Vizzini: He didn't fall? Inconceivable!
Inigo Montoya: You keep using that word. I do not think it means what you think it means.
-- William Goldman, The Princess Bride, 1987
Once, long ago, Hooker Furniture (NASDAQ:HOFT) became one of the first-ever recommendations at the Fool's small-cap stock-picking service, Motley Fool Hidden Gems. After reviewing the company's fiscal second-quarter report Tuesday, I think I see why it's since been banished from that kingdom.
Reading through the report felt like tackling a press release in Greek. It’s not that I didn’t understand the numbers or the text. But I just can't shake the suspicion that a lot of the things Hooker said don't mean what Hooker seems to think they mean.
Straight translation
Let's start with the easy parts:
- Sales in the first fiscal half declined 10% in comparison to the year-ago period.
- Operating margins slipped 390 basis points to land at 5.2%.
- Profits fell 42% to $0.41 per share.
So far, so bad. But at least we can all agree on what these words mean. Up to this point, Hooker is sharing a lingua franca with its fellow furniture retailers, like La-Z-Boy (NYSE:LZB) or Furniture Brands (NYSE:FBN). (Really, they all seem to be reading from the same script.)
But here's where things get tricky.
Hooker needs a dictionary
As cash levels plunged over the course of this first fiscal half, Hooker management explained to us, it has merely "redeployed ... half of its available cash and cash equivalents." Part of the cash was used to buy back stock -- and at not-half-bad prices, so I guess you can call that a redeployment without stretching the definition too far.
But Hooker says it also "invested $7.2 million in higher inventory levels to improve its inventory position." Now, ordinarily when a company's free cash flow declines 97% to just $599,000, I call that "burning cash." Hooker apparently prefers the translation, "redeployed cash."
You say to-MAY-to, and Hooker says to-MAH-to
If this is all just quibbling over terminology, then I have to wonder why Hooker moved so quickly to reassure investors that, "We anticipate improving cash flow from operations throughout the next two quarters as we work down our inventory levels by the end of the year.''
I mean, if "investing" in inventory is a good thing, and if it "improves" the inventory position, then why is Hooker so anxious to work that inventory right back down ASAP? For that matter, if working down the inventory will "improve cash flow" in the second half, doesn't it logically follow that cash flow in the first half was, shall we say, in need of improvement? (And if it was, then why didn't Hooker come out and say so?)
Through the looking glass
Such strange twists of logic and language pervade Hooker's release. Here's another example: "The summer business environment was even more challenging than anticipated ... [but] we anticipate that business in the fall will be marginally better than the summer,'' said CEO Paul Toms.
Oh, OK. That's great. So maybe the 14% buildup in inventories (in the face of double-digit sales declines) over the past six months isn't so scary after all. Business is going to improve ... um, "marginally."
And yet, Toms continues, "we expect demand for furniture will continue to be softer over the next several months than we've experienced in recent years."
So let me get this straight. Inventories are up 2% year over year, even as sales plummet. Demand (another word for "sales") will be softer over the next several months, relative to sales in years past. And all this is supposed to result in business being better, and cash flow improving?
Sorry, fellas. That just makes no sense.
Foolish takeaway
Toll Brothers' (NYSE:TOL) just posted a $29 million loss, and Lennar (NYSE:LEN) and Ryland (NYSE:RYL) were slammed on the news. The housing market isn’t sitting pretty, so “marginal” improvement in the demand for furniture seems like a far-fetched idea.
All I can figure at this point, is that Hooker has been sampling the housing rebound Kool-Aid that Home Depot (NYSE:HD) CEO Frank Blake was dishing out last week. Maybe if I had been drinking as heavily, Hooker's Q2 report would have made more sense to me.
For further Foolishness on the furniture maker with the funny name, read:
