Edgar Filing: HOOKER FURNITURE CORP

hookerfurn10q080413.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 4, 2013

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)	(I.R.S. Employer Identification Number)

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 ¨

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 ¨

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 ¨	Accelerated filer x
	Non-accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 11, 2013

Common stock, no par value	10,752,982
(Class of common stock)	(Number of shares)

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Information	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION

Item 6.	Exhibits	28

Signature		29

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, including share data)

(Unaudited)


	August 4,		February 3,
	2013		2013

Assets
Current Assets
Cash and cash equivalents	$	28,974	$	26,342
Accounts receivable, less allowance for doubtful accounts of $1,068 and $1,249, respectively		26,234		28,272
Inventories		48,494		49,872
Prepaid expenses and other current assets		2,881		3,569
Deferred taxes		1,806		1,612
Total current assets		108,389		109,667
Property, plant and equipment, net		23,347		22,829
Intangible assets		1,257		1,257
Cash surrender value of life insurance policies		18,264		17,360
Deferred taxes		4,300		4,379
Other assets		331		331
Total assets	$	155,888	$	155,823

Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable	$	10,801	$	11,620
Accrued salaries, wages and benefits		3,073		3,316
Other accrued expenses		1,549		2,531
Total current liabilities		15,423		17,467
Deferred compensation		7,671		7,311
Total liabilities		23,094		24,778

Shareholders' equity
Common stock, no par value, 20,000 shares authorized, 10,753 and 10,746 shares issued and oustanding on each date, respectively		17,471		17,360
Retained earnings		115,155		113,483
Accumulated other comprehensive income		168		202
Total shareholders' equity		132,794		131,045
Total liabilities and shareholders' equity	$	155,888	$	155,823

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

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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 4,			July 29,		August 4,			July 29,
	2013			2012		2013			2012

Net sales	$	55,301		$	50,185	$	111,596		$	101,915

Cost of sales		42,044			38,920		84,423			79,728

Gross profit		13,257			11,265		27,173			22,187

Selling and administrative expenses		10,617			8,943		21,299			18,337

Operating income		2,640			2,322		5,874			3,850

Other (expense) income, net		(22	)		20		(54	)		64

Income before income taxes		2,618			2,342		5,820			3,914

Income tax expense		930			868		2,006			1,420

Net income	$	1,688		$	1,474	$	3,814		$	2,494

Earnings per share
Basic	$	0.16		$	0.14	$	0.35		$	0.23
Diluted	$	0.16		$	0.14	$	0.35		$	0.23

Weighted average shares outstanding:
Basic		10,722			10,770		10,719			10,771
Diluted		10,753			10,789		10,749			10,800

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.

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HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	August 4,			July 29,			August 4,			July 29,
	2013			2012			2013			2012

Net Income	$	1,688		$	1,474		$	3,814		$	2,494
Other comprehensive income:
Amortization of actuarial gain		(27	)		(14	)		(53	)		(29	)
Income tax effect on amortization of actuarial gains		10			5			19			11
Adjustments to net periodic benefit cost		(17	)		(9	)		(34	)		(18	)

Comprehensive Income	$	1,671		$	1,465		$	3,780		$	2,476

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

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HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Twenty-Six Weeks Ended
	August 4,			July 29,
	2013			2012
Cash flows from operating activities
Cash received from customers	$	113,624		$	104,093
Cash paid to suppliers and employees		(103,561	)		(95,713	)
Income taxes (paid) / received, net		(3,368	)		13
Interest paid, net		(47	)		(20	)
Net cash provided by operating activities		6,648			8,373

Cash flows from investing activities
Purchase of property, plant and equipment		(1,726	)		(2,935	)
Proceeds received on notes issued for the sale of property, plant and equipment		28			18
Proceeds from the sale of property and equipment		31			598
Premiums paid on company-owned life insurance		(715	)		(783	)
Proceeds received on company-owned life insurance		516			-
Net cash used in investing activities		(1,866	)		(3,102	)

Cash flows from financing activities
Cash dividends paid		(2,150	)		(2,159	)
Purchase and retirement of common stock		-			(142	)
Net cash used in financing activities		(2,150	)		(2,301	)

