Description

Hooker Furniture is a relatively small manufacturer (number 16 in the U.S.) and importer of residential furniture. Following a modest restructuring, and a significant cap shrink, the company's earnings and earnings power appears to be be quite sizeable. Based upon the low end of my EPS range, the shares are trading at 5.2x fully taxed fiscal 02 EPS, at a 15% discount to a hard book, and carry a 2.7% yield.

The Company's products range from home entertainment centers to wall systems and bedrooms. The target price is generally in the upper-medium price points. The company owns manufacturing facilities in Virginia and North Carolina, with aggregate space of almost 2.6 million sq. ft. (currently 189,000 sq., ft. are idle and held for sale or lease).

In general the product line is updated regularly. The finished products are sold through some 90 independent sales representatives to various independent furniture retailers, catalog merchandisers, national and retail chain stores, as well as department stores. In fiscal 2001 (November), HOFT sold to almost 4,000 customers, and no customer represented more than 3% of sales.

From fiscal 1997 to fiscal 2000, sales grew from $176 million to $251 million while fully taxed EPS rose from $1.30 to $2.06 per share. During that time, span dividends rose from $0.26 to $0.34 per share. In fiscal 2001, with consumer confidence ebbing, sales fell almost 11.9%, and net income dropped 56% (to $6.5 million). The decline in EPS was pared by a 20% reduction in the average shares, resulting in EPS of $1.12 (which included a $0.13 non-recurring charge).

The reduction in the share base stems largely from a 1.8 million share tender by the ESOP, which was completed in September 2000 at $12.50 per share. The company borrowed $22.5 million under a 10-year loan to fund the purchase (at 7.4%). The ESOP issued the company a 25-year note bearing interest at 8%. Over the next 25 years the ESOP will repay the company from company contributions and dividends. As of the most recent proxy, the ESOP owned 31.8% of the outstanding shares while directors and executives owned 27.3%. Subsequent to the ESOP tender, the company has employed open market purchase to further reduce the share base.

Several recent events have made this investment a potentially very timely one. At the end of November 2001, management indicated that backlog had jumped 20.6% to $28.1 million. In addition, a restructuring plan has made the company more cost efficient. Lastly with the lower share base, the impact on EPS could be dramatic. For fiscal 2002, I think the company’s revenues should top the prior record of fiscal 2000. Assuming no margin improvement from fiscal 2000’s level (which we think is unduly conservative, EPS could top $2.50 per share). On the other hand, if consumer confidence remains high, EPS could approach $3.00 per share, with further improvement likely in fiscal 2003.

Despite the aggressive share repurchase efforts the company’s balance sheet remains strong. The current ratio at fiscal year end was almost 5 to 1. Working capital was about $10 per share. Book value was $15.45 per share. In fiscal 2001, depreciation and amortization was $7.6 million, cash dividends consumed $2.2 million and purchase of PPE totaled $8.9 million. Cap ex for fiscal 02 should be about $4.5 million.

As an ESOP controlled company, these shares are unlikely to command a multiple consistent with its record and balance sheet. However, with a yield of about 3%, a discount to an understated book and a P/E of perhaps 5x on 12-month out EPS, the valuation appears to offer outstanding risk/reward characteristics. Note that the shares trade thinly.

Catalyst

There is no catalyst that I know of, This is simply one of the cheapest stocks I've seen