Edgar Filing: HOOKER FURNITURE CORP

hookerfurniture10q110115.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 November 1, 2015

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 the number of shares outstanding of each of the issuer’s classes of common stock as of December 3, 2015:

Common stock, no par value	10,811,507
(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	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 6.	Exhibits	25

Signature		26

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

As of	November 1,			February 1,
	2015			2015
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	49,474		$	38,663
Trade accounts receivable, less allowance for doubtful accounts of $1,092 and $1,329 on each respective date		30,655			32,245
Inventories		42,019			44,973
Prepaid expenses and other current assets		2,456			2,353
Deferred taxes		1,565			1,704
Total current assets		126,169			119,938
Property, plant and equipment, net		22,896			22,824
Cash surrender value of life insurance policies		21,617			20,373
Deferred taxes		4,057			4,188
Intangible assets		1,382			1,382
Other assets		2,300			2,050
Total non-current assets		52,252			50,817
Total assets	$	178,421		$	170,755

Liabilities and Shareholders’ Equity
Current liabilities
Trade accounts payable	$	8,098		$	10,293
Accrued salaries, wages and benefits		4,713			4,824
Income tax accrual		1,141			1,368
Accrued commissions		882			916
Customer deposits		911			853
Other accrued expenses		911			813
Total current liabilities		16,656			19,067
Deferred compensation		8,714			8,329
Income tax accrual		165			90
Other long-term liabilities		400			360
Total long-term liabilities		9,279			8,779
Total liabilities		25,935			27,846

Shareholders’ equity
Common stock, no par value, 20,000 shares authorized, and 10,812 and 10,774 shares issued and outstanding, respectively, on each date		18,546			17,852
Retained earnings		134,191			125,392
Accumulated other comprehensive loss		(251	)		(335	)
Total shareholders’ equity		152,486			142,909
Total liabilities and shareholders’ equity	$	178,421		$	170,755

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				Thirty-Nine Weeks Ended
	November 1,		November 2,		November 1,		November 2,
	2015		2014		2015		2014

Net sales	$	65,338	$	63,168	$	186,434	$	179,447

Cost of sales		47,173		47,137		135,801		134,149

Gross profit		18,165		16,031		50,633		45,298

Selling and administrative expenses		11,525		11,148		32,892		32,758

Operating income		6,640		4,883		17,741		12,540

Other income, net		33		85		216		183

Income before income taxes		6,673		4,968		17,957		12,723

Income tax expense		2,043		1,764		5,917		4,443

Net income	$	4,630	$	3,204	$	12,040	$	8,280

Earnings per share
Basic	$	0.43	$	0.30	$	1.11	$	0.77
Diluted	$	0.43	$	0.30	$	1.11	$	0.77

Weighted average shares outstanding:
Basic		10,787		10,742		10,775		10,733
Diluted		10,809		10,771		10,802		10,766

Cash dividends declared per share	$	0.10	$	0.10	$	0.30	$	0.30

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 COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 1,			November 2,			November 1,			November 2,
	2015			2014			2015			2014

Net Income	$	4,630		$	3,204		$	12,040		$	8,280
Other comprehensive income:
Amortization of actuarial loss (gain)		44			(13	)		134			(38	)
Income tax effect on amortization		(16	)		11			(50	)		20
Other comprehensive income, net of tax		28			(2	)		84			(18	)

Total comprehensive Income	$	4,658		$	3,202		$	12,124		$	8,262

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)

	Thirty-Nine Weeks Ended
	November 1,			November 2,
	2015			2014
Operating Activities:
Net income	$	12,040		$	8,280
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,082			1,927
Loss/(Gain) on disposal of assets		41			(37	)
Deferred income tax expense		346			274
Noncash restricted stock and performance awards		566			405
Provision for doubtful accounts		(132	)		728
Changes in assets and liabilities:
Trade accounts receivable		1,722			(1,220	)
Inventories		2,954			1,584
Income tax recoverable		-			682
Gain on life insurance policies		(675	)		(586	)
Prepaid expenses and other current assets		(269	)		(612	)
Trade accounts payable		(2,214	)		2,248
Accrued salaries, wages, and benefits		47			614
Accrued income taxes		(228	)		1,167
Accrued commissions		(34	)		(35	)
Customer deposits		58			65
Other accrued expenses		99			139
Deferred compensation		439			136
Other long-term liabilities		40			41
Net cash provided by operating activities		16,882			15,800