Net increase in cash and cash equivalents	$	2,632		$	2,970
Cash and cash equivalents at the beginning of the period		26,342			40,355
Cash and cash equivalents at the end of the period	$	28,974		$	43,325

Reconciliation of net income to net cash provided by operating activities:
Net income	$	3,814		$	2,494
Depreciation and amortization		1,186			1,475
Non-cash restricted stock awards and performance grants		333			160
Provision for doubtful accounts		(33	)		(13	)
Deferred income taxes		(95	)		387
Gain on disposal of property		(9	)		(39	)
Gain on insurance policies		(451	)		(460	)
Changes in assets and liabilities:
Trade accounts receivable		2,071			2,109
Inventories		1,378			(1,684	)
Prepaid expenses and other current assets		406			774
Trade accounts payable		(819	)		3,427
Accrued salaries, wages, and benefits		(243	)		(1,534	)
Accrued income taxes		(751	)		1,046
Other accrued expenses		(231	)		170
Deferred compensation		92			61
Net cash provided by operating activties	$	6,648		$	8,373

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

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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 4, 2013

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 3, 2013.

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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 6, 2013 and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 4, 2013, which both ended August 4, 2013, compared to the thirteen-week period that began April 30, 2012 and the twenty-six week period that began January 30, 2012, which both ended July 29, 2012; and

§	our financial condition as of August 4, 2013 compared to February 3, 2013.

References in these notes to the condensed consolidated financial statements of the Company 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.

Certain amounts have been reclassified in the prior period financial statements and notes to reflect the current period classification.

2. Inventories

	August 4,			February 3,
	2013			2013
Finished furniture	$	58,042		$	58,584
Furniture in process		720			688
Materials and supplies		8,512			8,478
Inventories at FIFO		67,274			67,750
Reduction to LIFO basis		(18,780	)		(17,878	)
Inventories	$	48,494		$	49,872

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3. Property, Plant and Equipment

	Depreciable Lives			August 4,		February 3,
	(In years)			2013		2013

Buildings and land improvements	15	-	30	$	23,742	$	23,680
Computer software and hardware	3	-	10		22,348		22,203
Machinery and equipment	10		10		4,067		3,663
Leasehold improvements	Term of lease				2,727		2,698
Furniture and fixtures	3	-	8		2,068		1,989
Other	5		5		693		703
Total depreciable property at cost					55,645		54,936
Less accumulated depreciation					35,702		34,559
Total depreciable property, net					19,943		20,377
Land					1,152		1,152
Construction-in-progress					2,252		1,300
Property, plant and equipment, net				$	23,347	$	22,829

At August 4, 2013, construction-in-progress consisted of $1.3 million of expenditures related to our ongoing ERP conversion efforts and $971,000 related to various other projects to enhance our facilities and operations. The increase in machinery and equipment for the first half of 2014 is primarily related to the capitalization of computerized fabric cutting equipment for our upholstery operating segment.

4. Intangible Assets

	August 4,		February 3,
	2013		2013
Non-amortizable Intangible Assets
Trademarks and trade names - Bradington-Young	$	861	$	861
Trademarks and trade names - Sam Moore		396		396
Total trademarks and tradenames		1,257		1,257

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5. Accounts Receivable

	August 4,			February 3,
	2013			2013

Trade accounts receivable	$	19,994		$	22,712
Receivable from factor		7,308			6,809
Allowance for doubtful accounts		(1,068	)		(1,249	)
Accounts receivable	$	26,234		$	28,272

“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 when 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 4, 2013 and February 3, 2013 were $410,000 and $130,000, 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.

