Hooker Furnishings - 10-Q quarterly report FY

Washington, D.C. 20549

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, including share data)

(Unaudited)

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except per share data)

(Unaudited)

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

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 3, 2008

The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “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, management believes that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended February 3, 2008.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter” or “quarterly period”) that began May 5, 2008 and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 4, 2008, both ending on August 3, 2008. These financial statements also include the thirteen-week period that began April 30, 2007 and the twenty-six week period that began January 29, 2007, both ending on July 29, 2007.

References to the 2009 fiscal year and comparable terminology in the notes to the condensed consolidated financial statements mean the fiscal year that began February 4, 2008 and will end February 1, 2009. References to the 2008 fiscal year and comparable terminology in the notes to the consolidated financial statements mean the fiscal year that began January 29, 2007 and ended February 3, 2008.

On December 14, 2007, the Company completed its acquisition of certain assets of Opus Designs Furniture LLC, a specialist in imported moderately-priced youth bedroom furniture. The Company has integrated this business with its existing imported wood and metal furniture business and offers this brand to customers as Opus Designs by Hooker. During the 2009 second quarter the Company paid additional acquisition related expenses and settled certain purchase price adjustments with the seller, which resulted in an adjustment to the recorded purchase price and the values of certain acquired assets. After taking these adjustments into account, the Company paid an aggregate purchase price of $5.4 million, including $116,000 in acquisition-related fees, for the accounts receivable, inventory, intangible assets and goodwill of Opus Designs Furniture LLC.

The recorded values of the assets acquired were:

The Hooker Furniture Corporation 2005 Stock Incentive Plan permits incentive awards of restricted stock, restricted stock units, stock appreciation rights and performance grants to key employees and non-employee directors. The Company has issued annual restricted stock awards to each non-employee member of the board of directors since January 2006. These shares will vest if the director remains on the board through a 36-month service period or may vest earlier in accordance with terms specified in the plan. The Company accounts for these awards as “non-vested equity shares.” For each restricted common stock issuance, the following table summarizes the actual number of shares that have been issued/vested/forfeited, the weighted average issue price of those shares on the grant date, the fair value of each grant on the grant date, compensation expense recognized for the non-vested shares of each grant and the remaining fair value of the non-vested shares of each grant as of August 3, 2008:

On April 30, 2008, the Compensation Committee of the Company’s board of directors awarded two performance grants to certain senior executives of the Company under the 2005 Stock Incentive Plan. Payments under each fixed dollar grant will be based on the Company’s cumulative earnings per share (“EPS”) and average annual return on equity (“ROE”) for the grant’s designated performance and service period. The respective performance periods for the two grants are the fiscal two-year period ending January 31, 2010 and the fiscal three-year period ending January 30, 2011. Payment, if any, under each performance grant will be paid in cash, shares of the Company’s common stock or a combination of both, at the discretion of the Compensation Committee.

These performance grants have been classified as liabilities since the (i) settlement amount for each grant will not be known until after the applicable performance period is completed and (ii) settlement of the grants may be made in common stock, cash or a combination of both. The estimated cost of each grant will be recorded as compensation expense over the respective performance periods when it becomes probable that the EPS and ROE performance targets will be achieved. The expected cost of the grants will be revalued each reporting period. As assumptions change regarding the expected achievement of target performance levels, a cumulative adjustment will be recorded and future compensation expense will increase or decrease based on the currently projected performance levels. If the Company determines that the minimum EPS and ROE performance thresholds for the grants will not be met, no further compensation cost will be recognized and any previously recognized compensation cost will be reversed. A maximum of $3.2 million could be paid under these grants. In the 2009 second quarter, the Company reversed $130,000 previously accrued for these grants. As a result, through the six-month period ended August 3, 2008, no compensation expense has been recorded for these performance grants.

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Restricted shares awarded to non-employee members of the board of directors that have not yet vested are considered when computing diluted earnings per share. As of August 3, 2008, there were approximately thirteen thousand shares of non-vested restricted stock outstanding.

Since February 2007, the Company has spent $50 million, excluding commissions to repurchase 2.5 million shares of Company common stock under these authorizations at an average price of $19.90 per share.

