hookerfurn10q080314.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 

 
FORM 10-Q
 

 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended August 3, 2014

Commission file number 000-25349

HOOKER FURNITURE CORPORATION
(Exact name of registrant as specified in its charter)
 
Virginia
54-0251350
(State or other jurisdiction of incorporation or organization)
(IRS employer identification no.)

440 East Commonwealth Boulevard, Martinsville, VA  24112
(Address of principal executive offices, zip code)

(276) 632-0459
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated Filer o
Accelerated filer x
 Non-accelerated Filer o (Do not check if a smaller reporting company) 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 5, 2014:
 
Common stock, no par value
10,762,991
(Class of common stock)
(Number of shares)
 
 
 

 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
3
     
Item 2.
13
     
Item 3.
27
     
Item 4.
27
     
PART II. OTHER INFORMATION
 
     
Item 6.
28
     
29
 
 
 

 
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
As of
 
August 3,
   
February 2,
 
   
2014
   
2014
 
   
(unaudited)
       
Assets
           
Current assets
           
    Cash and cash equivalents
  $ 36,943     $ 23,882  
    Trade accounts receivable, less allowance for doubtful
       accounts of $1,058 and $1,243 on each respective date
    25,224       29,393  
    Inventories
    44,595       49,016  
    Prepaid expenses and other current assets
    2,334       2,413  
    Deferred taxes
    1,165       1,664  
    Income tax recoverable
    36       682  
         Total current assets
    110,297       107,050  
Property, plant and equipment, net
    23,185       23,752  
Cash surrender value of life insurance policies
    19,746       18,891  
Deferred taxes
    4,135       4,051  
Intangible assets
    1,382       1,382  
Other assets
    1,666       355  
         Total non-current assets
    50,114       48,431  
               Total assets
  $ 160,411     $ 155,481  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
    Trade accounts payable
  $ 8,709     $ 7,077  
    Accrued salaries, wages and benefits
    3,295       3,478  
    Accrued commissions
    764       934  
    Customer deposits
    599       659  
    Other accrued expenses
    809       759  
         Total current liabilities
    14,176       12,907  
Deferred compensation
    7,937       7,668  
Income tax accrual
    132       103  
Other long-term liabilities
    325       -  
Total long-term liabilities
    8,394       7,771  
              Total liabilities
    22,570       20,678  
                 
Shareholders’ equity
               
  Common stock, no par value, 20,000 shares authorized, and
    10,763 and 10,753 shares issued and outstanding,
       respectively, on each date
    17,714       17,585  
    Retained earnings
    120,045       117,120  
    Accumulated other comprehensive income
    82       98  
              Total shareholders’ equity
    137,841       134,803  
                   Total liabilities and shareholders’ equity
  $ 160,411     $ 155,481  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 
3

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
   
August 3,
   
August 4,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net sales
  $ 54,883     $ 55,301     $ 116,279     $ 111,596  
                                 
   Cost of sales
    41,226       42,044       87,012       84,423  
                                 
      Gross profit
    13,657       13,257       29,267       27,173  
                                 
Selling and administrative expenses
    10,243       10,617       21,610       21,299  
                                 
        Operating income
    3,414       2,640       7,657       5,874  
                                 
Other income (expense), net
    52       (22 )     98       (54 )
                                 
      Income before income taxes
    3,466       2,618       7,755       5,820  
                                 
Income tax expense
    1,194       930       2,679       2,006  
                                 
       Net income
  $ 2,272     $ 1,688     $ 5,076     $ 3,814  
                                 
Earnings per share
                               
       Basic
  $ 0.21     $ 0.16     $ 0.47     $ 0.35  
       Diluted
  $ 0.21     $ 0.16     $ 0.47     $ 0.35  
                                 
Weighted average shares outstanding:
                               
       Basic
    10,731       10,722       10,728       10,719  
       Diluted
    10,767       10,753       10,762       10,749  
                                 
Cash dividends declared per share
  $ 0.10     $ 0.10     $ 0.20     $ 0.20  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 
4

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
   
August 3,
   
August 4,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net Income
 
$
2,272
   
$
1,688
   
$
5,076
   
$
3,814
 
       Other comprehensive income:
                               
                 Amortization of actuarial gain
   
(12
)
   
(27
)
   
(25
)
   
(53
)
                 Income tax effect on amortization of actuarial gains
   
4
     
10
     
9
     
19
 
        Adjustments to net periodic benefit cost
   
(8
)
   
(17
)
   
(16
)
   
(34
)
                                 
Comprehensive Income
 
$
2,264
   
$
1,671
   
$
5,060
   
$
3,780
 
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 
5

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
 
   
2014
   
2013
 
Operating Activities:
           
Net income
  $ 5,076     $ 3,814  
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
    1,259       1,186  
Gain on disposal of assets
    (37 )     (9 )
Deferred income tax expense (benefit)
    499       (95 )
Noncash restricted stock and performance awards
    272       333  
Provision for doubtful accounts
    94       33  
Changes in assets and liabilities:
               