6. Earnings Per Share

We refer you to the Earnings Per Share disclosure in Note 1-Summary of Significant Accounting Policies, in our fiscal year 2013 Form 10-K, 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) to certain senior executives since fiscal 2012, under the Company’s Stock Incentive Plan. Each RSU entitles the executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. 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 restricted stock units, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

	August 4,		February 3,
	2013		2013

Restricted shares		28,614		29,063
Restricted stock units		32,353		32,353
		60,967		61,416

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All restricted shares and restricted stock units 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 4,		July 29,		August 4,		July 29,
	2013		2012		2013		2012

Net income	$	1,688	$	1,474	$	3,814	$	2,494
Less: Unvested participating restricted stock dividends		3		3		6		3
Net earnings allocated to unvested participating restricted stock		5		-		11		-
Earnings available for common shareholders		1,680		1,471		3,797		2,491

Weighted average shares outstanding for basic earnings per share		10,722		10,770		10,719		10,771
Dilutive effect of unvested restricted stock and RSU awards		31		19		30		29
Weighted average shares outstanding for diluted earnings per share		10,753		10,789		10,749		10,800

Basic earnings per share	$	0.16	$	0.14	$	0.35	$	0.23

Diluted earnings per share	$	0.16	$	0.14	$	0.35	$	0.23

7. Long-Term Debt

As of August 4, 2013, we had an aggregate $13.0 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 $2.0 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of August 4, 2013. There were no additional borrowings outstanding under the revolving credit facility on August 4, 2013. Any principal outstanding under the revolving credit facility is due July 31, 2018.

During the fiscal 2014 second quarter, we amended the loan agreement for our $15 million revolving credit facility. Please refer to “Liquidity, Financial Resources and Capital Expenditures” under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional discussion of the terms of the amended credit facility.

8. Employee Benefit Plans

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives. The liability for the SRIP at August 4, 2013 and February 3, 2013 was $7.6 million and $7.4 million, respectively, and is shown in our condensed consolidated balance sheets as follows:

	August 4,		February 3,
	2013		2013
Accrued salaries, wages and benefits (current portion)	$	379	$	379
Deferred compensation (long-term portion)		7,183		7,056
Total liability	$	7,562	$	7,435

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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 4,			July 29,			August 4,			July 29,
	2013			2012			2013			2012
Net periodic benefit cost
Service cost	$	64		$	64		$	128		$	128
Interest cost		73			74			146			148
Actuarial gain		(26	)		(14	)		(53	)		(29	)
Net periodic benefit cost	$	111		$	124		$	221		$	247

9. Income Taxes

We recorded income tax expense of $930,000 for the fiscal 2014 second quarter compared to $868,000 for the comparable prior year period. The effective tax rates for the fiscal 2014 and 2013 second quarters were 35.5% and 37.1%, respectively. During the fiscal 2014 second quarter, the State of North Carolina passed legislation reducing their state corporate income tax rate. As a result, we reduced our effective deferred state tax rate from 3.7% to 3.1%. In the 2013 fiscal second quarter, we reduced our federal deferred tax rate from 35% to 34%. The net impact of these two rate adjustments and the lower current state income tax rate reduced our effective tax rate by 3.3 percentage points from fiscal 2013 to fiscal 2014. This benefit, and larger permanent benefits related to our former captive insurance arrangement (a 1.1 percentage point decrease) were partially offset by a smaller permanent benefit from Company-owned life insurance contracts (a 3.5 percentage point increase).

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10. Segment Information

For financial reporting purposes, we are organized into two operating segments – casegoods furniture and upholstered furniture. Results from our new business initiatives-H Contract and Homeware- are aggregated with the results from our casegoods operating segment. The following table presents segment information for the periods, and of the dates, indicated:

	Thirteen Weeks Ended											Twenty-Six Weeks Ended
	August 4, 2013					July 29, 2012						August 4, 2013					July 29, 2012
			% Net						% Net					% Net					% Net
Net Sales			Sales						Sales					Sales					Sales
Casegoods	$	34,839		63.0	%	$	32,195			64.2	%	$	70,281		63.0	%	$	64,940		63.7	%
Upholstery		20,462		37.0	%		17,990			35.8	%		41,315		37.0	%		36,975		36.3	%
Consolidated	$	55,301		100.0	%	$	50,185			100.0	%	$	111,596		100.0	%	$	101,915		100.0	%

Gross Profit
Casegoods	$	9,148		26.3	%	$	8,126			25.2	%	$	19,146		27.2	%	$	15,574		24.0	%
Upholstery		4,109		20.1	%		3,139			17.4	%		8,027		19.4	%		6,613		17.9	%
Consolidated	$	13,257		24.0	%	$	11,265			22.5	%	$	27,173		24.3	%	$	22,187		21.8	%

Operating Income
Casegoods	$	1,806		5.2	%	$	2,372			7.4	%	$	4,372		6.2	%	$	3,749		5.8	%
Upholstery		834		4.1	%		(50	)		-0.3	%		1,502		3.6	%		101		0.3	%
Consolidated	$	2,640		4.8	%	$	2,322			4.6	%	$	5,874		5.3	%	$	3,850		3.8	%

Depreciation & Amortization
Casegoods	$	381				$	475					$	762				$	883
Upholstery		220					405						424					592
Consolidated	$	601				$	880					$	1,186				$	1,475

Capital Expenditures
Casegoods	$	549				$	401					$	1,227				$	1,765
Upholstery		297					323						499					1,170
Consolidated	$	846				$	724					$	1,726				$	2,935

	As of August 4, 2013		% Total			As of February 3, 2013		% Total
Total Assets			Assets					Assets
Casegoods	$	123,158		79	%	$	124,509		79.9	%
Upholstery		32,730		21	%		31,314		20.1	%
Consolidated	$	155,888		100.0	%	$	155,823		100.0	%

11. Subsequent Events

Dividends

At its September 4, 2013 meeting, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on September 27, 2013 to shareholders of record at September 13, 2013.

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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 6, 2013, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 4, 2013, and which both ended August 4, 2013. This report discusses our results of operations for these periods compared to the fiscal year 2013 thirteen-week period that began April 30, 2012 and the twenty-six week period that began January 30, 2012, which both ended July 29, 2012 and our financial condition as of August 4, 2013 compared to February 4, 2013.

We encourage users of this report to familiarize themselves with all of our recent public filings made with the 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 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 business initiatives, H Contract and Homeware, 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 the 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 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 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.

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We launched two new initiatives in fiscal 2014, which are designed to help us reach a broader consumer base: H Contract- which will supply upholstered seating and casegoods to upscale senior living facilities throughout the country and Homeware- featuring customer-assembled, modular upholstered and casegoods products designed for younger and more mobile furniture customers.

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 transition sourcing among suppliers, often located in different countries or regions, when quality concerns or inflationary pressures diminish the value proposition offered by our current suppliers.

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 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 half of fiscal 2014.

The following are the primary factors that affected our consolidated results of operations for the three and six-month periods ended August 4, 2013:

§	Consolidated net sales increased approximately 10% in both periods, primarily due to:

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

o	increased unit volume in our upholstery segment in both periods; and

§	Gross profit increased due to increased sales volume in both segments in both periods, 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 in the fiscal 2014 second quarter; and

o	lower domestic manufacturing costs as a percent of net sales in our upholstery segment, due to cost reduction initiatives and improved overhead utilization resulting from increased sales volume in both periods.

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§	Selling and administrative expenses increased due to increased sales and a variety of other factors, including start-up costs for our H Contract and Homeware divisions; and

§	Our upholstery segment reported operating profitability of:

o	$834,000 for the fiscal 2014 second quarter compared to an operating loss of $50,000 for the fiscal 2013 second quarter; and

o	$1.5 million for the fiscal 2014 first half compared to operating income of $101,000 for the fiscal 2013 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						Twenty-Six Weeks Ended
	August 4,			July 29,			August 4,			July 29,
	2013			2012			2013			2012
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		76.0			77.6			75.7			78.2
Gross profit		24.0			22.5			24.3			21.8
Selling and administrative expenses		19.2			17.8			19.1			18.0
Operating income		4.8			4.6			5.3			3.8
Other (expense) income, net		-			0.1			-			0.1
Income before income taxes		4.7			4.7			5.2			3.8
Income tax expense		1.7			1.7			1.8			1.4
Net income		3.1			2.9			3.4			2.5

Fiscal 2014 Second Quarter Compared to Fiscal 2013 Second Quarter

Net Sales

	Thirteen Weeks Ended
	August 4, 2013				July 29, 2012				$ Change		% Change
			% Net Sales				% Net Sales
Casegoods	$	34,839	63.0	%	$	32,195	64.2	%	$	2,644		8.2	%
Upholstery		20,462	37.0	%		17,990	35.8	%	$	2,472		13.7	%
Consolidated	$	55,301	100.0	%	$	50,185	100.0	%	$	5,116		10.2	%

Unit Volume	FY14 Q2 % Increase vs. FY13 Q2			Average Selling Price	FY14 Q2 % Increase vs. FY13 Q2

Casegoods		0.0	%	Casegoods		7.4	%
Upholstery		11.1	%	Upholstery		2.2	%
Consolidated		3.2	%	Consolidated		6.2	%

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The increase in consolidated net sales for the fiscal 2014 second quarter was principally due to higher average selling prices in both segments and increased unit volume in our upholstery 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. During 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.

