitability in fiscal 2013 after reporting operating losses since the fiscal 2009 second quarter.


Table of Contents

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income:

                                       Fifty-three
                                       weeks ended           Fifty-two weeks ended
                                       February 3,      January 29,         January 30,
                                          2013              2012               2011
Net sales                                     100.0 %          100.0 %             100.0 %
Cost of sales                                  75.9             78.0                78.0
 Casualty loss                                    -                -                 1.0
 Insurance recovery                               -                -                (0.8 )
Gross profit                                   24.1             22.0                21.8
Selling and administrative expenses            18.1             18.1                19.0
Restructuring charges                             -                -                 0.7
Intangible asset impairment charges               -              0.8                 0.2
Operating income                                5.9              3.0                 1.9
Other income, net                               0.1              0.1                 0.1
Income before income taxes                      6.0              3.1                 1.9
Income taxes                                    2.0              0.8                 0.4
Net income                                      4.0              2.3                 1.5

Fiscal 2013 Compared to Fiscal 2012

Net Sales

                    Fifty-three weeks ended               Fifty-two weeks ended
                February 3,                          January 29,
                    2013                                 2012                             $ Change        % Change
                                    % Net Sales                         % Net Sales
Casegoods       $    141,064                64.6 %   $    147,927               66.5 %   $    (6,863 )          -4.6 %
Upholstery            77,295                35.4 %         74,578               33.5 %   $     2,717             3.6 %
 Consolidated   $    218,359               100.0 %   $    222,505              100.0 %   $    (4,146 )          -1.9 %



                           FY13 %                                         FY13 %
                        Increase vs.                                   Increase vs.
   Unit Volume              FY12             Average Selling Price         FY12

   Casegoods                     (19.7 %)    Casegoods                           17.8 %
   Upholstery                    (4.25 %)    Upholstery                           7.9 %
    Consolidated                 (15.8 %)     Consolidated                       15.7 %


Table of Contents

The decrease in consolidated net sales was principally due to lower unit volume, particularly in our casegoods segment, partially offset by higher average selling prices in both segments. The casegoods sales decrease was driven by out-of-stock positions on several key items, groups and collections in the first half of the 2013 fiscal year and decreased discounting. The out-of-stock positions were primarily due to overly-aggressive inventory reductions that began in fiscal 2012 and continued into the fiscal 2013 first six months. To a lesser extent and consistent with our fiscal 2012 fourth quarter, vendor shifts from China to other Asian countries resulted in the delay of several well-placed new casegoods collections and negatively impacted fiscal 2013 first six month sales. These vendor shifts contributed to the out-of-stock positions and increased the demand for our best-selling, in-stock products. This accelerated demand cycle hastened the out-of-stock position on best sellers. Sales of imported products in fiscal 2012 were driven by heavy discounting, intended to reduce inventory of slow selling and discontinued products. Upholstery net sales increased compared to the same prior-year period, primarily due to increased average selling prices, partially offset by lower unit volume.

Because we report on a fiscal year that ends on the Sunday closest to January 31st of each year, the 2013 fiscal year was one week longer than the comparable 2012 fiscal year. The following table presents average net sales per shipping day in thousands for the 2013 and 2012 fiscal years:

                                   Average Net Sales Per Shipping Day
                 Fifty-three weeks ended             %             Fifty-two weeks ended
                    February 3, 2013              Change             January 29, 2012
Casegoods       $                     553              -6.1 %     $                   589
Upholstery                            303               1.9 %                         297
 Consolidated   $                     856              -3.8 %     $                   886

Shipping Days                         255                                             251

Gross Profit

                    Fifty-three weeks ended               Fifty-two weeks ended
                February 3,                          January 29,
                    2013                                 2012                              $ Change        % Change
                                    % Net Sales                          % Net Sales
Casegoods       $     38,054                27.0 %   $     37,550                25.4 %   $       504             1.3 %
Upholstery            14,492                18.8 %         11,313                15.2 %         3,179            28.1 %
 Consolidated   $     52,546                24.1 %   $     48,863                22.0 %   $     3,683             7.5 %

As a percentage of net sales, consolidated gross margin increased primarily due to decreased discounting in both segments and lower domestic upholstery manufacturing costs, as a percentage of net sales, partially offset by modestly higher costs on some of our imported products. The higher levels of product discounting in fiscal 2012 were primarily due to efforts to reduce slow-moving inventory levels. In absolute terms, consolidated gross profit increased primarily due to improved upholstery segment performance, partially offset by the decline in casegoods net sales discussed above.