Investing Activities:
Purchases of property and equipment		(2,177	)		(2,460	)
Proceeds received on notes for sale of assets		23			24
Proceeds from sale of property and equipment		-			69
Premiums paid on life insurance policies		(676	)		(758	)
Net cash used in investing activities		(2,830	)		(3,125	)

Financing Activities:
Cash dividends paid		(3,241	)		(3,229	)
Net cash used in financing activities		(3,241	)		(3,229	)

Net increase in cash and cash equivalents		10,811			9,446
Cash and cash equivalents - beginning of year		38,663			23,882
Cash and cash equivalents - end of quarter	$	49,474		$	33,328

Supplemental schedule of cash flow information:
Income taxes paid, net	$	(5,779	)	$	(2,311	)

Supplemental schedule of noncash investing activities:
Increase in property and equipment through accrued purchases	$	18			-

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 Thirty-Nine Weeks Ended November 1, 2015

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 1, 2015 (“2015 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,” “third quarter” or “quarterly period”) that began August 3, 2015 and the thirty-nine week period (also referred to as “nine months,” “nine-month period” or “year-to-date period”) that began February 2, 2015, which both ended November 1, 2015, compared to the thirteen-week period that began August 4, 2014 and the thirty-nine week period that began February 3, 2014, which both ended November 2, 2014; and

our financial condition as of November 1, 2015 compared to February 1, 2015.

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

the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and will end January 31, 2016; and

the 2015 fiscal year and comparable terminology mean the fiscal year that began February 3, 2014 and ended February 1, 2015.

2.	Accounts Receivable

	November 1,			February 1,
	2015			2015
Trade accounts receivable	$	27,731		$	25,322
Receivable from factor		4,016			8,252
Allowance for doubtful accounts		(1,092	)		(1,329	)
Accounts receivable	$	30,655		$	32,245

“Receivable from factor” represents amounts due with respect to factored accounts receivable. Before the fiscal 2016 second quarter, we factored substantially all of our domestically-produced upholstery accounts receivable without recourse to us. However, we ended Sam Moore’s factoring relationship when our new ERP system became fully operational there at the beginning of the fiscal 2016 second quarter. Since that time, we have been managing Sam Moore’s accounts receivable in-house. As of November 1, 2015 there are no outstanding receivables for which payment is due to us from the factor as part of its residual obligations under Sam Moore’s legacy factoring agreement.

Under our current factoring agreement, which continues to serve Bradington-Young (BY), invoices for domestically produced BY 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.

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A limited number of our accounts receivable for our domestically produced BY upholstery products are factored with recourse to us. The amounts of these receivables at November 1, 2015 and February 1, 2015 were $242,000 and $237,000, 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 the calculation of our allowance for doubtful accounts.

3.	Inventories

	November 1,			February 1,
	2015			2015
Finished furniture	$	54,187		$	54,896
Furniture in process		827			615
Materials and supplies		7,762			9,131
Inventories at FIFO		62,776			64,642
Reduction to LIFO basis		(20,757	)		(19,669	)
Inventories	$	42,019		$	44,973

4.	Property, Plant and Equipment

	Depreciable Lives	November 1,		February 1,
	(In years)	2015		2015

Buildings and land improvements	15 - 30	$	22,378	$	22,162
Computer software and hardware	3 - 10		15,568		18,444
Machinery and equipment	10		4,836		4,757
Leasehold improvements	5		2,811		2,840
Furniture and fixtures	3 - 8		1,440		2,240
Other	5		564		628
Total depreciable property at cost			47,597		51,070
Less accumulated depreciation			26,990		32,790
Total depreciable property, net			20,607		18,280
Land			1,067		1,067
Construction-in-progress			1,222		3,477
Property, plant and equipment, net		$	22,896	$	22,824

The decreases in computer software and hardware, furniture and fixtures and accumulated depreciation line items above are primarily due to the write-off of fully depreciated assets that are no longer in use.

At November 1, 2015, construction-in-progress primarily consisted of $233,000 of expenditures related to our ongoing Enterprise Resource Planning (ERP) conversion efforts and $989,000 related to various other projects to enhance our facilities and operations.

The decrease in the construction-in-progress line item above is primarily due to placing our ERP asset in-service when the Sam Moore division went-live on our ERP platform during the fiscal 2016 second quarter. This partially offset the decreases in the computer software and hardware line item discussed above.