Gross Profit

	Thirteen Weeks Ended
	August 4, 2013				July 29, 2012				$ Change		% Change
			% Net Sales				% Net Sales
Casegoods	$	9,148	26.3	%	$	8,126	25.2	%	$	1,022		12.6	%
Upholstery		4,109	20.1	%		3,139	17.4	%		970		30.9	%
Consolidated	$	13,257	24.0	%	$	11,265	22.5	%	$	1,992		17.7	%

Consolidated gross profit increased in the fiscal 2014 second quarter, as compared to the fiscal 2013 second quarter, primarily due to:

§	higher average selling prices in both segments;

§	lower cost of goods sold as a percentage of net sales in our casegoods segment due to decreased warehousing and distribution expense; and

§	lower domestic upholstery manufacturing costs as a percentage of net sales, due to cost reduction initiatives and improved overhead utilization resulting from increased sales volume, partially offset by higher labor costs to train new production workers in order to meet demand.

Selling and Administrative Expenses

	Thirteen Weeks Ended
	August 4, 2013				July 29, 2012				$ Change		% Change
			% Net Sales				% Net Sales
Casegoods	$	7,342	21.1	%	$	5,754	17.9	%	$	1,588		27.6	%
Upholstery		3,275	16.0	%		3,189	17.7	%		86		2.7	%
Consolidated	$	10,617	19.2	%	$	8,943	17.8	%	$	1,674		18.7	%

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

Casegoods selling and administrative expenses increased primarily due to:

§	start-up costs for our H Contract and Homeware initiatives;

§	an increase in bonus expense due to improved earnings performance as compared to the prior-year period;

§	an increase in professional service expense due to increased compliance and regulatory costs; and

§	increased selling expenses due to increased sales.

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Upholstery selling and administrative expenses increased in absolute terms in the fiscal 2014 second quarter compared to the same prior-year period, primarily due to increased commissions due to increased sales, partially offset by decreased samples expense.

Operating Income

	Thirteen Weeks Ended
	August 4, 2013				July 29, 2012					$ Change			% Change
			% Net Sales					% Net Sales
Casegoods	$	1,806	5.2	%	$	2,372		7.4	%	$	(566	)		-23.9	%
Upholstery		834	4.1	%		(50	)	-0.3	%		884			1768.0	%
Consolidated	$	2,640	4.8	%	$	2,322		4.6	%	$	318			13.7	%

Consolidated operating profitability increased for the fiscal 2014 second quarter as compared to the same prior-year period, both as a percentage of net sales and in absolute terms due to the factors discussed above, in addition to improved upholstery operating performance. Startup costs of our new initiatives are reported in the Casegoods segment and account for substantially all of the decrease from the prior year, on an absolute basis.

Income taxes

	Thirteen Weeks Ended
	August 4, 2013					July 29, 2012					$ Change		% Change
				% Net Sales					% Net Sales
Consolidated income tax expense	$	930		1.7	%	$	868		1.7	%	$	62		7.1	%

Effective Tax Rate		35.5	%				37.1	%

We recorded income tax expense of $930,000 for the fiscal 2014 second quarter compared to $868,000 for the comparable prior year period. The effective tax rates for the fiscal 2014 and 2013 second quarters were 35.5% and 37.1%, respectively. During the 2014 fiscal second quarter, the State of North Carolina passed legislation reducing their state corporate income tax rate. As a result, we reduced our effective deferred state tax rate from 3.7% to 3.1%. In the fiscal 2013 second quarter, we reduced our federal deferred tax rate from 35% to 34%. The net impact of these two rate adjustments and the lower current state income tax rate reduced our effective tax rate by 3.3 percentage points from fiscal 2013 to fiscal 2014. This benefit, and larger permanent benefits related to our former captive insurance arrangement (a 1.1 percentage point decrease) were partially offset by a smaller permanent benefit from Company-owned life insurance contracts (a 3.5 percentage point increase).