Trade accounts receivable
    4,075       2,005  
Inventories
    4,422       1,378  
Income tax recoverable
    646       (515 )
Gain on life insurance policies
    (477 )     (451 )
Prepaid expenses and other current assets
    618       921  
Trade accounts payable
    1,631       (819 )
Accrued salaries, wages, and benefits
    (183 )     (243 )
Accrued income taxes
    -       (751 )
Accrued commissions
    (170 )     (163 )
Customer deposits
    (60 )     -  
Other accrued  expenses
    53       (68 )
Deferred compensation
    55       92  
Other long-term liabilities
    23       -  
              Net cash provided by operating activities
  $ 17,796     $ 6,648  
                 
Investing Activities:
               
Purchases of property and equipment
    (1,999 )     (1,726 )
Proceeds received on notes for sale of assets
    16       28  
Proceeds from sale of property and equipment
    69       31  
Premiums paid on life insurance policies
    (670 )     (715 )
Proceeds received on life insurance policies
    -       516  
              Net cash used in investing activities
    (2,584 )     (1,866 )
                 
Financing Activities:
               
Cash dividends paid
    (2,151 )     (2,150 )
              Net cash used in financing activities
    (2,151 )     (2,150 )
                 
Net increase in cash and cash equivalents
    13,061       2,632  
Cash and cash equivalents - beginning of year
    23,882       26,342  
Cash and cash equivalents - end of quarter
  $ 36,943     $ 28,974  
                 
Supplemental schedule of cash flow information:
               
Income taxes paid, net
  $ 1,563     $ 3,368  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 
6

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Twenty-Six Weeks Ended August 3, 2014
 
1.
Preparation of Interim Financial Statements

The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations.  However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position.  Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.  These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended February 2, 2014 (“2014 Annual Report”).

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from our estimates.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q and include:

§  
our results of operations for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 5, 2014 and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 3, 2014,  which both ended August 3, 2014, compared to the  thirteen-week period that began May 6, 2013 and the twenty-six week period that began February 4, 2013, which both ended August 4, 2013; and

§  
our financial condition as of August 3, 2014 compared to February 2, 2014.

References in these notes to the condensed consolidated financial statements of the Company 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.
 
2.           Change in Presentation of Consolidated Statement of Cash Flows

GAAP permits the direct or indirect methods of computing cash flows. Beginning with our fiscal 2014 annual report on Form 10-K, we elected to change the presentation of our cash flow statements from the direct to indirect method of computing cash flows. We believe the indirect method is preferable because:

§  
it provides a more straight-forward presentation of the reconciliation between consolidated net income and consolidated cash flows;
 
§  
it helps financial statement users to better understand how non-cash transactions are factors of consolidated net income but not sources of consolidated cash flows; and
 
§  
it helps financial statement users to better understand the different linkages among our consolidated financial statements.
 
Consequently, we have recast our prior-year condensed consolidated statements of cash flows to conform to the fiscal 2015 presentation under the indirect method.
 
 
7

 
3.          Accounts Receivable
 
   
August 3,
   
February 2,
 
   
2014
   
2014
 
             
Trade accounts receivable
  $ 18,446     $ 22,776  
Receivable from factor
    7,836       7,860  
Allowance for doubtful accounts
    (1,058 )     (1,243 )
   Accounts receivable
  $ 25,224     $ 29,393  
 
“Receivable from factor” represents amounts due with respect to factored accounts receivable. We factor substantially all of our domestically-produced upholstery accounts receivable without recourse to us.

Under our factoring agreement, invoices for domestically produced upholstery products are generated and transmitted to our customers, with copies to the factor on a daily basis, as products are shipped to our customers. The factor collects the amounts due and remits collected funds to us semi-weekly, less factoring fees. We retain ownership of the accounts receivable until the invoices are 90 days past due. At that time, the factor pays us the net invoice amount, less factoring fees, and takes ownership of the accounts receivable. The factor is then entitled to collect the invoices on its own behalf and retain any subsequent remittances. The invoiced amounts are reported as accounts receivable on our condensed consolidated balance sheets, generally from the date the merchandise is shipped to our customer until payment is received from the factor.

A limited number of our accounts receivable for our domestically produced upholstery are factored with recourse to us. The amounts of these receivables at August 3, 2014 and February 2, 2014 were $375,000 and $324,000, respectively. If the factor is unable to collect the amounts due, invoices are returned to us for collection. We include an estimate of potentially uncollectible receivables in our calculation of our allowance for doubtful accounts.
 
4.           Inventories
 
   
August 3,
   
February 2,
 
   
2014
   
2014
 
Finished furniture
  $ 54,472     $ 58,515  
Furniture in process
    737       804  
Materials and supplies
    8,523       8,068  
   Inventories at FIFO
    63,732       67,387  
Reduction to LIFO basis
    (19,137 )     (18,371 )
   Inventories
  $ 44,595     $ 49,016  
 
 
8

 
5.          Property, Plant and Equipment

   
Depreciable Lives
   
August 3,
   
February 2,
 
   
(In years)
   
2014
   
2014
 
                   
Computer software and hardware
  3 - 10     $ 22,745     $ 22,294  
Buildings and land improvements
  15 - 30       22,036       24,026  
Machinery and equipment
  10       4,778       4,495  
Leasehold improvements
  5       2,811       2,765  
Furniture and fixtures
  3 - 8       2,200       2,060  
Other
  5       668       689  
Total depreciable property at cost
      55,238       56,329  
Less accumulated depreciation
      36,023       36,447  
Total depreciable property, net
      19,215       19,882  
Land
          1,067       1,152  
Construction-in-progress
          2,903       2,718  
Property, plant and equipment, net
    $ 23,185     $ 23,752  
 
At August 3, 2014, construction-in-progress consisted of $2.0 million of expenditures related to our ongoing Enterprise Resource Planning (ERP) conversion efforts and $910,000 related to various other projects to enhance our facilities and operations.

The $2.0 million decline in buildings and land improvements during the fiscal 2015 first half is primarily due to the completion of the sale of our Cloverleaf warehouse facility in April 2014. We recognized a gain of $34,000 on the sale in our fiscal 2015 first-half financial statements. See Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for additional information regarding this transaction.
 
6.           Fair Value Measurements

Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
 
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of August 3, 2014 and February 2, 2014, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.

As of August 3, 2014, a mortgage note receivable was measured at fair value on a non-recurring basis using Level 3 inputs. The note receivable was delivered to us by the buyer as part of the purchase price for our Cloverleaf facility during the fiscal 2015 first quarter and was recorded at approximately $1.6 million, the original face value of the note. The carrying value of the note is assumed to approximate its fair value. We measure the probability that amounts due to us under this note will be collected primarily based on the buyer’s payment history. Specifically, we consider the buyer’s adherence to the contractual payment terms for both timeliness and payment amounts. Should it become probable that we would be unable to collect all amounts due according to the contractual terms of the note, we would measure the note for impairment and record a valuation allowance against the note, if needed, with the related expense charged to income for that period. The note is included in the “Other assets” line of our condensed consolidated balance sheets.
 
 
9

 
Our assets measured at fair value on a recurring and non-recurring basis at August 3, 2014 and February 2, 2014, were as follows:
 
   
Fair value at August 3, 2014
         
Fair value at February 2, 2014
       
Description
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
    (In thousands)  
Assets measured at fair value
                                               
Company-owned life insurance
  $ -     $ 19,746     $ -     $ 19,746     $ -     $ 18,891     $ -     $ 18,891  
Mortgage note receivable
    -       -       1,575       1,575       -       -       -       -  
 
7.           Intangible Assets
 
       
August 3,
   
February 2,
 
Non-amortizable Intangible Assets
 
Segment
  2014     2014  
Trademarks and trade names - Bradington-Young
 
Upholstery
  $ 861     $ 861  
Trademarks and trade names - Sam Moore
 
Upholstery
    396       396  
URL- Homeware.com
 
Casegoods
    125       125  
   Total trademarks and tradenames
        1,382       1,382  
 
8.          Long-Term Debt

As of August 3, 2014, we had an aggregate $13.3 million available under our $15.0 million unsecured revolving credit facility to fund working capital needs.  Standby letters of credit in the aggregate amount of $1.7 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of August 3, 2014.  There were no additional borrowings outstanding under the revolving credit facility on August 3, 2014.  Any principal outstanding under the revolving credit facility is due July 31, 2018.
 
9.          Employee Benefit Plans

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives. The liability for the SRIP at August 3, 2014 and February 2, 2014 was $7.7 million and is shown in our condensed consolidated balance sheets as follows:

   
August 3,
   
February 2,
 
   
2014
   
2014
 
Accrued salaries, wages and benefits (current portion)
  $ 354     $ 354  
Deferred compensation (long-term portion)
    7,381       7,308  
   Total liability
  $ 7,735     $ 7,662  
 
Components of net periodic benefit cost for the SRIP are included in our condensed consolidated statements of income under selling and administrative expenses:

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
   
August 3,
   
August 4,
 
   
2014
   
2013
   
2014
   
2013
 
Net periodic benefit cost
                       
   Service cost
  $ 25     $ 64     $ 51     $ 128  
   Interest cost
    85       73       170       146  
   Actuarial gain
    (13 )     (26 )     (26 )     (53 )
      Net periodic benefit cost
  $ 97     $ 111     $ 195     $ 221  
 
10

 
10.        Earnings Per Share

We refer you to the discussion of Earnings Per Share in Note 1-Summary of Significant Accounting Policies, in the financial statements included in our 2014 Annual Report, for additional information concerning the calculation of earnings per share.
 
We have issued restricted stock awards to non-employee members of the board of directors since 2006 and restricted stock units (RSUs) and/or restricted stock to certain senior executives and other key employees since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles the recipient to receive one share of the Company’s common stock if the recipient remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

   
August 3,
   
Feb 2,
 
   
2014
   
2014
 
             
Restricted shares
    27       29  
Restricted stock units
    35       32  
      62       61  

All restricted shares and RSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
   
August 3,
   
August 4,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net income
  $ 2,272     $ 1,688     $ 5,076     $ 3,814  
   Less: Unvested participating restricted stock dividends
    3       3       6       6  
            Net earnings allocated to unvested participating restricted stock
    7       5       15       11  
Earnings available for common shareholders
    2,262       1,680       5,055       3,797  
                                 
Weighted average shares outstanding for basic earnings per share
    10,731       10,722       10,728       10,719  
Dilutive effect of unvested restricted stock and RSU awards
    36       31       34       30  
   Weighted average shares outstanding for diluted earnings per share
    10,767       10,753       10,762       10,749  
                                 