In March 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This statement requires enhanced disclosures about an entity’s derivative and hedging activities and is thereby intended to improve the transparency of financial reporting. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on the Company’s financial position or results of operations.

The Company has advanced approximately $450,000 to one of its finished goods suppliers against the Company’s purchase orders placed with that supplier. The purpose of the advance was to facilitate the supplier’s purchase of raw materials in order to ensure timely delivery of furniture shipments to the Company. Also, the Company assisted the supplier in obtaining additional bank financing by issuing a standby letter of credit in the amount of $600,000, which expires in July 2009, as security for that financing.  In conjunction with the issuance of the letter of credit, the Company entered into a security agreement with the supplier, which provides the Company with a security interest in certain assets of the supplier and its shareholders. The Company does not intend to make additional advances to the supplier. The Company’s maximum exposure under the advance and the standby letter of credit as of August 3, 2008 is approximately $1.1 million. The Company believes its financial exposure under this arrangement is adequately secured. 

This quarterly report on Form 10-Q includes the Company’s unaudited consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter” or “quarterly period”) that began May 5, 2008 and twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 4, 2008, both ending on August 3, 2008. This report discusses the Company’s:

References in this report to the 2009 fiscal year, or comparable terminology, refer to the Company’s fiscal year that began February 4, 2008 and will end February 1, 2009.

Hooker Furniture Corporation is a home furnishings design, marketing and logistics company with world-wide sourcing capabilities. With the closing of its last domestic wood furniture plant during the fiscal 2008 first quarter, the Company is now focused on imported wood and metal and domestically-produced and imported upholstered home furnishings.

In April 2007, the Company completed the acquisition of the assets of Sam Moore Furniture Industries, Inc., a Bedford, Virginia manufacturer of upscale occasional chairs with an emphasis on fabric-to-frame customization in the upper-medium to high-end price niches. The Company began operating the business as Sam Moore Furniture LLC during the fiscal 2008 second quarter.

The acquisition of the assets of Opus Designs Furniture, LLC was completed in December 2007. The addition of the Opus Designs’ product line provides the Company with a solid foundation to build a strong youth bedroom program at more moderate price points, with a more comprehensive product line and superior sourcing arrangements.

Results of operations for the thirteen and twenty-six week periods ended August 3, 2008 continue to reflect the weak retail environment for home furnishings that has carried over from last year. Discretionary purchases of furniture, particularly at the upper-middle price points where the Company competes, are highly affected by consumer confidence. Current economic factors, such as high energy and food costs and a difficult housing and mortgage market, have continued to result in a weak retail environment. The Company continues to believe, however, that its business model provides the flexibility necessary to adjust to changing market conditions by controlling inventory purchases from suppliers. The Company also continues to believe that the current economic malaise is temporary and upon economic recovery, the Company will be well positioned to respond quickly to increased demand.

Following are the principal factors that impacted the Company’s results of operations during the three and six-month periods ended August 3, 2008:

The following table sets forth the percentage relationship to net sales of certain items included in the consolidated statements of operations.

Net sales for the fiscal year 2009 second quarter declined $8.8 million, or 12.0%, to $64.6 million compared to $73.4 million for the fiscal 2008 second quarter, principally due to:

Excluding discontinued domestically-produced wood furniture, net sales declined 7.7% year-over-year.

Second quarter 2009 unit volume decreased compared to the same 2008 period across most all wood and upholstery product categories, but increased for:

While overall average selling prices decreased during the fiscal 2009 second quarter compared to the fiscal 2008 second quarter principally due to the higher proportion of imported products shipped, average selling prices also:

Gross profit margin decreased to 28.3% of net sales in the fiscal 2009 second quarter compared to 31.3% in the fiscal 2008 second quarter, principally as a result of:

Inflationary pressures in product costs and certain other operating expenses related to higher costs for raw materials, fuel prices, offshore labor costs and ocean freight, along with weakness of the dollar negatively impacted the Company’s gross profit margin during the fiscal 2009 second quarter. Since the spring, the Company has received cost increases from its offshore suppliers on imported furniture, as well as for transportation costs, raw materials for its upholstered furniture and for other operating expenses. The Company has recently implemented a price increase intended to offset these cost increases from its suppliers and to improve margins compared to second quarter 2009 levels.