Net Income

	Thirteen Weeks Ended
	August 4, 2013				July 29, 2012				$ Change		% Change
			% Net Sales				% Net Sales
Consolidated	$	1,688	3.1	%	$	1,474	2.9	%	$	214		14.5	%

Earnings per share	$	0.16			$	0.14

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Fiscal 2014 First Half Compared to Fiscal 2013 First Half

Net Sales

	Twenty-Six Weeks Ended
	August 4, 2013				July 29, 2012				$ Change		% Change
			% Net Sales				% Net Sales
Casegoods	$	70,281	63.0	%	$	64,940	63.7	%	$	5,341		8.2	%
Upholstery		41,315	37.0	%		36,975	36.3	%	$	4,340		11.7	%
Consolidated	$	111,596	100.0	%	$	101,915	100.0	%	$	9,681		9.5	%

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

Casegoods		-2.4	%	Casegoods		10.3	%
Upholstery		5.8	%	Upholstery		5.5	%
Consolidated		0.0	%	Consolidated		9.1	%

The increase in consolidated net sales for the fiscal 2014 first half was principally due to higher average selling prices in both segments and increased unit volume in our upholstery segment, partially offset by lower unit volume in our casegoods segment. The higher average selling prices in both segments were primarily the result of a shift in the mix of products sold toward some of our higher priced items. The decrease in casegoods unit volume was primarily due to reduced promotional discounting activity compared to the prior-year period.

Gross Profit

	Twenty-Six Weeks Ended
	August 4, 2013					July 29, 2012					$ Change		% Change
			% Net Sales					% Net Sales
Casegoods	$	19,146		27.2	%	$	15,574		24.0	%	$	3,572		22.9	%
Upholstery		8,027		19.4	%		6,613		17.9	%		1,414		21.4	%
Consolidated	$	27,173		24.3	%	$	22,187		21.8	%	$	4,986		22.5	%

Consolidated gross profit increased in the fiscal 2014 first half, as compared to the fiscal 2013 first half, primarily due to higher sales and average selling prices in both segments, lower domestic upholstery manufacturing costs as a percentage of net sales and lower distribution costs in our casegoods segment.

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Selling and Administrative Expenses

	Twenty-Six Weeks Ended
	August 4, 2013					July 29, 2012					$ Change		% Change
			% Net Sales					% Net Sales
Casegoods	$	14,774		21.0	%	$	11,826		18.2	%	$	2,948		24.9	%
Upholstery		6,525		15.8	%		6,511		17.6	%		14		0.2	%
Consolidated	$	21,299		19.1	%	$	18,337		18.0	%	$	2,962		16.2	%

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

Casegoods selling and administrative expenses increased primarily due to:

§	start-up costs for our H Contract and Homeware initiatives;

§	an increase in bonus expense due to improved earnings performance as compared to the prior-year period;

§	an increase in professional service expense due to increased compliance and regulatory costs; and

§	an increase in commissions and other selling expenses, due to higher sales volume.

Upholstery selling and administrative expenses were essentially flat to the prior-year period.

Operating Income

	Twenty-Six Weeks Ended
	August 4, 2013					July 29, 2012					$ Change		% Change
			% Net Sales					% Net Sales
Casegoods	$	4,372		6.2	%	$	3,749		5.8	%	$	623		16.6	%
Upholstery		1,502		3.6	%		101		0.3	%		1,401		1387.1	%
Consolidated	$	5,874		5.3	%	$	3,850		3.8	%	$	2,024		52.6	%

Operating profitability increased for the fiscal 2014 first half as compared to the same prior-year period, both as a percentage of net sales and in absolute terms due to the factors discussed above.