Basic earnings per share
  $ 0.21     $ 0.16     $ 0.47     $ 0.35  
                                 
Diluted earnings per share
  $ 0.21     $ 0.16     $ 0.47     $ 0.35  
 
11.        Income Taxes

We recorded income tax expense of $1.2 million for the fiscal 2015 second quarter compared to $930,000 for the comparable prior year period.  The effective tax rates for the fiscal 2015 and 2014 second quarters were 34.4% and 35.5%, respectively. In the fiscal 2014 second quarter we reduced the carrying value of our deferred tax assets to reflect the rate at which they were expected to be utilized. This discrete adjustment increased income tax expense in the fiscal year 2014 quarter by approximately 4%.  Our effective tax rate was lower in the fiscal 2015 second quarter primarily due the absence of a similar adjustment in the fiscal 2015 second quarter, partially offset by the impact of smaller anticipated rate benefits from earnings on company-owned life insurance policies and distributions from our former captive insurance arrangement as a percentage of quarterly income, due to the increased income in the quarter.
 
We recorded income tax expense of $2.7 million for the fiscal 2015 first-half compared to $2.0 million for the comparable prior year period.  The effective tax rate for the fiscal 2015 and 2014 six-month periods was 34.5%. The impact of the change in deferred rates, recorded in fiscal year 2014 was offset by the impact of smaller anticipated rate benefits from earnings on company-owned life insurance policies and distributions from our former captive insurance arrangement in fiscal year 2015.
 
 
11

 
The net unrecognized tax benefits as of August 3, 2014 and February 2, 2014, which, if recognized, would affect our effective tax rate are $339,000 and $303,000, respectively.  In fiscal 2014, an uncertain tax position was identified and accrued for which forthcoming remediation action steps will effectively settle the uncertainty in the next 12 months. In fiscal 2014, we also established a reserve for an uncertain tax position related to the use of a portion of state loss carryforwards in our current tax returns. The balance of that reserve at August 3, 2014 and February 2, 2014 was $132,000 and $103,000, respectively.
 
The tax years ending 2012 through 2014 remain subject to examination by federal taxing authorities. State tax returns for the years ending 2011 through 2014 remain subject to examination.

12.         Segment Information

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. The following table presents segment information for the periods, and as of the dates, indicated:

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
August 3, 2014
         
August 4, 2013
       
         
% Net
         
% Net
         
% Net
         
% Net
 
Net Sales
       
Sales
         
Sales
         
Sales
         
Sales
 
   Casegoods
  $ 33,996       61.9 %   $ 34,839       63.0 %   $ 73,014       62.8 %   $ 70,281       63.0 %
   Upholstery
    20,887       38.1 %     20,462       37.0 %     43,265       37.2 %     41,315       37.0 %
Consolidated
  $ 54,883       100.0 %   $ 55,301       100.0 %   $ 116,279       100.0 %   $ 111,596       100.0 %
                                                                 
Gross Profit & Margin
                                                               
   Casegoods
  $ 9,657       28.4 %   $ 9,148       26.3 %   $ 21,034       28.8 %   $ 19,146       27.2 %
   Upholstery
    4,000       19.2 %     4,109       20.1 %     8,233       19.0 %     8,027       19.4 %
Consolidated
  $ 13,657       24.9 %   $ 13,257       24.0 %   $ 29,267       25.2 %   $ 27,173       24.3 %
                                                                 
Operating Income & Margin
                                                               
   Casegoods
  $ 2,688       7.9 %   $ 1,806       5.2 %   $ 6,399       8.8 %   $ 4,372       6.2 %
   Upholstery
    726       3.5 %     834       4.1 %     1,258       2.9 %     1,502       3.6 %
Consolidated
  $ 3,414       6.2 %   $ 2,640       4.8 %   $ 7,657       6.6 %   $ 5,874       5.3 %
                                                                 
Depreciation & Amortization
                                                               
   Casegoods
  $ 388             $ 381             $ 755             $ 762          
   Upholstery
    258               220               504               424          
Consolidated
  $ 646             $ 601             $ 1,259             $ 1,186          
                                                                 
Capital Expenditures
                                                               
   Casegoods
  $ 705             $ 549             $ 1,383             $ 1,227          
   Upholstery
    286               297               616               499          
Consolidated
  $ 991             $ 846             $ 1,999             $ 1,726          
 
   
As of August 3, 2014
   
% Total
                   
As of February 2, 2014
   
% Total
                 
Total Assets
         
Assets
                           
Assets
                 
   Casegoods
  $ 126,723       79.0 %                   $ 122,345       78.7 %                
   Upholstery
    33,688       21.0 %                     33,136       21.3 %                
Consolidated
  $ 160,411       100.0 %                   $ 155,481       100.0 %                

13.      Subsequent Events
 
Dividends
 
On September 2, 2014, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on September 30, 2014 to shareholders of record at September 15, 2014.
 
 
12

 
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,” “second quarter” or “quarterly period”) that began May 5, 2014, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 3, 2014, and which both ended August 3, 2014.  This report discusses our results of operations for these periods compared to the fiscal year 2014 thirteen-week period that began May 6, 2013 and the twenty-six week period that began February 4, 2013, which both ended August 4, 2013 and our financial condition as of August 3, 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 we face, critical accounting policies and information on commitments and contractual obligations which 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 2013 shipments to U.S. retailers, according to a 2014 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 2014 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, primarily 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.
 