Selling and Administrative Expenses

                     Fifty-three weeks ended              Fifty-two weeks ended
                February 3,                          January 29,
                    2013                                 2012                              $ Change        % Change
                                    % Net Sales                          % Net Sales
Casegoods       $     26,102                18.5 %   $     26,905                18.2 %   $      (803 )          -3.0 %
Upholstery            13,504                17.5 %         13,470                18.1 %            34             0.3 %
 Consolidated   $     39,606                18.1 %   $     40,375                18.1 %   $      (769 )          -1.9 %


Table of Contents

Casegoods selling and administrative expenses increased as a percentage of net sales primarily due to the net sales decrease discussed above, but decreased in absolute terms, primarily due to:

increased amounts billed to our imported upholstery division for its share of administrative costs compared to prior periods;

lower contribution expense, due to lower levels of distressed inventory;

lower bad debt expense due to favorable collections experience;

reduced advertising and sample expenses, due to cost-cutting measures; and

lower sales and design commissions, due to lower net sales.

These expense improvements were partially offset by increases in:

bonus expense, due to the reversal of an accrual for long-term performance grant awards in the comparable prior-year period;

salary expense, primarily due to an executive promotion and other salary increases; and

fees for professional services, due to additional fees for several corporate initiatives.

Upholstery selling and administrative expenses decreased as a percentage of net sales, primarily due to decreases in:

salary expense, due to an executive promotion to a corporate position and cost reduction efforts undertaken in fiscal 2012;

benefits expense due to decreased headcount and lower health claims; and

sample and advertising expenses, due to cost-cutting measures.

These decreases were partially offset by an increase in the upholstery segment's share of Company-wide administrative costs.

Operating Income

                    Fifty-three weeks ended               Fifty-two weeks ended
                February 3,                          January 29,
                    2013                                 2012                              $ Change        % Change
                                    % Net Sales                          % Net Sales
Casegoods       $     11,953                 8.5 %   $     10,644                 7.2 %   $     1,309            12.3 %
Upholstery               987                 1.3 %         (3,971 )              -5.3 %         4,958           124.9 %
 Consolidated   $     12,940                 5.9 %   $      6,673                 3.0 %   $     6,267            93.9 %

Operating profitability increased both as a percentage of net sales and in absolute terms, due to the factors discussed above. The upholstery segment returned to operating profitability during the 2013 fiscal first quarter and, despite a modest operating loss in the fiscal 2013 second quarter, posted an operating profit for fiscal 2013. The upholstery segment has returned to operating profitability due to operational improvements and due to the non-recurrence of intangible asset impairment charges in fiscal 2013. During the fourth quarter of fiscal 2012, our upholstery segment recorded a non-cash charge of $1.8 million ($1.1 million, or $0.10 per share, after tax) to write-down the value of the Bradington-Young trade name. We wrote down the carrying value of the Bradington-Young trade name because of operating losses incurred in that division through fiscal 2012.

The following table reconciles operating income as a percentage of net sales ("operating margin") to operating margin excluding intangible asset impairment charges as a percentage of net sales for each period. Operating margin excluding the impact of intangible asset impairment charges is a "non-GAAP" financial measure. We provide this information because we believe it is useful to investors in evaluating our ongoing operations. This non-GAAP financial measure is intended to provide insight into our operating margin and should be evaluated in the context in which it is presented. This measure is not intended to reflect our overall financial results.


Table of Contents

GAAP to Non-GAAP Operating Margin Reconciliation
                                                              Fifty-Three        Fifty-Two Weeks
                                                              Weeks Ended             Ended
                                                              February 3,          January 29,
                                                                  2013                2012
Consolidated operating margin, including FY12 intangible
asset impairment charges                                                 5.9 %               3.0 %
Intangible asset impairment charges                                        -                 0.8 %
Consolidated operating margin, excluding FY12 intangible
asset impairment charges                                                 5.9 %               3.8 %

Other income, net

                       Fifty-three weeks ended                    Fifty-two weeks ended
                 February 3, 2013                          January 29, 2012                           $ Change        % Change
                                         % Net Sales      `                         % Net Sales
Casegoods       $              579                0.4 %   $              755                 0.5 %   $      (176 )         -23.3 %
Upholstery                    (526 )             -0.7 %                 (483 )              -0.7 %           (43 )          -8.9 %
 Consolidated   $               53                0.1 %   $              272                 0.1 %   $      (219 )         -80.5 %

The decrease in other income, net is primarily due to decreased interest earned on anti-dumping duty refunds and decreased finance charges we charged on past due invoices to our customers.