5.	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.

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As of November 1, 2015 and February 1, 2015, 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 November 1, 2015, a mortgage note receivable (related to the sale of our Cloverleaf warehouse facility during the fiscal 2015 first quarter) was measured at fair value on a non-recurring basis using Level 3 inputs. The note receivable was recorded at approximately $1.6 million, which was the face value of the note issued for the mortgage. The carrying value of the note receivable is assumed to approximate its fair value. We measure the probability to collect amounts due to us under this note receivable primarily based on the buyer’s payment history. Specifically, we consider the buyer’s adherence to the contractual payment terms for both the 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 underlying loan agreement, we would measure the note for impairment and record a valuation allowance against the note receivable, if needed, with the related expense charged to income for that period. The current portion of the note receivable is included in the prepaid expenses and other current assets line of our condensed consolidated balance sheets. The non-current portion is included in the “Other assets” line of our condensed consolidated balance sheets.

Our assets measured at fair value on a recurring and non-recurring basis at November 1, 2015 and February 1, 2015, were as follows:

	Fair value at November 1, 2015								Fair value at February 1, 2015
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	$	-	$	21,617	$	-	$	21,617	$	-	$	20,373	$	-	$	20,373
Mortgage note receivable		-		-		1,575		1,575		-		-		1,575		1,575

6.	Intangible Assets

		November 1,		February 1,
Non-amortizable Intangible Assets	Segment	2015		2015
Trademarks and trade names - Bradington-Young	Upholstery	$	861	$	861
Trademarks and trade names - Sam Moore	Upholstery		396		396
URL- Homeware.com	All other		125		125
Total trademarks and tradenames			1,382		1,382

7.	Long-Term Debt

As of November 1, 2015, 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 November 1, 2015. There were no additional borrowings outstanding under the revolving credit facility on November 1, 2015. Any principal outstanding under the revolving credit facility is due July 31, 2018.

8.	Employee Benefit Plans

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives. The liability for the SRIP at November 1, 2015 and February 1, 2015 was $8.7 million and $8.4 million, respectively, and is shown in our condensed consolidated balance sheets as follows:

	November 1,		February 1,
	2015		2015
Accrued salaries, wages and benefits (current portion)	$	354	$	354
Deferred compensation (long-term portion)		8,341		8,031
Total liability	$	8,695	$	8,385

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					Thirty-Nine Weeks Ended
	November 1,		November 2,			November 1,		November 2,
	2015		2014			2015		2014
Net periodic benefit cost
Service cost	$	101	$	25		$	304	$	76
Interest cost		72		85			217		254
Actuarial gain		45		(13	)		133		(38	)
Net periodic benefit cost	$	218	$	97		$	654	$	292

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9.	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 2015 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) 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. Beginning in fiscal 2016, RSU grants to non-employee members of the board of directors have a one-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:

	November 1,		February 1,
	2015		2015

Restricted shares		25		27
Restricted stock units		20		25
		45		52

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				Thirty-Nine Weeks Ended
	November 1,		November 2,		November 1,		November 2,
	2015		2014		2015		2014

Net income	$	4,630	$	3,204	$	12,040	$	8,280
Less: Unvested participating restricted stock dividends		2		3		8		8
Net earnings allocated to unvested participating restricted stock		11		8		30		22
Earnings available for common shareholders		4,617		3,193		12,002		8,250

Weighted average shares outstanding for basic earnings per share		10,787		10,742		10,775		10,733
Dilutive effect of unvested restricted stock and RSU awards		22		29		27		33
Weighted average shares outstanding for diluted earnings per share		10,809		10,771		10,802		10,766

Basic earnings per share	$	0.43	$	0.30	$	1.11	$	0.77

Diluted earnings per share	$	0.43	$	0.30	$	1.11	$	0.77

10.	Income Taxes

We recorded income tax expense of $2.0 million for the fiscal 2016 third quarter compared to $1.8 million for the comparable prior year period. The effective tax rates for the fiscal 2016 and 2015 third quarters were 30.6% and 35.5%, respectively. Our effective tax rate was lower in the fiscal 2016 third quarter as compared to fiscal 2015 third quarter, primarily due to the settlement of an uncertain tax position during the fiscal 2016 third quarter and increases in certain other permanent differences.

