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HOFT > SEC Filings for HOFT > Form 10-Q on 12-Dec-2013All Recent SEC Filings

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Form 10-Q for HOOKER FURNITURE CORP


12-Dec-2013

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 5, 2013 and the thirty-nine week period (also referred to as "nine months" or "nine-month period") that began February 4, 2013, which both ended November 3, 2013. This report discusses our results of operations for these periods compared to the fiscal year 2013 thirteen-week period that began July 30, 2012 and the thirty-nine week period that began January 30, 2012, which both ended October 28, 2012, and our financial condition as of November 3, 2013 compared to February 3, 2013.

We encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission ("SEC"), especially our 2013 annual report on Form 10-K ("2013 Annual Report") filed with the SEC on April 19, 2013. Our 2013 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives. Our 2013 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.

For financial reporting purposes, we are organized into two operating segments - casegoods furniture and upholstered furniture. Results from our new H Contract and Homeware business initiatives, and the elimination of intercompany sales and profits related to these businesses, are aggregated with the results from our casegoods operating segment. Our upholstery segment includes the Bradington-Young, Sam Moore and Seven Seas upholstery product lines. References in this report to "we," "us," "our," "Hooker," or "the Company" refer to Hooker Furniture Corporation and our consolidated subsidiaries, unless specifically referring to segment information.
References in this report to:

the 2014 fiscal year and comparable terminology mean the fiscal year that began February 4, 2013 and will end February 2, 2014; and

the 2013 fiscal year and comparable terminology mean the fiscal year that began January 30, 2012 and ended February 3, 2013.

Dollar amounts presented in the tables below are in thousands.

Nature of Operations

Hooker Furniture Corporation 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 2012 shipments to U.S. retailers, according to a 2013 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 brands include Bradington-Young, a specialist in upscale motion and stationary leather furniture, Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization, and Seven Seas, an imported leather-upholstered furniture line with products targeted at the medium and upper-medium price ranges. 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.

We launched two new initiatives during fiscal 2014, which are designed to help us reach a broader consumer base:

H Contract- which supplies upholstered seating and casegoods to upscale senior living facilities throughout the country; and

Homeware- which features customer-assembled, modular upholstered and casegoods products, including home accessories, designed for younger and more mobile furniture customers, marketed direct-to-consumer via the internet.


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.

Current economic and economic-related factors, such as high unemployment and changing consumer priorities, have resulted in a somewhat depressed retail environment for discretionary home furnishings and related purchases since 2008. However, the extended weakness in housing and housing-related industries is beginning to show signs of sustained recovery, and mostly positive news on housing and consumer confidence is encouraging.

Our lower overhead, variable-cost import operations have driven our profitability over the last few years and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. On the other hand, our import model requires a larger investment in inventory and longer production lead times. In addition, we must constantly evaluate our imported furniture suppliers and, when quality concerns or inflationary pressures diminish the value proposition offered by our current suppliers, transition sourcing to other suppliers, often located in different countries or regions.

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 have experienced operating losses or low operating profitability since our fiscal 2009 second quarter. Extensive cost reduction efforts over that time have mitigated the effect of the weakness in demand and have resulted in our upholstery segment returning to operating profitability for fiscal 2013 and for the first nine months of fiscal 2014.

The following are the primary factors that affected our consolidated results of operations for the three and nine-month periods ended November 3, 2013 compared to the prior-year periods.

Consolidated net sales increased in both fiscal 2014 periods, primarily due to:

o higher average selling prices in both operating segments both periods; and

o increased unit volume in our upholstery segment in the year-to-date period.

Gross profit was essentially flat in absolute terms in both segments in the fiscal 2014 third quarter primarily due to:

o increased product discounting in our casegoods segment; and

o higher domestic upholstery manufacturing costs in our upholstery segment.

Gross profit increased in absolute terms and as a percentage of sales in the fiscal 2014 nine-month period due primarily to increased sales volume in both segments, as well as:

o lower cost of goods sold as a percentage of net sales for our casegoods segment, primarily due to decreased warehousing and distribution expense and decreased cost of sales due to lower LIFO expense in the current year; and

o to a lesser extent, reduced upholstery segment cost of sales as a percentage of net sales, due to cost reduction initiatives and improved overhead utilization resulting from increased sales volume.

Selling and administrative expenses increased in both fiscal 2014 periods.

o In the fiscal 2014 third quarter, selling and administrative expense increased primarily due to start-up costs for our H Contract and Homeware initiatives.

o In the fiscal 2014 first nine-months, about half of the increase in selling and administrative expense was due to start-up costs for our H Contract and Homeware initiatives. Additional factors, including increases in professional services, benefits expense and bad debts expense, are explained in greater detail below.


Table of Contents

Our upholstery segment reported operating income of:

o $543,000 for the fiscal 2014 third quarter compared to $567,000 for the fiscal 2013 third quarter; and

o $2.0 million for the fiscal 2014 nine-month period compared to $669,000 for the fiscal 2013 nine-month period.

Fiscal 2014 third quarter results were not as strong as the fiscal 2014 first half, primarily due to increased discounting in our casegoods segment. Consolidated discounting was two hundred and ten basis points higher in the fiscal 2014 third quarter than in the fiscal 2014 first half.

