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HOFT > SEC Filings for HOFT > Form 10-Q on 12-Jun-2014All Recent SEC Filings

Show all filings for HOOKER FURNITURE CORP

Form 10-Q for HOOKER FURNITURE CORP


12-Jun-2014

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" "first quarter" or "quarterly period") that began February 3, 2014 and ended on May 4, 2014. This report discusses our results of operations for this period compared to the 2014 fiscal year thirteen-week period that began February 4, 2013 and ended on May 5, 2013; and our financial condition as of May 4, 2014 compared to February 2, 2014.

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also 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 2014 annual report on Form 10-K ("2014 Annual Report") filed with the SEC on April 18, 2014. Our 2014 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 2014 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 of our casegoods operating segment. References in this report to "we," "us," "our," "Hooker," "Hooker Furniture" or "the Company" refer to Hooker Furniture Corporation and our consolidated subsidiaries, unless specifically referring to segment information.

References in this report to:

the 2015 fiscal year and comparable terminology mean the fiscal year that began February 3, 2014 and will end February 1, 2015; and

the 2014 fiscal year and comparable terminology mean the fiscal year that began February 4, 2013 and ended February 2, 2014.

Dollar amounts presented in the tables below are in thousands except for per share data.

Nature of Operations

Hooker Furniture Corporation is a home furnishings marketing, design 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 accents, home office, dining, bedroom and home entertainment furniture under the Hooker Furniture brand. Our residential upholstered seating companies include Bradington-Young, a specialist in upscale motion and stationary leather furniture and Sam Moore Furniture, 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 home furnishings retailers primarily targeting the upper-medium price range. For our core product line, 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 more than 10 other countries internationally. Other customers include independent furniture stores, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.

To expand and grow beyond our core business, we launched two start-up brands during the just-completed fiscal year focused on serving the needs of emerging consumer groups on the opposite ends of the age and life stage spectrum. One, H Contract, focuses on the burgeoning senior living market for retirees. The other, Homeware, focuses on younger and more mobile consumers in the early stages of their careers.

H Contract supplies upholstered seating and casegoods to upscale senior living facilities throughout the country, working with designers specializing in the contract industry to provide functional furniture that meets the style and comfort expectations of today's retirees.


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To address the needs of younger furniture shoppers, as well as those living in urban or smaller spaces, we launched Homeware during our 2014 fiscal year, Homeware is an online-only brand that is sold through leading international e-commerce retailers as well as our own e-commerce website, homeware.com. In addition to unique chairs and ottomans designed to be assembled in minutes by the consumer with no tools or hardware required, Homeware also offers home accessories and plans to expand into living room tables, multi-seat upholstery, entertainment centers and dining room furniture in the coming fiscal year.

Overview

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

consumer confidence;

availability of consumer credit;

energy and other commodity prices; and

housing and mortgage markets;

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

fashion trends;

disposable income; and

household formation and turnover.

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. 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. However, we acknowledge that some economic headwinds persist.

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 experienced operating losses or low operating profitability beginning with our fiscal 2009 second quarter through the second quarter of fiscal 2013. We initiated extensive cost reduction efforts over that time, which mitigated the effect of the weakness in demand. Our upholstery segment operations have been profitable for the last two fiscal years, as well as the most recently completed fiscal quarter.

Consolidated net sales for the fiscal 2015 first quarter increased by $5.1 million, or 9.1%, to $61.4 million, and net income for the fiscal 2015 first quarter increased by $678,000, or 31.9%, to $2.8 million, in each case compared to the fiscal 2014 first quarter. The following are the primary factors that affected our consolidated fiscal 2015 first quarter results of operations:

Consolidated net sales increased by 9.1% due to increased unit volume on essentially flat average selling prices. Unit volume increased in our casegoods segment, while remaining essentially flat in our upholstery segment. Higher average selling prices increased in our upholstery segment, but were offset by lower average selling prices in our casegoods segment, primarily due to increased discounting and higher container direct sales

Gross profit increased in absolute terms due to increased sales in both segments and increased as a percentage of net sales due primarily to lower casegoods segment warehouse and distribution expenses.

Selling and administrative expenses decreased as a percentage of net sales due to increased net sales, but increased in absolute terms due to a variety of other factors, including start-up costs for our H Contract and Homeware initiatives.

Our casegoods segment increased operating profitability by 44.6% or $1.1 million, from $2.6 million in the fiscal 2014 first quarter to $3.7 million in the fiscal 2015 first quarter.