We recorded income tax expense of $5.9 million for the fiscal 2016 first nine-months compared to $4.4 million for the comparable prior year period. The effective tax rates for the fiscal 2016 and 2015 nine-month periods were 32.9% and 34.9%, respectively. Our effective tax rate was lower in the fiscal 2016 nine-month period as compared to fiscal 2015 nine-month period, primarily due to the settlement of uncertain tax positions during the fiscal 2016 nine-month period and increases in certain other permanent differences.

The net unrecognized tax benefits as of November 1, 2015 and February 1, 2015, which, if recognized, would affect our effective tax rate are $219,000 and $426,000, respectively.

Our Federal tax returns for the fiscal years 2014 and 2015 remain subject to examination by federal taxing authorities. An examination of fiscal year 2013 with federal taxing authorities was completed during the fiscal 2016 second quarter with no adjustments. Our state tax returns for the fiscal years ending 2012 through fiscal 2015 remain subject to examination by state taxing authorities. An examination of our North Carolina state tax returns for fiscal years 2012 and 2013 is underway by the North Carolina Department of Revenue.

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11.	Segment Information

For financial reporting purposes, we are organized into three operating segments – casegoods furniture, upholstered furniture and an “All other” segment, which includes our two new businesses, H Contract and Homeware. The following table presents segment information for the periods, and as of the dates, indicated:

	Thirteen Weeks Ended												Thirty-Nine Weeks Ended
	November 1,						November 2,						November 1,						November 2,
	2015						2014						2015						2014
				% Net						% Net						% Net						% Net
Net Sales				Sales						Sales						Sales						Sales
Casegoods	$	41,199			63.1	%	$	39,798			63.0	%	$	116,996			62.8	%	$	111,142			61.9	%
Upholstery		21,719			33.2	%		22,046			34.9	%		63,718			34.2	%		65,311			36.4	%
All other		2,424			3.7	%		1,634			2.6	%		5,949			3.2	%		3,691			2.1	%
Intercompany eliminations		(4	)					(310	)					(229	)					(697	)
Consolidated	$	65,338					$	63,168					$	186,434					$	179,447

Gross Profit & Margin
Casegoods	$	12,786			31.0	%	$	11,227			28.2	%	$	34,991			29.9	%	$	31,683			28.5	%
Upholstery		4,742			21.8	%		4,332			19.6	%		13,993			22.0	%		12,565			19.2	%
All other		630			26.0	%		484			29.7	%		1,629			27.4	%		1,067			28.9	%
Intercompany eliminations		7						(12	)					20						(17	)
Consolidated	$	18,165			27.8	%	$	16,031			25.4	%	$	50,633			27.2	%	$	45,298			25.2	%

Operating Income & Margin
Casegoods	$	5,347			13.0	%	$	4,226			10.6	%	$	13,904			11.9	%	$	11,307			10.2	%
Upholstery		1,318			6.1	%		878			4.0	%		4,073			6.4	%		2,135			3.3	%
All other		(32	)		-1.3	%		(209	)		-12.8	%		(256	)		-4.3	%		(885	)		-24.0	%
Intercompany eliminations		7						(12	)					20						(17	)
Consolidated	$	6,640			10.2	%	$	4,883			7.7	%	$	17,741			9.5	%	$	12,540			7.0	%

Capital Expenditures
Casegoods	$	724					$	421					$	1,664					$	1,804
Upholstery		107						19						524						635
All other		-						21						7						21
Consolidated	$	831					$	461					$	2,195					$	2,460

Depreciation & Amortization
Casegoods	$	500					$	416					$	1,374					$	1,171
Upholstery		240						252						699						756
All other		3						-						9						-
Consolidated	$	743					$	668					$	2,082					$	1,927

	As of Nov 1,			% Total			As of Feb 1,			% Total
Identifiable Assets	2015			Assets			2015			Assets
Casegoods	$	141,900			79.5	%	$	135,403			79.3	%
Upholstery		35,534			19.9	%		33,788			19.8	%
All other		1,006			0.6	%		1,605			0.9	%
Intercompany eliminations		(19	)					(41	)
Consolidated	$	178,421			100.0	%	$	170,755			100.0	%

12.	Subsequent Events

Dividends

On December 1, 2015, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on December 31, 2015 to shareholders of record at December 15, 2015.