 
13

 
To address the needs of younger furniture shoppers, as well as those living in urban or smaller spaces, we launched Homeware . 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 living room tables. Homeware plans to expand into multi-seat upholstery, in  late fiscal 2015  and into casual dining and entertainment centers in the first-half of fiscal 2016.
 
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 for the first-half of fiscal 2015.
 
The following are the primary factors that affected our consolidated results of operations for the three-month period ended August 3, 2014 compared to the three-month period ended August 4, 2013:
 
§
Net sales were essentially flat, decreasing 0.8% or $418,000, primarily due to lower unit volume in both segments, partially offset by higher average selling prices in our upholstery segment;
§
Gross profit increased by $400,000, or 3.0%, primarily due to lower casegoods segment cost of goods sold as a percentage of net sales, primarily  due to changes in product mix and decreased casegoods segment discounting, partially offset by increased returns and allowances;
§
Selling and administrative expenses decreased both in absolute terms and as a percentage of net sales; and
§
Consolidated operating profitability increased by $774,000 or 29.4%, primarily due to a casegoods segment operating profitability increase of $882,000 or 48.8%.

The following are the primary factors that affected our consolidated results of operations for the six-month period ended August 3, 2014 compared to the six-month period ended August 4, 2013:

§
Net sales increased 4.2% or $4.7 million, due to increased unit volume in our casegoods segment and higher average selling prices in our upholstery segment;
§
Gross profit increased by $2.1 million or 7.7%, primarily due to lower casegoods segment cost of goods sold as a percentage of net sales. Decreased casegoods segment discounting was offset by increased returns and allowances;
§
Selling and administrative expenses decreased as a percentage of net sales to 18.6% from 19.1%, but increased in absolute terms by $311,000; and
§
Consolidated operating profitability increased by $1.8 million or 30.4%, primarily due to a casegoods segment operating profitability increase of $2.0 million or 46.4%.

 
14


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
   
Twenty-Six Weeks Ended
 
   
August 3,
   
August 4,
   
August 3,
   
August 4,
 
   
2014
   
2013
   
2014
   
2013
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    75.1       76.0       74.8       75.7  
Gross profit
    24.9       24.0       25.2       24.3  
Selling and administrative expenses
    18.7       19.2       18.6       19.1  
Operating income
    6.2       4.8       6.6       5.3  
Other income, net
    0.1       -       0.1       -  
Income before income taxes
    6.3       4.7       6.7       5.2  
Income tax expense
    2.2       1.7       2.3       1.8  
Net income
    4.1       3.1       4.4       3.4  
 
Fiscal 2015 Second Quarter Compared to Fiscal 2014 Second Quarter

   
Net Sales
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
          $ Change     % Change  
          % Net Sales           % Net Sales              
Casegoods
  $ 33,996       61.9 %   $ 34,839       63.0 %   $ (843 )     -2.4 %
Upholstery
    20,887       38.1 %     20,462       37.0 %     425       2.1 %
  Consolidated
  $ 54,883       100.0 %   $ 55,301       100.0 %   $ (418 )     -0.8 %
 
Unit Volume
 
FY15 Q2 % Increase vs. FY14 Q2
   
Average Selling Price
 
FY15 Q2 % Increase vs. FY14 Q2
 
                 
Casegoods
    -2.8 %  
Casegoods
    0.0 %
Upholstery
    -4.8 %  
Upholstery
    7.6 %
Consolidated
    -3.5 %  
Consolidated
    2.7 %
 
 
15

 
The decrease in consolidated net sales for the fiscal 2015 second quarter was primarily due to decreased unit volume in both operating segments, partially offset by higher upholstery segment average selling prices. Unit volume decreases in our casegoods segment were primarily due to general weakness at retail, which we believe belies the beginning of a recovery in casegoods sales industry-wide. Upholstery net sales increased due to net sales gains at Sam Moore, which were due primarily to higher average selling prices and, to a lesser extent, increased unit volume.  Both of our new business initiatives, H Contract and Homeware, contributed net sales in the fiscal 2015 quarter compared to the prior-year period, when they were in the pre-revenue phase of their startups.

   
Gross Income and Margin
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 9,657       28.4 %   $ 9,148       26.3 %   $ 509       5.6 %
Upholstery
    4,000       19.2 %     4,109       20.1 %     (109 )     -2.7 %
  Consolidated
  $ 13,657       24.9 %   $ 13,257       24.0 %   $ 400       3.0 %

Consolidated gross profit increased in the fiscal 2015 second quarter, primarily due to:
§  
Lower casegoods segment cost of sales as a percentage of net sales primarily due to changes in product mix.
§  
Lower casegoods segment discounting, as a percentage of net sales and in absolute terms, as a result of successful efforts to reduce slow-moving inventory earlier in fiscal 2015.

These improvements were partially offset by decreased upholstery segment gross profit, due primarily to lower sales of imported upholstery, partially offset by improved gross profit at Sam Moore due to increased net sales.