Selling and administrative expenses increased to $15.4 million, or 23.9% of net sales, for the fiscal 2009 second quarter, compared to $15.1 million, or 20.5% of net sales, for the fiscal 2008 second quarter. The increase in spending during the 2009 second quarter was principally the result of:

During the 2009 second quarter, the Company recorded a restructuring credit of $258,000 for previously accrued health care benefits that are not expected to be paid for terminated employees at the former Roanoke and Martinsville, Va. manufacturing facilities. In the 2008 second quarter, the Company recorded restructuring charges of $473,000 principally for additional asset impairment and disassembly costs related to the closure of the Martinsville, Va. manufacturing facility.

As a result of the above, operating income for the fiscal 2009 second quarter decreased to $3.1 million, or 4.8% of net sales, compared to $7.5 million, or 10.2% of net sales, in the fiscal 2008 second quarter.

Other income, net was $168,000, or 0.3% of net sales, for the fiscal 2009 second quarter compared to $308,000, or 0.4% of net sales, for the fiscal 2008 second quarter. This decline was principally due to a decrease in interest income in the fiscal 2009 second quarter, due to lower cash and cash equivalent balances and lower returns earned on those balances, partially offset by a decrease in interest expense.

The Company recorded income tax expense of $1.2 million for the fiscal 2009 second quarter and $2.9 million for the fiscal 2008 second quarter. The Company’s effective tax rate decreased slightly to 37.0% for the fiscal 2009 second quarter from 37.4% during the fiscal 2008 second quarter.

Fiscal year 2009 second quarter net income was $2.1 million, or $0.18 per share, compared to net income of $4.9 million, or $0.39 per share, in the fiscal 2008 second quarter. The earnings per share decrease resulting from lower net income was partially offset by a decrease in weighted average shares outstanding resulting from the repurchase 2.5 million shares of common stock since February 2007.

Net sales for the fiscal year 2009 first half declined $15.1 million, or 10.0%, to $135.7 million compared to $150.7 million for the fiscal 2008 first half, principally due to:

These declines in net sales were partially offset by the addition of net sales from upholstered seating specialist Sam Moore. Net sales for Sam Moore amounted to $13.0 million during the 2009 first half compared to $6.7 million for the 2008 three month period following its acquisition at the end of April 2007. Excluding discontinued domestically-produced wood furniture and net sales from Sam Moore, net sales declined 8.8% year-over-year.

First half 2009 unit volume decreased compared to the same 2008 period across all wood and upholstery product categories with the exception of youth bedroom products, due to the addition of the Opus Designs product line, and Sam Moore upholstered products.

However, average selling prices increased slightly for upholstered furniture manufactured or imported by Bradington-Young due to an overall increase in per unit selling prices implemented to echo cost increases received from suppliers.

Gross profit margin decreased to 29.2% of net sales in the fiscal 2009 first half compared to 29.9% in the fiscal 2008 first half, principally as a result of:

In the first six months of fiscal 2009, selling and administrative expenses increased $1.7 million, or 5.5%, to $32.8 million compared with $31.1 million in the fiscal 2008 six-month period. As a percentage of net sales, selling and administrative expenses increased to 24.2% in the fiscal 2009 first six months from 20.6% in the fiscal 2008 six-month period. The increased spending is due principally to:

These cost increases were partially offset by lower selling expenses for Hooker imported wood and Bradington-Young upholstered furniture. Also, in the fiscal 2008 six-month period the Company recognized a gain on the settlement of a corporate-owned life insurance policy in connection with the death of a former executive of the Company, which reduced selling and administrative expenses. Selling and administrative expenses increased as a percentage of net sales principally through the effect of lower net sales in the current year first half.

During the 2009 first half, the Company recorded a restructuring credit of $258,000 for previously accrued health care benefits that are not expected to be paid for terminated employees at the former Roanoke and Martinsville, Va. manufacturing facilities.

During the first six months of fiscal 2008, the Company recorded aggregate restructuring charges of $344,000 consisting of:

Other income, net decreased $486,000 to $355,000, or 0.3% of net sales, for the first six months of fiscal 2009 from $841,000, or 0.6% of net sales, for the fiscal 2008 six-month period. This decrease was principally the result of a decrease in interest income earned on lower cash and cash equivalent balances.