Income Taxes

	August 4, 2013						July 29, 2012						$ Change		% Change
				% Net Sales						% Net Sales
Consolidated income tax expense	$	2,006			1.8	%	$	1,420			1.4	%	$	586		41.3	%

Effective Tax Rate		34.5	%					36.3	%

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We recorded income tax expense of $2.0 million for the fiscal 2014 first half compared to $1.4 million for the comparable prior year period. The effective tax rates for the first half of fiscal 2014 and 2013 were 34.5% and 36.3%, respectively. Our effective tax rate was lower in the fiscal 2014 first half primarily due to the impact of a reduction in our federal deferred tax rate last year (a 4.1 percentage point increase), which was partially offset by the unfavorable impact of a change to our state deferred tax rate in the current year (a 1.8 percentage point decrease).

Net Income and Earnings Per Share

	Twenty-Six Weeks Ended
	August 4, 2013					July 29, 2012					$ Change		% Change
Net Income			% Net Sales					% Net Sales
Consolidated	$	3,814		3.4	%	$	2,494		2.5	%	$	1,320		52.9	%

Earnings per share	$	0.35				$	0.23

Outlook

Given the mostly positive macro-economic news over the past year, we are optimistic about our longer-term future, both with our core business and our new ventures. We believe we are positioned to capitalize on continued improvements in the economy as they occur. In the shorter-term, however, the recovery in furniture sales has been somewhat inconsistent and skewed toward upholstery, which is typically a smaller ticket purchase and has a shorter replacement cycle. Additionally, the combined impact of rising mortgage rates, slowing new home sales and a moderate softening in retail sales from earlier in the year, could adversely impact our short-term results.

As we enter the second half of fiscal 2014, we have seen increased demand for our products compared to the same period a year ago, which we attribute to the vitality of our freshened line up and somewhat better retail conditions compared to last year. We continue to increase production at our upholstery segment manufacturing facilities, maintain good inventory positions on our best-selling casegoods segment products and promote what we believe to be our strongest product line in several years.

Casegoods Segment

Casegoods sales have been slower to regain their pre-recession momentum, possibly due to the longer life of wood furniture and its higher average purchase prices compared to upholstery. However, we are shipping much better than last year thanks to a much improved inventory position and strength of our best-selling lines. For the first half of fiscal 2014, casegoods shipments were up approximately 8% over the prior-year first-half, which we believe is higher than the average for the casegoods industry as a whole. In the fiscal 2014 second quarter, casegoods orders increased approximately 11% over the prior-year quarter. We expect to continue the elevated levels of casegoods promotional discounting to reduce our inventories of older, slower moving imported products to make room for new introductions, as we did in the fiscal 2014 second quarter. We expect casegoods product margins to be further tempered by increased discounting as we work down this inventory over the remainder of the year. However, the ultimate effect on margins is largely dependent on the mix of discounted and non-discounted products that we’re able to sell over the second-half of the fiscal year.

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Upholstery Segment

We have seen significant improvement in our upholstery segment results since early in the 2013 fiscal year thanks to higher sales volume and to a number of cost control initiatives. The upholstery segment has higher fixed costs than our casegoods segment, due to the upholstery segment’s domestic manufacturing operations. To mitigate the impact of sales declines in recent years, we streamlined our upholstery operations by improving efficiency, reducing overhead, operating costs and adjusting capacity to better match costs to current and expected sales volume levels. Further significant cost reductions in our upholstery segment will be challenging. Future profitability increases will continue to require us to increase sales while maintaining gross margins at, or close to, current levels.

We believe both of our upholstery segment product lines are gaining market share due to:

§	the expansion of Sam Moore’s product offering to include sofas, sectionals, recliners and ottomans, in addition to the core decorative chair line; and

§	the success of Bradington-Young’s Comfort@Home gallery program, which is now in approximately 150 retailers. Growth among our Comfort @ Home dealers has outpaced the rest of our dealer base and the Comfort @ Home program now drives approximately 35% of our domestic leather business.

At Sam Moore, the challenge of increasing production, expanding capacity and manufacturing productivity has proven greater than expected. Over the last several quarters, we have continued to hire new manufacturing associates, but it typically takes at least three months before a new sewer or upholsterer makes a direct contribution. Consequently, we have incurred significant training and overtime costs. Due to these production challenges and increased sales, our order backlog was 75% higher at the end of the fiscal 2014 second quarter as compared to the end of the 2013 second quarter. We believe that once we reduce our order backlog and increase capacity, the additional shipment volume and improved labor efficiency will result in increased profitability. As we move forward, we also expect to reduce our training and overtime costs for additional savings. While the progress has been slower than we would like, we are optimistic about the long-term future for both sales and profitability at Sam Moore.