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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,” “third quarter” or “quarterly period”) that began August 3, 2015 and the thirty-nine week period (also referred to as “nine months,” “nine-month period”, or “year-to-date period”) that began February 2, 2015, which both ended November 1, 2015. This report discusses our results of operations for these periods compared to the thirteen-week period that began August 4, 2014 and the thirty-nine week period that began February 3, 2014, which both ended November 2, 2014, and our financial condition as of November 1, 2015 compared to February 1, 2015.

References in this report to:

the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and will end January 31, 2016; and

the 2015 fiscal year and comparable terminology mean the fiscal year that began February 3, 2014 and ended February 1, 2015.

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

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 2015 annual report on Form 10-K (“2015 Annual Report”) filed with the SEC on April 17, 2015. Our 2015 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 condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.

Our business is subject to a number of significant risks and uncertainties, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see Item 1A, “Risk Factors” and “Forward-Looking Statements” beginning on page eleven of our 2015 Annual Report.

Our 2015 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.

Nature of Operations

Hooker Furniture Corporation (referred to as “we,” “us”, “our”, “Hooker” or “the Company”) 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 2014 shipments to U.S. retailers, according to a 2015 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, Hooker Upholstery, a line of imported leather upholstery, 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 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 nearly 40 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 of retirees. The other, Homeware, focuses on younger and more mobile consumers in the early stages of their careers, as well as those living in smaller or urban spaces.

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For financial reporting purposes, we are organized into three operating segments – casegoods furniture, upholstered furniture and an All other segment that includes our two new businesses – H Contract and Homeware.

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.

The extended weakness in housing and housing-related industries which began as part of the broader economic downturn in 2008 has begun to show signs of sustained recovery, and the mostly positive news on housing and consumer confidence is encouraging. Generally speaking, we believe that our business and the home furnishings industry in general are gaining momentum as the U.S. economy continues to recover from an extended and severe downturn.

Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers, such as duties and tariffs, diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions.

Our domestic upholstery operations have significantly higher overhead and fixed costs than our import operations, and their profitability has been and can be adversely affected by economic downturns. Our upholstery segment operations have been profitable for the last three fiscal years, with overall profitability improving each year, primarily due to improving profitability in our domestic upholstery, which lagged the import operations during the economic downturn but are now seeing the impact of cost reduction efforts and improving sales on their operations.

Executive Summary-Results of Operations

Consolidated net sales for the fiscal 2016 third quarter increased 3.4% or $2.2 million to $65.3 million, while net income increased by nearly 45%, or $1.4 million, to $4.6 million, in each case compared to the fiscal 2015 third quarter.

Consolidated net sales for the fiscal 2016 first nine-months increased approximately 4% or $7.0 million to $186.4 million, while net income increased by 45.4%, or $3.8 million, to $12.0 million, in each case compared to the first nine-months of fiscal 2015.

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2016 third quarter and first nine-month results of operations:

Increased net sales. Consolidated net sales increased in both the quarter and year-to-date periods primarily due to net sales increases in our casegoods and All other operating segments, partially offset by net sales decreases in our upholstery segment.

Increased gross profit. Consolidated gross profit increased primarily due to:

increased net sales, decreased discounting, returns and allowances and better quality experience in our casegoods segment which, along with lower freight rates, helped offset cost increases on our imported products;

improved operating efficiencies and decreased contract manufacturing in our upholstery segment;

decreased medical claims expenses in all segments; and

increased net sales in our All other segment.

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Flat (Q3) and decreased (YTD) selling and administrative expenses as a percentage of net sales. As a percentage of net sales, consolidated selling and administrative expenses were flat for the fiscal 2016 third quarter, but increased in absolute terms due primarily to increased professional fees, contributions and compensation expense, partially offset by lower bad debt and banking expenses. For the fiscal 2016 first nine-months, consolidated selling and administrative expenses decreased as a percentage of net sales, but increased in absolute terms primarily due to increased professional fees, partially offset by decreased bad debts expense and banking expenses.

Increased operating income. Due to the factors discussed above, consolidated operating income increased both in absolute terms and as a percentage of net sales. Our casegoods segment generated an operating margin of over 10% for the fifth consecutive fiscal quarter and upholstery segment operating income increased fifty percent in the fiscal 2016 third quarter and nearly doubled in the fiscal 2016 first nine-months.