Results of Operations

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

                            Thirteen Weeks Ended               Thirty-nine Weeks Ended
                      November 3,         October 28,      November 3,        October 28,
                          2013               2012              2013               2012
    Net sales                100.0 %             100.0 %          100.0 %            100.0 %
    Cost of sales             77.0                76.1             76.1               77.5
    Gross profit              23.0                23.9             23.9               22.5
    Selling and
    administrative
    expenses                  17.7                17.2             18.6               17.7
    Operating
    income                     5.3                 6.7              5.3                4.8
    Other income,
    net                          -                 0.1                -                0.1
    Income before
    income taxes               5.4                 6.7              5.3                4.9
    Income tax
    expense                    1.8                 2.4              1.8                1.8
    Net income                 3.6                 4.3              3.5                3.1

Fiscal 2014 Third Quarter Compared to Fiscal 2013 Third Quarter

                                   Net Sales

                                                     Thirteen Weeks Ended
               November 3,                        October 28,
                   2013                               2012                            $ Change        % Change
                                 % Net Sales                        % Net Sales
Casegoods      $     37,716              63.8 %   $     36,508              64.3 %   $     1,208             3.3 %
Upholstery           21,409              36.2 %         20,295              35.7 %         1,114             5.5 %
Consolidated   $     59,125             100.0 %   $     56,803             100.0 %   $     2,322             4.1 %



                                   FY14 Q3 %                                              FY14 Q3 %
                               Increase vs. FY13                                      Increase vs. FY13
Unit Volume                           Q3               Average Selling Price                  Q3

Casegoods                                    0.3 %     Casegoods                                     2.9 %
Upholstery                                  -2.9 %     Upholstery                                    8.8 %
Consolidated                                -0.6 %     Consolidated                                  4.7 %


Table of Contents

The increase in consolidated net sales for the fiscal 2014 third quarter was principally due to higher average selling prices in both segments, partially offset by decreased unit volume in our upholstery segment and essentially flat unit volume in our casegoods segment. Higher average selling prices were primarily the result of a shift in the mix of products sold toward some of our higher-priced items in both segments. The higher average selling prices were partially offset by increased discounting in our casegoods segment, due to an effort to decrease levels of slow moving and obsolete inventory. Beginning in the fiscal 2014 second quarter, we became more aggressive in reducing our inventories of older, slower moving products to make room for new introductions and best sellers. Upholstery segment unit volume decreased due to lower sales of lower-priced products, partially offset by a higher volume of more expensive products such as sofas and recliners.

                                  Gross Profit

                                                      Thirteen Weeks Ended
               November 3,                        October 28,
                   2013                               2012                             $ Change        % Change
                                 % Net Sales                        % Net Sales
Casegoods      $      9,620              25.5 %   $      9,580              26.2 %   $         40             0.4 %
Upholstery            3,978              18.6 %          3,980              19.6 %             (2 )          -0.1 %
Consolidated   $     13,598              23.0 %   $     13,560              23.9 %   $         38             0.3 %

Consolidated gross profit was essentially flat in absolute terms and down slightly as a percentage of net sales in the fiscal 2014 third quarter, as compared to the fiscal 2013 third quarter, primarily due to:

increased discounting in our casegoods segment due to efforts to reduce slow-moving and obsolete inventory levels; and

higher domestic upholstery manufacturing costs due to continuing excess labor costs to train new upholsterers at our Sam Moore manufacturing plant to handle sales volume increases and to a lesser degree, some material cost inflation in the upholstery division.

                      Selling and Administrative Expenses

                                                     Thirteen Weeks Ended
               November 3,                        October 28,
                   2013                               2012                            $ Change        % Change
                                 % Net Sales                        % Net Sales
Casegoods      $      7,008              18.6 %   $      6,369              17.4 %   $       639            10.0 %
Upholstery            3,435              16.0 %          3,412              16.8 %            23             0.7 %
Consolidated   $     10,443              17.7 %   $      9,781              17.2 %   $       662             6.8 %

Consolidated selling and administrative expenses increased both in absolute terms and as a percentage of net sales in the fiscal 2014 third quarter compared to the same prior-year period.

Casegoods segment selling and administrative expenses increased both in absolute terms and as a percentage of net sales primarily due to:

start-up costs for our H Contract and Homeware initiatives. Start-up costs were $574,000 pre-tax ($370,000 or $0.03 per share after tax), for the fiscal 2014 third quarter; and

an increase in bad debt expense due to a favorable adjustment recognized in the prior-year quarter.

Upholstery selling and administrative expenses decreased as a percentage of net sales, due to higher net sales, and were essentially flat in absolute terms in the fiscal 2014 third quarter compared to the same prior-year period, due primarily to:

higher benefits expense due to higher medical claims expense; and higher commissions expense due to increased sales, offset by lower upholstery segment advertising supplies expense.


Table of Contents

                                Operating Income

                                                     Thirteen Weeks Ended
               November 3,                        October 28,
                   2013                               2012                            $ Change        % Change
                                 % Net Sales                        % Net Sales
Casegoods      $      2,612               6.9 %   $      3,212               8.8 %   $      (600 )         -18.7 %
Upholstery              543               2.5 %            567               2.8 %           (24 )           4.2 %
Consolidated   $      3,155               5.3 %   $      3,779               6.7 %   $      (624 )         -16.5 %

Consolidated operating profitability decreased for the fiscal 2014 third quarter as compared to the same prior-year period, both as a percentage of net sales and in absolute terms, primarily due to startup costs of our new H Contract and Homeware initiatives, which are reported in the casegoods segment, and increased product discounting in our casegoods segment.

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