We continue to face inflationary pressures on leather and other upholstery raw materials, especially leather, foam and plywood. We passed along a price increase that went into effect during the fiscal 2014 second quarter. Since then, it appears that leather prices have stabilized for the short-term.

Leather and raw materials inflation is even more of a challenge for our imported Seven Seas Seating line, since it is positioned as a more affordable, moderately- priced leather line and is in a more price-sensitive niche. In order to mitigate the impact of leather and raw materials inflation we are aggressively expanding product offerings in our Seven Seas product line and expect to introduce stationary sofas and sectionals at some very attractive wholesale price points at the October 2014 High Point Furniture Market.

We expect to be successful in passing price increases along in both the casegoods and upholstery segments; however, the magnitude of the impact on the demand for these products is uncertain.

New Initiatives

Our H Contract product line, which will supply upholstered seating and casegoods to upscale senior living facilities throughout the country, officially launched early in the fiscal 2014 second quarter. It has been well received in initial meetings with designers, architects and end-users across the country and H Contract products have been included in a number of upcoming projects, which should have sales implications well into the next fiscal year.

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Our Homeware product line, featuring customer-assembled, modular upholstered and casegoods products designed for younger and more mobile furniture customers, officially launched in August 2013 on two major home furnishings e-commerce websites. During the fiscal third quarter, we added a third e-commerce partner. We offered our first major Homeware product promotion during and shortly after the Labor Day holiday in the fiscal 2014 third quarter. Initial exposure and sales for the Homeware were positive; however, we expect it to take some time to build the Homeware brand.

Startup costs associated with both new product lines were approximately $1.0 million before tax, and $657,000 after-tax, or $0.06 per share in the fiscal 2014 first half. We expect startup costs for these product lines will negatively impact net income by approximately $0.12 to $0.15 per share for the 2014 fiscal year. Results from these new business initiatives are aggregated with the results from our casegoods operating segment.

As we progress through the remainder of the year, we will continue to focus on:

§	pursuing additional distribution channels, including through our new H Contract and Homeware initiatives;

§	controlling costs;

§	adjusting product pricing on our main-line products in order to mitigate inflation and improve margins;

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

§	sourcing product from cost-competitive locations and from quality-conscious sourcing partners and strengthening our relationships with key vendors;

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

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

Financial Condition, Liquidity and Capital Resources

Balance Sheet and Working Capital

The following chart shows changes in our total assets, current assets, current liabilities, net working capital and working capital ratio during the first half of fiscal 2014:

	Balance Sheet and Working Capital
	August 4, 2013		February 3, 2013		$ Change

Total Assets	$	155,888	$	155,823	$	65

Cash	$	28,974	$	26,342	$	2,632
Trade Receivables		26,234		28,272		(2,038	)
Inventories		48,494		49,872		(1,378	)
Prepaid Expenses & Other		4,687		5,181		(494	)

Total Current Assets	$	108,389	$	109,667	$	(1,278	)

Trade Accounts Payable	$	10,801	$	11,620	$	(819	)
Accrued Salaries, Wages and Benefits		3,073		3,316		(243	)
Other Accrued Expenses		1,549		2,531		(982	)

Total Current Liabilities	$	15,423	$	17,467	$	(2,044	)

Net Working Capital	$	92,966	$	92,200	$	766

Working Capital Ratio	7.0 to 1		6.3 to 1

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As of August 4, 2013, total assets are essentially flat compared to February 3, 2013, primarily due to increased cash and cash equivalents, net property, plant and equipment and cash surrender value of Company-owned life insurance, offset by decreased trade receivables, inventories and prepaid expenses and other current assets.

§	Cash increased due primarily to the reduction of inventories and accounts receivable.

§	Property, plant and equipment, net, increased primarily due to expenditures related to our ongoing ERP efforts and other capital projects to enhance our facilities and operations, partially offset by normal depreciation.