Results of Operations

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

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 1,			November 2,			November 1,			November 2,
	2015			2014			2015			2014
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		72.2			74.6			72.9			74.8
Gross profit		27.8			25.4			27.2			25.2
Selling and administrative expenses		17.6			17.6			17.6			18.3
Operating income		10.2			7.7			9.5			7.0
Other income, net		0.1			0.2			0.1			0.1
Income before income taxes		10.2			7.9			9.6			7.1
Income tax expense		3.1			2.8			3.2			2.5
Net income		7.1			5.1			6.5			4.6

Fiscal 2016 Third Quarter Compared to Fiscal 2015 Third Quarter

	Net Sales
	Thirteen Weeks Ended
	November 1, 2015						November 2, 2014						$ Change			% Change
				% Net Sales						% Net Sales
Casegoods	$	41,199			63.1	%	$	39,798			63.0	%	$	1,401			3.5	%
Upholstery		21,719			33.2	%		22,046			34.9	%		(327	)		-1.5	%
All Other		2,424			3.7	%		1,634			2.6	%		790			48.3	%
Intercompany Elimination		(4	)					(310	)					306
Consolidated	$	65,338			100.0	%	$	63,168			100.0	%	$	2,170			3.4	%

Unit Volume	FY16 Q3 % Increase vs. FY15 Q3			Average Selling Price	FY16 Q3 % Increase vs. FY15 Q3

Casegoods		-2.1	%	Casegoods		5.7	%
Upholstery		-3.7	%	Upholstery		2.5	%
All Other		55.2	%	All Other		-5.0	%
Consolidated		-1.0	%	Consolidated		4.0	%

Consolidated net sales increased for the fiscal 2016 third quarter primarily due to:

increased average selling prices in our casegoods segment due primarily to lower product discounting which was due to decreased low-margin sales of distressed products in the quarter as compared to the prior-year;

increased average selling prices in our upholstery segment primarily due to the mix of leather upholstered products sold; and

increased unit volume in our All other segment.

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Those increases were partially offset by decreased upholstery segment net sales principally due to lower unit volume at Hooker Upholstery and lower average selling prices at Sam Moore. These decreases were due primarily to exiting low margin sales programs at the expense of net sales at both operating units. Additionally, at Sam Moore there were some lingering effects of post-ERP implementation inefficiencies. Our ERP system was implemented at the beginning of the fiscal 2016 second quarter at that division. These upholstery segment sales decreases were partially offset by increased net sales at BY due to well-performing new products and market share gains. Our all other segment contributed positively to sales in the fiscal 2016 third quarter compared to the prior-year period, driven by H Contract’s sales growth, but remains a small component of our overall sales.

We believe casegoods segment unit volume decreased during the quarter due to:

Challenging conditions at retail, particularly in October, some of which we attribute to sales declines in areas particularly affected by current conditions in the domestic oil and gas industry;

Outages of key component products that prevented orders for certain suites from shipping during the fiscal 2016 third quarter.

Lingering product availability challenges due to expanding lead times and late deliveries of certain of our more popular October 2014 market introductions in that segment during the fiscal 2016 first quarter. We received most of the October market introductions and delivered existing orders to customers during the fiscal 2016 second quarter; however, late deliveries resulted in delayed reorders even on products which have retailed well, which impacted shipments into the fiscal 2016 third quarter.

	Gross Income and Margin
	Thirteen Weeks Ended
	November 1, 2015					November 2, 2014						$ Change		% Change
			% Net Sales						% Net Sales
Casegoods	$	12,786		31.0	%	$	11,227			28.2	%	$	1,559		13.9	%
Upholstery		4,742		21.8	%		4,332			19.6	%		410		9.5	%
All Other		630		26.0	%		484			29.7	%		146		30.2	%
Intercompany Elimination		7					(12	)					19
Consolidated	$	18,165		27.8	%	$	16,031			25.4	%	$	2,134		13.3	%

Consolidated gross profit increased in the fiscal 2016 third quarter, primarily due to:

Improved casegoods segment gross profit due to decreased discounting due to product mix, lower product costs resulting from lower freight rates and, to a lesser extent, lower returns and allowances as a result of better product quality;

Improved upholstery segment gross profit due to a net sales increase at BY and increased gross profit at Sam Moore despite a net sales decrease, as well as other operating efficiencies such as decreased contract manufacturing and lower medical claims expense in that segment; and

Improved All other segment gross profit due primarily to increased net sales at H Contract.