The Company recorded income tax expense of $2.7 million for the first six months of fiscal 2009 and $5.4 million for fiscal 2008 six-month period. The Company’s effective tax rate approximated 37.0% for the first six months of fiscal 2009 and fiscal 2008. 

Net income for the 2009 first half declined to $4.7 million, or $0.41 per share, from $9.1 million, or $0.71 per share, in the fiscal 2008 six-month period. As a percent of net sales, net income declined to 3.5% in the 2009 six-month period compared to 6.1% for the fiscal 2008 six-month period.

During the fiscal 2009 second quarter the Company experienced declines in incoming orders compared to the 2009 first quarter. Historically the Company has experienced a modest improvement in incoming orders following the Labor Day holiday. Management attributes this to consumers returning from vacations along with the start of a new school year and updating home furnishings for the fall and winter seasons. While the Company anticipates a similar improvement in quarter-over-quarter orders, it expects that overall retail conditions compared to the prior year will continue to be sluggish for the remainder of the fiscal year.

The Company has been taking the following steps to address profitability over the near term in the face of weak sales:

In addition, net sales of discontinued domestic wood products, which have carried sharply reduced margins, will continue to decline for the remainder of fiscal 2009, in comparison to fiscal 2008.

In the fiscal 2009 first quarter, the Company began shipping certain imported wood and upholstered furniture products from its new Carson, California distribution facility, and has expanded the service area for this facility to the ten westernmost states. The Company expects that this distribution center will improve service and delivery and reduce freight costs to its dealers in these states, enhancing the value of the Company’s products in that market.

Since its acquisition in April 2007, Sam Moore has operated at a modest loss. Sam Moore continues to take steps to improve profitability, including:

During the fiscal 2009 first quarter, the Company completed the integration of the Opus Designs product line into its business. The Company believes that the addition of the Opus line will ultimately result in significant growth for its youth bedroom products; however, initial growth has been slow due to current retail market conditions.

As of August 3, 2008, assets totaled $161.2 million, decreasing from $175.2 million at February 3, 2008, primarily due to decreases in cash and cash equivalents and accounts receivable, partially offset by an increase in inventory and cash surrender value of life insurance policies. The Company’s long-term debt, including current maturities, decreased to $6.6 million at August 3, 2008, from $7.9 million at February 3, 2008, as a result of scheduled debt repayments. Shareholders’ equity at August 3, 2008 decreased to $129.2 million, compared to $140.8 million at February 3, 2008, due to common stock repurchases and dividends paid, partially offset by net income earned for the period.

Working capital decreased by $13.0 million, or 12.7%, to $89.3 million as of August 3, 2008, from $102.3 million at the end of fiscal 2008, as a result of a $14.5 million decrease in current assets and a $1.5 million decrease in current liabilities.

The decrease in current assets is mainly due to decreases of $17.3 million in cash and cash equivalents and $4.7 million in accounts receivable, partly offset by an increase of $7.2 million in inventories. Accounts receivable decreased principally due to lower sales.

Since the end of the last fiscal year, The Company has redeployed more than half of its available cash and cash equivalents. Cash and cash equivalents declined by $17.3 million to $15.8 million as of August 3, 2008 from $33.1 million on February 3, 2008. The Company used cash of $14.1 million to repurchase approximately 798,000 shares of its common stock during the 2009 first half under authorizations approved by its Board of Directors since late last year. Repurchases under those authorizations were substantially complete as of the end of the 2009 first half. The Company also invested an additional $7.2 million in higher inventory levels to improve its inventory position primarily for imported wood furniture in anticipation of an uptick in business during the upcoming fall season.

Inventories increased 14.4%, to $57.8 million as of August 3, 2008, from $50.6 million at February 3, 2008, largely due to:

The decrease in current liabilities is attributed to decreases of $1.1 million in other accrued expenses and $819,000 in accrued salaries, wages and benefits, partially offset by a $345,000 increase in accounts payable.

