Well, at least it didn't come as a surprise.
Fool readers were warned in advance that Motley Fool Hidden Gems recommendation Hooker Furniture
Clunk.
Last week, Hooker announced the coup de grace to its furniture-building business; a press release stated that its crown jewel -- the 760,000-square foot Martinsville, Va. plant -- is slated for closure. The layoff of its 280 workers will bring Hooker's total payroll down to just over 1000, or roughly half the size it was 3.5 years ago.
Does size matter?
But is this a case of diminishing size, diminishing returns, or of "smaller, faster, cheaper, better?" I see two ways you can look at Hooker's transition from domestic furniture-maker with an import business on the side to wood-furniture-importer-that-also-makes-upholstered-stuff-stateside.
The bull thesis
Hooker bulls can today point to the firm's emphasis on imports as a smart business move that will continue to maximize profits through a "light" business model. As a (primarily) design-and-marketing shop, Hooker will create the intellectual property, then have others transform it into goods abroad -- much the way Dell
So it could well be that getting out of the domestic wood furniture business entirely was the best thing Hooker could have done for its shareholders.
The bear thesis
And yet, I'm bearish on Hooker. Why?
Well, call me a sentimentalist, but the reason I first invested in Hooker years ago (in addition to the fact that Tom Gardner recommended the stock, of course), was that I really liked the idea of how Hooker was run by employee-owners. There aren't that many such companies still around -- SAIC
Back when Hooker was 30% employee-owned, and there were twice as many employees as today, the employees had a stake in the business, making for a stronger employer-employee bond. And Hooker's reputation in local North Carolinian and Virginian communities for keeping its factories running and its employees at work, even in tough economic times, further strengthened that bond. With nearly half of Hooker's workforce laid off over the last three years, however, and with many of those employees having cashed out their shares (I suspect), I have to wonder whether that bond remains intact.
That, in a nutshell, is the reason I sold my own shares in the company when it first began shutting down factories a few years back. But to cover all the bases, let me point out two other developments that argue against owning the stock:
First, analysts' projected growth rates have turned out to be wildly overoptimistic. Over the last three years, sales grew 5% per year (half the rate they expected), and profits have fallen 5% per year. Today, the same analysts positing 13% growth a few years ago now whisper that Hooker may in fact only grow at 8%. So this part of the investment thesis appears broken.
Second, the dollar has weakened, not grown stronger. And by all indications, that weakening seems likely to continue. This makes Hooker's reliance on imports more of a liability than an asset, at least in the near term.
As master investor Philip A. Fisher replied when asked "when to sell," a stock should be sold "When a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a significant margin, less favorable than originally believed."
In my opinion, Hooker has reached that point.
For more on the troubles the furniture makers have seen, check out:
As an investment, Hooker hasn't panned out quite as expected, returning just 14% capital gains against a 45% return for the S&P 500 over the last three years. But overall, Hidden Gems stocks have done a lot better. On average, they're beating the S&P 500 by a margin of better than 2-to-1, up 48% since inception against a market return of just 21%. To learn how Hidden Gems does, claim your free trial today.
Dell is both a Stock Advisor and an Inside Value recommendation.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that.