   
Selling and Administrative Expenses
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 6,969       20.6 %   $ 7,342       21.1 %   $ (373 )     -5.1 %
Upholstery
    3,274       15.6 %     3,275       16.0 %     (1 )     0.0 %
Consolidated
  $ 10,243       18.7 %   $ 10,617       19.2 %   $ (374 )     -3.5 %
 
Consolidated selling and administrative expenses decreased both as a percentage of net sales and in absolute terms.
Casegoods selling and administrative expenses decreased both as a percentage of net sales and in absolute terms, primarily due to decreased:

§  
professional services expenses due to lower compliance costs;
§  
selling expenses due to lower net sales; and
§  
benefits expense due to increases in the cash surrender value of Company-owned life insurance.

These improvements were partially offset by an approximate $57,000 increase in operating expenses for the H Contract and Homeware divisions. Upholstery selling and administrative expenses were essentially flat as compared to the prior year period.
 
 
16

 
   
Operating Profit and Margin
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
 
% Change
 
          % Net Sales           % Net Sales            
Casegoods
  $ 2,688       7.9 %   $ 1,806       5.2 %   $ 882       48.8 %
Upholstery
    726       3.5 %     834       4.1 %     (108 )     -12.9 %
Consolidated
  $ 3,414       6.2 %   $ 2,640       4.8 %   $ 774       29.4 %
 
Operating profitability increased for the fiscal 2015 second quarter, both as a percentage of net sales and in absolute terms, due to the factors discussed above.
 
   
Income Taxes
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
 
% Change
 
          % Net Sales           % Net Sales            
Consolidated income tax expense
  $ 1,194       2.2 %   $ 930       1.7 %   $ 264       28.4 %
                                                 
Effective Tax Rate
    34.4 %             35.5 %                        
 
We recorded income tax expense of $1.2 million for the fiscal 2015 second quarter compared to $930,000 for the comparable prior year period.  The effective tax rates for the fiscal 2015 and 2014 second quarters were 34.4% and 35.5%, respectively. In the fiscal 2014 second quarter we reduced the carrying value of our deferred tax assets to reflect the rate at which they were expected to be utilized. This discrete adjustment increased income tax expense in the fiscal year 2014 quarter by approximately 4%.  Our effective tax rate was lower in the fiscal 2015 second quarter primarily due the absence of a similar adjustment in the fiscal 2015 second quarter, partially offset by the impact of smaller anticipated rate benefits from earnings on company-owned life insurance policies and distributions from our former captive insurance arrangement as a percentage of quarterly income, due to the increased income in the quarter.

   
Net Income
 
   
Thirteen Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
 
% Change
 
          % Net Sales           % Net Sales            
Consolidated
  $ 2,272       4.1 %   $ 1,688       3.1 %   $ 586       34.8 %
                                                 
Earnings per share
  $ 0.21             $ 0.16                          
 
 
17

 
Fiscal 2015 First Half Compared to Fiscal 2014 First Half

   
Net Sales
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 73,014       62.8 %   $ 70,281       63.0 %   $ 2,733       3.9 %
Upholstery
    43,265       37.2 %     41,315       37.0 %   $ 1,950       4.7 %
  Consolidated
  $ 116,279       100.0 %   $ 111,596       100.0 %   $ 4,683       4.2 %

Unit Volume
 
FY15 YTD % Increase vs. FY14 YTD
   
Average Selling Price
 
FY15 YTD % Increase vs. FY14 YTD
 
                 
Casegoods
    5.3 %  
Casegoods
    -1.6 %
Upholstery
    -0.6 %  
Upholstery
    5.7 %
  Consolidated
    3.5 %  
  Consolidated
    0.7 %
 
The increase in consolidated net sales for the fiscal 2015 first half was principally due to increased unit volume in our casegoods segment during the first quarter and, to a lesser extent, higher average selling prices in our upholstery segment. Unit volume increases in our casegoods segment during the first quarter were led by increases in container-direct shipments to retailers, which we continue to believe to be indicative of a recovery in casegoods sales industry-wide. The higher average selling prices in the upholstery segment were primarily the result of a shift in the mix of products sold toward some of our higher priced items.

   
Gross Profit
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 21,034       28.8 %   $ 19,146       27.2 %   $ 1,888       9.9 %
Upholstery
    8,233       19.0 %     8,027       19.4 %     206       2.6 %
  Consolidated
  $ 29,267       25.2 %   $ 27,173       24.3 %   $ 2,094       7.7 %
 
Consolidated gross profit increased in the fiscal 2015 first half primarily due to higher net sales in both segments and lower casegoods cost of goods sold as a percentage of net sales. Decreased casegoods segment discounting was offset by increased returns and allowances.
 
   
Selling and Administrative Expenses
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 14,635       20.1 %   $ 14,774       21.0 %   $ (139 )     -0.9 %
Upholstery
    6,975       16.1 %     6,525       15.8 %     450       6.9 %
  Consolidated
  $ 21,610       18.6 %   $ 21,299       19.1 %   $ 311       1.5 %
 
Consolidated selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales in the fiscal 2015 first half.

Casegoods selling and administrative expenses decreased as a percentage of net sales and in absolute terms primarily due to decreased professional services and selling expenses, partially offset by increased commissions expense due to higher sales and increased operating expenses for our H Contract and Homeware initiatives.
 