During the six months ended August 3, 2008, cash generated from operations ($1.9 million) and a decrease in cash and equivalents ($17.3 million) funded the purchase and retirement of common stock ($14.1 million), payment of cash dividends ($2.3 million), scheduled principal payments on long-term debt ($1.3 million), capital expenditures to maintain and enhance the Company’s business operating systems and facilities ($1.3 million) and additional expenditures in connection with the acquisition of the Opus Designs youth bedroom line ($181,000).

During the six months ended July 29, 2007, cash generated from operations ($23.8 million), a decrease in cash and cash equivalents ($9.9 million) and proceeds from the sale of property, plant and equipment ($59,000) funded the purchase and retirement of common stock ($18.4 million), the acquisition of Sam Moore Furniture ($10.6 million), payments of cash dividends ($2.6 million), principal payments on long-term debt ($1.2 million) and capital expenditures to maintain and enhance the Company’s business operating systems and facilities ($1.1 million).

Cash generated from operations during the first six months of fiscal 2009 decreased to $1.9 million compared with $23.8 million generated during the six-month period ended July 29, 2007. The decrease was primarily due to a decrease in cash received from customers, higher payments made to suppliers and employees and a decrease in interest income earned, partially offset by a decrease in income tax payments. The decline in cash received from customers is primarily attributed to lower net sales.

Payments to suppliers and employees increased as a result of higher inventory purchases and the Sam Moore operation. During the prior year quarter, inventory levels were higher than in the 2009 first half; consequently last year’s purchases were lower. Also, payments to suppliers and employees for the 2008 first half only included the operating costs of Sam Moore for the three-month period following its acquisition in April 2007.

The Company used $1.5 million of cash for investing activities during the first six months of fiscal year 2009 compared to $11.6 million during the six-month period ended July 29, 2007. The Company invested $1.3 million to purchase property, plant and equipment and made additional payments of $181,000 in connection with its acquisition of Opus Designs during the fiscal 2009 six-month period. During the six-month period ended July 29, 2007, the Company invested $10.6 million (net of cash acquired) for the acquisition of the assets of Sam Moore Furniture and invested $1.1 million to purchase property, plant and equipment.

The Company used $17.7 million of cash for financing activities during the first six months of fiscal 2009 compared to $22.2 million in the six-month period ended July 29, 2007. During the first six months of fiscal year 2009, the Company used $14.1 million to purchase and retire common stock, paid cash dividends of $2.3 million and made scheduled principal repayments of $1.3 million on the Company’s term loan. During the fiscal year 2008 six-month period, the Company purchased and retired $18.4 million of common stock, paid cash dividends of $2.6 million and made scheduled principal repayments of $1.2 million on the Company’s term loan.

The Company is party to an interest rate swap agreement that in effect provides for a fixed interest rate of 4.1% through 2010 on its term loan. In 2003, the Company terminated a similar swap agreement, which in effect provided a fixed interest rate of approximately 7.4% on that term loan. The Company’s $3.0 million payment to terminate the former swap agreement is being amortized over the remaining payment period of the loan, resulting in an effective fixed interest rate of approximately 7.4% on the term loan. The Company is accounting for the interest rate swap agreement as a cash flow hedge.

The aggregate fair market value of the Company’s swap agreement decreases when interest rates decline and increases when interest rates rise. Overall, interest rates have declined since the inception of the Company’s swap agreement. The aggregate decrease in the fair market value of the effective portion of the agreement of $131,000 ($212,000 pretax) as of August 3, 2008 and $191,000 ($311,000 pretax) as of February 3, 2008 is reflected under the caption “accumulated other comprehensive loss” in the consolidated balance sheets. See “Note 7 – Other Comprehensive Income” to the consolidated financial statements included in this report. Approximately $154,000 of the aggregate pre-tax decrease in fair market value of the agreement is expected to be reclassified into interest expense during the next twelve months.

The credit agreement for the Company’s revolving credit facility and outstanding term loan includes, among other requirements, financial covenants as to minimum tangible net worth, debt service coverage, the ratio of funded debt to earnings before interest, taxes, depreciation and amortization, and maximum capital expenditures. The Company was in compliance with these covenants as of August 3, 2008.