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Rsults 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
                                                   May 4,          May 5,
                                                    2014            2013
           Net sales                                   100.0 %       100.0 %
           Cost of sales                                74.6          75.3
           Gross profit                                 25.4          24.7
           Selling and administrative expenses          18.5          19.0
           Operating income                              6.9           5.7
           Other (expense) income, net                   0.1           0.0
           Income before income taxes                    7.0           5.7
           Income tax expense                            2.4           1.9
           Net income                                    4.6           3.8

Fiscal 2015 First Quarter Compared to Fiscal 2014 First Quarter

                                                            Net Sales
                                                      Thirteen Weeks Ended
                May 4, 2014                         May 5, 2013                         $ Change        % Change
                                  % Net Sales                         % Net Sales
Casegoods      $      39,018              63.6 %   $      35,444              63.0 %   $     3,574            10.1 %
Upholstery            22,378              36.4 %          20,851              37.0 %         1,527             7.3 %
Consolidated   $      61,396             100.0 %   $      56,295             100.0 %   $     5,101             9.1 %



                           FY15 Q1 %                                                      FY15 Q1 %
                       Increase vs. FY14                                              Increase vs. FY14
Unit Volume                   Q1                              Average Selling Price          Q1

Casegoods                           13.6 %                    Casegoods                            -3.3 %
Upholstery                           0.8 %                    Upholstery                            6.8 %
Consolidated                         9.6 %                    Consolidated                         -0.5 %


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The increase in consolidated net sales for the fiscal 2015 first quarter was primarily due to increased unit volume in our casegoods segment and essentially flat consolidated average selling prices. Unit volume in our casegoods segment was led by increases in container-direct shipments to retailers, which we believe to be indicative of a recovery in casegoods sales industry-wide. Both of our new business initiatives, H Contract and Homeware, contributed sales in the fiscal year 2015 quarter compared to the prior-year period, when they were in the pre-revenue phase of their startups. Upholstery net sales increased due to net sales gains at Sam Moore, which were due to both higher average selling prices and increased unit volume.

                                                     Gross Income and Margin
                                                      Thirteen Weeks Ended
                May 4, 2014                         May 5, 2013                         $ Change        % Change
                                  % Net Sales                         % Net Sales
Casegoods      $      11,377              29.2 %   $       9,998              28.2 %   $     1,379            13.8 %
Upholstery             4,233              18.9 %           3,918              18.8 %           315             8.0 %
Consolidated   $      15,610              25.4 %   $      13,916              24.7 %   $     1,694            12.2 %

Consolidated gross profit increased in the fiscal 2015 first quarter, primarily due to:
higher sales volume in both operating segments;

essentially flat discounting, as a percentage of net sales and in absolute terms, in our upholstery segment; and

lower casegoods segment warehouse and distribution expenses.

These improvements were partially offset by higher discounting in our casegoods segment, as we continued our efforts to reduce our levels of slow moving inventory and match inventory levels with projected demand, and higher manufacturing costs at Sam Moore, due to increases in labor and benefit costs.

                                               Selling and Administrative Expenses
                                                      Thirteen Weeks Ended
                May 4, 2014                         May 5, 2013                         $ Change        % Change
                                  % Net Sales                         % Net Sales
Casegoods      $       7,666              19.6 %   $       7,432              21.0 %   $       234             3.1 %
Upholstery             3,701              16.5 %           3,250              15.6 %           451            13.9 %
Consolidated   $      11,367              18.5 %   $      10,682              19.0 %   $       685             6.4 %

Consolidated selling and administrative expenses decreased as a percentage of net sales primarily due to increased sales volume, but increased in absolute terms in the fiscal 2015 first quarter compared to the same prior-year period.

Casegoods selling and administrative expenses increased in absolute terms, primarily due to an approximate $200,000 increase in operating expenses for the H Contract and Homeware divisions. Higher casegoods selling expenses, due to increased sales, were offset by lower long-term incentive accruals and professional fees.

Upholstery selling and administrative expenses increased both as a percentage of net sales and in absolute terms in the fiscal 2015 first quarter, primarily due to increased:

employee benefits costs;

ERP-related project costs;

sales commissions, samples and other sales related costs due to higher net sales; and

bad debts expense due to higher net sales and related increases in accounts receivable balances.


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                                                   Operating Profit and Margin
                                                      Thirteen Weeks Ended
                May 4, 2014                         May 5, 2013                         $ Change        % Change
                                  % Net Sales                         % Net Sales
Casegoods      $       3,712               9.5 %   $       2,566               7.2 %   $     1,146            44.7 %
Upholstery               531               2.4 %             668               3.2 %          (137 )         -20.5 %
Consolidated   $       4,243               6.9 %   $       3,234               5.7 %   $     1,009            31.2 %

Operating profitability increased for the fiscal 2015 first quarter compared to the same prior-year period, both as a percentage of net sales and in absolute terms, due to the factors discussed above.

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