 
18

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

§  
employee benefit costs;
§  
bad debts expense due to higher net sales and related increases in accounts receivable balances; and
§  
ERP-related project costs;

   
Operating Income
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
   
% Change
 
          % Net Sales           % Net Sales              
Casegoods
  $ 6,399       8.8 %   $ 4,372       6.2 %   $ 2,027       46.4 %
Upholstery
    1,258       2.9 %     1,502       3.6 %     (244 )     -16.2 %
  Consolidated
  $ 7,657       6.6 %   $ 5,874       5.3 %   $ 1,783       30.4 %
 
Operating profitability increased for the fiscal 2015 first half, both as a percentage of net sales and in absolute terms due to the factors discussed above.
 
   
Income Taxes
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
 
% Change
 
          % Net Sales            % Net Sales            
Consolidated income tax expense
  $ 2,679       2.3 %   $ 2,006       1.8 %   $ 673       33.5 %
                                                 
Effective Tax Rate
    34.5 %             34.5 %                        
 
We recorded income tax expense of $2.7 million for the fiscal 2015 first-half compared to $2.0 million for the comparable prior year period.  The effective tax rate for the fiscal 2015 and 2014 six-month periods was 34.5%. The impact of the change in deferred rates, recorded in fiscal year 2014 was offset by the impact of smaller anticipated rate benefits from earnings on company-owned life insurance policies and distributions from our former captive insurance arrangement in fiscal year 2015.

   
Net Income and Earnings Per Share
 
   
Twenty-Six Weeks Ended
 
   
August 3, 2014
         
August 4, 2013
         
$ Change
 
% Change
 
          % Net Sales           % Net Sales            
  Consolidated
  $ 5,076       4.4 %   $ 3,814       3.4 %   $ 1,262       33.1 %
                                                 
Earnings per share
  $ 0.47             $ 0.35                          
 
Review and Outlook
 
Orders for the fiscal 2015 first half increased over the prior-year period, but were not as strong as we would have expected them to be during the post Spring furniture-market period. The retail demand environment was particularly weak for casegoods during the fiscal 2015 second quarter. As we head into the Fall selling season, we expect to see an increase in retail furniture sales and are prepared to capitalize on any improvements in external conditions with our good inventory position on best sellers, strong product line, expected progress in our upholstery segment and with improvements in our new business initiatives.

Spring and Fall Furniture Markets

We are encouraged by results from the Spring International Home Furnishings Market (the “Market”) held in April 2014. We are pleased that our initial efforts at  expanding the “good” and “better” parts of our merchandising reach  were successful, as products offered in these two categories, as well as products in the “best” category, were very well received. Initial presentations of products slated to be released at the Fall Market are encouraging.
 
 
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Casegoods

Upholstery sales have outperformed casegoods industry-wide over the last few years. However, we are seeing indications of what we believe to be a recovery in casegoods’ sales and higher retailer confidence in the ability to sell large-ticket bedroom, dining and occasional furniture, despite the general weakness observed at retail during our fiscal 2015 second quarter. Significant increases in our container-direct shipments to retailers from our Asian warehouse program in the fiscal 2015 first quarter helped drive our fiscal year-to-date sales performance. We have strengthened our container-direct offering with a good service position on a broader selection of best sellers, and we believe that retailers are becoming more comfortable committing to the larger container purchases. Container direct shipments were brisk in August, as we began shipping the first wave of our well-placed April product introductions. We expect increased new product shipment momentum in the coming weeks as our domestic distribution centers begin shipping these new products to our broader customer base.

We introduced a new Vietnam-based warehouse container direct program to retailers at the Spring Market, which we expect will strengthen container direct sales even further. Initial demand for this program has been strong. While our China-based warehouse program focuses on the “best” price points in our good-better-best assortment, the Vietnam-based warehouse program focuses on the “good” and “better” price points. We continue to take orders for this new program, and began flowing product into the warehouse in early July. We expect to be fully operational in late September, in advance of what is historically the strongest selling season each year for furniture at retail. We believe this program will strengthen our value proposition at the retail level in the good and better price ranges. We expect the savings to retailers from this container program, compared to the same products sold out of our Martinsville warehouse, will be in the high single digits to low double-digits percentage range.

Additionally, we are seeing benefits from a sales management reorganization we implemented during the middle of the 2013 calendar year, in which we shifted from a sales management group organized around brand and product specialization to a regional management focus. The regional management strategy has helped our sales efforts to be more effective across both operating segments.

Another factor in the casegoods sales increase in the fiscal 2015 first-half was a national promotion of our Corsica Collection we conducted in March-April 2014. Sales of our Corsica Collection increased as a result of this effort, which achieved over 15 million consumer impressions for the collection and a drive-to-retail message across a wide spectrum of top digital and social media venues, including our own websites. We believe that our new state-of-the art, consumer-centric website, which debuted in August, and additional national marketing campaigns planned for the Fall selling season will positively contribute to casegoods performance in the second-half of fiscal 2015.
 
Upholstery Segment

Overall upholstery sales were up 4.7% for the fiscal 2015 first half on the strength of another double digit sales increase at Sam Moore, which offset a decline at Hooker Upholstery and relatively modest sales growth at Bradington-Young (BY).