	Selling and Administrative Expenses
	Thirteen Weeks Ended
	November 1, 2015					November 2, 2014					$ Change			% Change
			% Net Sales					% Net Sales
Casegoods	$	7,439		18.1	%	$	7,001		17.6	%	$	438			6.3	%
Upholstery		3,424		15.8	%		3,454		15.7	%		(30	)		-0.9	%
All Other		662		27.3	%		693		42.4	%		(31	)		-4.5	%
Consolidated	$	11,525		17.6	%	$	11,148		17.6	%	$	377			3.4	%

Consolidated selling and administrative expenses increased in absolute terms due to increased professional fee expense, partially offset by decreases in bad debt expense in all segments due to better collections experience and decreased banking expenses due to changes in sales policies and were flat as a percentage of sales.

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	Operating Profit and Margin
	Thirteen Weeks Ended
	November 1, 2015						November 2, 2014						$ Change		% Change
				% Net Sales						% Net Sales
Casegoods	$	5,347			13.0	%	$	4,226			10.6	%	$	1,121		26.5	%
Upholstery		1,318			6.1	%		878			4.0	%		440		50.1	%
All Other		(32	)		-1.3	%		(209	)		-12.8	%		177		-84.7	%
Intercompany Elimination		7						(12	)					19
Consolidated	$	6,640			10.2	%	$	4,883			7.7	%	$	1,757		36.0	%

Operating profitability increased for the fiscal 2016 third quarter, both as a percentage of net sales and in absolute terms, due to the factors discussed above.

	Income Taxes
	Thirteen Weeks Ended
	November 1, 2015						November 2, 2014						$ Change		% Change
				% Net Sales						% Net Sales
Consolidated income tax expense	$	2,043			3.1	%	$	1,764			2.8	%	$	279		15.8	%

Effective Tax Rate		30.6	%					35.5	%

	Net Income
	Thirteen Weeks Ended
	November 1, 2015					November 2, 2014					$ Change		% Change
			% Net Sales					% Net Sales
Consolidated	$	4,630		7.1	%	$	3,204		5.1	%	$	1,426		44.5	%

Earnings per share	$	0.43				$	0.30

Fiscal 2016 First Nine Months Compared to Fiscal 2015 First Nine Months

	Net Sales
	Thirty-Nine Weeks Ended
	November 1, 2015						November 2, 2014						$ Change			% Change
				% Net Sales						% Net Sales
Casegoods	$	116,996			62.8	%	$	111,142			61.9	%	$	5,854			5.3	%
Upholstery		63,718			34.2	%		65,311			36.4	%		(1,593	)		-2.4	%
All Other		5,949			3.2	%		3,691			2.1	%		2,258			61.2	%
Intercompany Elimination		(229	)					(697	)					468
Consolidated	$	186,434			100.0	%	$	179,447			100.0	%	$	6,987			3.9	%

Unit Volume	FY16 YTD % Increase vs. FY15 YTD			Average Selling Price	FY16 YTD % Increase vs. FY15 YTD

Casegoods		0.0	%	Casegoods		4.8	%
Upholstery		-6.5	%	Upholstery		4.3	%
All Other		101.2	%	All Other		-19.9	%
Consolidated		0.6	%	Consolidated		2.7	%

The increase in consolidated net sales for the fiscal 2016 first nine-months was principally due to higher average selling prices in our casegoods segment (due to the mix of products sold and lower discounting) on flat consolidated unit volume.

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We believe the flat unit volume in our casegoods segment was due to:

Challenging conditions at retail, particularly in October, some of which we attribute to sales declines in areas particularly affected by the challenging conditions in the domestic oil and gas industry;

Lingering product availability challenges due to expanding lead times and late deliveries of certain of our more popular October 2014 market introductions in that segment during the fiscal 2016 first quarter. We received most of the October market introductions and delivered standing orders to customers during the fiscal 2016 second quarter; however, late deliveries resulted in delayed reorders even on products which have retailed well, which impacted shipments into the fiscal 2016 third quarter; and

Outages of key component products that prevented orders for certain suites from shipping during the fiscal 2016 third quarter.

Unit volume decreases in our upholstery segment were primarily caused by decreases at Sam Moore due to the effects of discontinuing unprofitable sales programs at the expense of net sales and lingering post-ERP implementation inefficiencies during the fiscal 2016 third quarter.

	Gross Income and Margin
	Thirty-Nine Weeks Ended
	November 1, 2015					November 2, 2014					$ Change		% Change
			% Net Sales					% Net Sales
Casegoods	$	34,991		29.9	%	$	31,683		28.5	%	$	3,308		10.4