Income Taxes

                   Fifty-three weeks ended               Fifty-two weeks ended
               February 3,                          January 29,
                   2013                                 2012                              $ Change        % Change
                                   % Net Sales                          % Net Sales
Consolidated
income tax
expense        $      4,367                 2.0 %   $      1,888                 0.8 %   $     2,479           131.4 %

Effective
Tax Rate               33.6 %                               27.2 %

We recorded income tax expense of $4.4 million during fiscal 2013, compared to $1.9 million for fiscal 2012, due primarily to an increase in pre-tax income. Our effective tax rate rose to 33.6% from 27.2%. The effective rate in fiscal 2013 was higher than in fiscal 2012 mainly because our income was higher and the dollar value of the favorable permanent differences we recognize each year (officers' life insurance, distributions received from our offshore insurance affiliate and charitable contributions of inventory) remained fairly constant in dollar terms, but as a percentage of income the benefit was significantly smaller.

Net Income and Earnings Per Share

                         Fifty-three weeks ended               Fifty-two weeks ended
                     February 3,                          January 29,
                         2013                                 2012                              $ Change        % Change
Net Income                               % Net Sales                          % Net Sales
 Consolidated        $      8,626                 4.0 %   $      5,057                 2.3 %   $     3,569            70.6 %

Earnings per share   $       0.80                         $       0.47


Table of Contents

Fiscal 2012 Compared to Fiscal 2011

Net Sales

                                               Fifty-two weeks ended
                January 29,                       January 30,
                   2012                              2011                            $ Change        % Change
                                 % Net Sales                       % Net Sales
Casegoods       $   147,927              66.5 %   $   143,157              66.5 %   $     4,770             3.3 %
Upholstery           74,578              33.5 %        72,272              33.5 %   $     2,306             3.2 %
 Consolidated   $   222,505             100.0 %   $   215,429             100.0 %   $     7,076             3.3 %



                            FY12 %                                        FY12 %
                         Increase vs.                                  Increase vs.
   Unit Volume               FY11            Average Selling Price         FY11

   Casegoods                        1.4 %    Casegoods                            2.1 %
   Upholstery                       1.3 %    Upholstery                           3.4 %
    Consolidated                    1.4 %     Consolidated                        2.5 %

The consolidated net sales increase was principally due to increased unit volume and average selling prices across both our casegoods and upholstery segments. In particular, the increase in net sales for the upholstery segment reflects increases in fabric upholstery average selling price and unit volume of 7.3% and 4.2%, respectively, compared to the prior fiscal year, with such increases primarily due to the mix of products shipped.

Gross Income and Margin

                                                      Fifty-two weeks ended
                January 29,                        January 30,
                    2012                               2011                            $ Change        % Change
                                  % Net Sales                        % Net Sales
Casegoods       $     37,550              25.4 %   $     37,642              26.3 %   $       (92 )          -0.2 %
Upholstery            11,313              15.2 %          9,240              12.8 %         2,073            22.4 %
 Consolidated   $     48,863              22.0 %   $     46,882              21.8 %   $     1,981             4.2 %

Casegoods gross margins decreased as compared to the prior fiscal year primarily due to increased product discounting, partially offset by lower freight costs on imported products during the second half of fiscal 2012. As a percentage of net sales, product discounting increased approximately 200 basis points over the prior fiscal year, primarily due to a conscious effort to reduce excess inventory. Upholstery margins increased primarily due to cost reduction efforts and higher fabric upholstery selling prices, partially offset by increased raw material costs and a casualty loss expense of $181,000 related to a sprinkler malfunction at one of our warehouses during the 2012 fiscal year.


Table of Contents

Selling and Administrative Expenses

                                                      Fifty-two weeks ended
                January 29,                        January 30,
                    2012                               2011                            $ Change        % Change
                                  % Net Sales                        % Net Sales
Casegoods       $     26,905              18.2 %   $     27,897              19.5 %   $      (992 )          -3.6 %
Upholstery            13,470              18.1 %         13,125              18.2 %           345             2.6 %
 Consolidated   $     40,375              18.1 %   $     41,022              19.0 %   $      (647 )          -1.6 %

Fiscal 2012 selling and administrative expense decreased in our casegoods segment, 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 compensation during the first quarter of fiscal 2012;

Lower advertising supplies expense and sample expense, due to cost reduction measures;

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

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

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

Fiscal 2012 selling and administrative expenses increased as compared to the prior year in our upholstery segment primarily due to:

Increased commissions and sales incentives due to higher sales and initiatives to drive sales volume growth;

. . .

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