After considerable effort, Sam Moore, has reduced order backlogs by over 33% from the end of fiscal year 2014 as increased capacity and greater labor efficiency helped improve service to our customers. Currently,  order backlogs are at our goal of five weeks or less. We believe that retail sales associates are recommending and selling Sam Moore products with greater confidence and without the hesitation they once had that deliveries of Sam Moore items would be delayed. Gaining the confidence of retail sales professionals is critical, since they are such a key, front-line advocate for our brand.  Additionally, we are pleased to report that Sam Moore had an operating profit for the second quarter, primarily due to increased net sales and more favorable medical plan experience. Our expectation is that we will have steady improvements sequentially over the next several quarters. However, this depends on a consistent rate of incoming orders at current or increased levels, among other factors. While Sam Moore was not profitable on an operating basis for our fiscal 2015 first-half, we expect it to be so for the 2015 fiscal year.

BY’s fiscal 2015 second quarter performance was encouraging despite a net sales decrease. A highlight of the BY summer selling season was the introduction of a new reclining chair program which targets more moderate price points. In addition, we introduced “B-Y X” or “Bradington-Young Express,” an in-stock quick-ship program on some of our best-selling reclining chairs. After introducing this program, we experienced an approximate 200% rate of sale increase on these recliners, which positively impacted our second quarter order rate, particularly in July and then continuing into the fiscal 2015 third quarter. At the Fall premarket scheduled for mid-September 2014, we plan to introduce a stationary leather sofa program to strengthen our opening price points. The program will offer several sofas with superior construction and cover selection to choose from at what we believe to be a key wholesale price point.
 
 
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As we continue to deal with steady increases in leather raw material costs and rising prices from leather suppliers, we’re finding it important to fine-tune our value equation in both the Bradington-Young domestically-produced line and the Hooker Upholstery imported leather line. Because of these price increases, the price gap between our domestic and imported leather lines is narrowing; therefore, we are strengthening our opening price points in both lines to offer a better value proposition for both. We are also seeking to be more creative and innovative in our design and color direction. Overall, we are doing whatever we can to mitigate rising leather costs without sacrificing gross margins. Upholstery management continues to work with BY to improve the perceived value of its imported leather products.  The increase in leather costs has had some positive impact in reducing competition in the leather market. As leather has been positioned more firmly as a luxury product, the promotional players are moving away from leather to less expensive alternative covers. However, more expensive leather furniture also makes fabric and leather alternative covers more attractive to consumers.
 
Future upholstery profitability increases will continue to require us to increase sales while maintaining Bradington-Young gross margins at, or close to, current levels and improve manufacturing processes and work flow at the Sam Moore facility.

H Contract and Homeware

Our H Contract product line was close to operating profitability for the first six-months of fiscal 2015, but remained a small part of our net sales overall. We are pleased that H Contract order activity is increasing, as is the size of bid opportunities as the H Contract brand becomes better established in the industry. We expect H Contract to continue to broaden its customer base and product line, increase sales and to contribute to consolidated operating profitability in fiscal 2015.

Our Homeware product line is performing close to expectations.  We continue to be enthusiastic about the brand and the future of online furniture retailing. While we have experienced and expect to continue to experience the challenges associated with new initiatives, such as developing the right sourcing relationships and building the correct levels of inventory, we have seen steady improvement in month-over-month website traffic and other key performance indicators. During the fiscal 2015 first quarter, we introduced occasional tables as well as home décor products such as rugs, lighting and mirrors. In late fiscal 2015, we plan to introduce major upholstery items including sofas, loveseats and sectionals. Casual dining and entertainment will follow in the first half of fiscal 2016. We believe that expanding the product line will be an important catalyst for growth. We also believe the Homeware initiative is critical to address the migration of retail business to online outlets, but expect it will take longer than H Contract to reach critical mass and profitability. However, we view this investment as a vital step toward the future of consumer-centric home furnishings retailing.
 
Collectively, these new ventures increased net sales by $2.1 million in the fiscal 2015 first-half and operating losses from these ventures totaled $677,000. We expect these new ventures will negatively affect net income by between $0.04 and $0.06 per share for the 2015 fiscal year. Results from these new business initiatives are aggregated with the results from our casegoods operating segment.
 
Sale of Cloverleaf Warehouse Facility

During the fiscal 2015 first quarter, we completed the sale of our Cloverleaf warehouse facility. Part of the purchase price was paid in the form of a mortgage note receivable with an original amount of $1.6 million.  As required by GAAP (Accounting Standards Codification 360-20-55), we utilized the installment method for gain recognition and recognized approximately $34,000 on the sale in our fiscal 2015 first quarter condensed consolidated income statements. The gain was netted against our warehouse and distribution expenses, which are included in the “cost of goods sold” line of our condensed consolidated income statements. Under the installment method, we will apportion principal payments made by the buyer on the mortgage note between the cost recovered and profit. The apportionment is in the same ratio as total cost and profit bear to the sales value. Consequently, the remaining balance of the gain of $302,000 on the sale was deferred and will be recognized as we receive principal payments on the mortgage note.  The mortgage note specifies an interest-only payment period. Consequently, no additional gain beyond the initial $34,000 was recognized in the fiscal 2015 first-half. The deferred gain is recorded in the “other long-term liabilities” line of our condensed consolidated balance sheets.
 
 
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Fiscal 2015

As we progress through fiscal 2015, we will continue to focus on:

§  
improving sales in our existing distribution channels, through efforts like our P3 program;
§  
pursuing additional distribution channels, including for our new H Contract and Homeware initiatives;