The Company has advanced approximately $450,000 to one of its finished goods suppliers against the Company’s purchase orders placed with that supplier. The purpose of the advance was to facilitate the supplier’s purchase of raw materials in order to ensure timely delivery of furniture shipments to the Company. Also, the Company assisted the supplier in obtaining additional bank financing by issuing a standby letter of credit in the amount of $600,000 as security for that financing.  In conjunction with the issuance of the letter of credit, the Company entered into a security agreement with the supplier, which provides the Company with a security interest in certain assets of the supplier and its shareholders. The Company does not intend to make additional advances to the supplier. The Company’s maximum exposure under the advance and the standby letter of credit as of August 3, 2008 is approximately $1.1 million. The Company believes its financial exposure under this arrangement is adequately secured. 

As of August 3, 2008, the Company had an aggregate $13.0 million available under its 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 the Company’s revolving credit facility as of August 3, 2008. There were no other borrowings outstanding under the revolving credit line on August 3, 2008. Any principal outstanding under the credit line is due March 1, 2011.

The Company believes that it has the financial resources (including available cash and cash equivalents, expected cash flow from operations, and lines of credit) needed to meet business requirements for the foreseeable future, including capital expenditures, working capital, dividends on the Company’s common stock, repurchases of common stock under the Company’s stock repurchase program and repayment of debt. Cash flow from operations is highly dependent on incoming order rates and the Company’s operating performance. The Company expects to spend $2.5 to $3.5 million in capital expenditures during the remainder of fiscal year 2009 to maintain and enhance its operating systems and facilities.

During the six months that ended August 3, 2008, the Company reduced long-term debt, including current maturities by $1.3 million, through scheduled debt payments.

At its September 9, 2008 meeting, the board of directors of the Company declared a quarterly cash dividend of $0.10 per share, payable on November 28, 2008 to shareholders of record November 17, 2008.

In March 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This statement requires enhanced disclosures about an entity’s derivative and hedging activities and is thereby intended to improve the transparency of financial reporting. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on the Company’s financial position or results of operations.

Certain statements made in this report, including certain statements under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, are not historical facts, but are forward-looking statements. These statements reflect the Company’s reasonable judgment and outlook with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could,” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including but not limited to:

Any forward looking statement that the Company makes speaks only as of the date of that statement, and the Company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which could impact its results of operations and financial condition. The Company manages its exposure to these risks through its normal operating and financing activities and, in some cases, through the use of interest rate swap agreements with respect to interest rates.

The Company’s obligations under its revolving line of credit and term loan bear interest at variable rates. The outstanding balance under the Company’s term loan, including current maturities, amounted to $6.6 million as of August 3, 2008. The Company has entered into an interest rate swap agreement that, in effect, fixes the rate of interest on its term loan at 4.1% through 2010 (7.4% when the effect of a previously terminated swap agreement is taken into account when determining interest expense). The notional principal value of the swap agreement is substantially equal to the outstanding principal balance of the term loan. A fluctuation in market interest rates of one percentage point (100 basis points) would not have a material impact on the Company’s results of operations or financial condition. For additional discussion of the Company’s swap agreement see “Swap Agreements” in Management’s Discussion and Analysis in the Company’s annual report on Form 10-K for the year ended February 3, 2008 and in this quarterly report.

For imported products, the Company generally negotiates firm pricing denominated in U.S. Dollars with its foreign suppliers, for periods typically of six months to one year. The Company accepts the exposure to exchange rate movements beyond these negotiated periods without using derivative financial instruments to manage this risk. The majority of the Company’s imports are purchased from China. The Chinese currency, formerly pegged to the U.S. Dollar, now floats within a limited range in relation to the U.S. Dollar, resulting in additional exposure to foreign currency exchange rate fluctuations.

Since the Company transacts its imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price the Company pays for imported products beyond the negotiated periods. The Company generally expects to reflect substantially all of the effect of any price increases from suppliers in the prices it charges for imported products. However, these changes could adversely impact sales volume and profit margin during affected periods.

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the Company’s fiscal quarter ended August 3, 2008. Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Company’s internal control over financial reporting during the Company’s quarter ended August 3, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following table provides information about common stock purchases by or on behalf of the Company during the quarter ended August 3, 2008:

In December 2007, the Company announced that its Board of Directors had authorized the repurchase up to $10 million of the Company’s common stock. In April 2008, the Company announced that the Board had increased that authorization by an additional $10 million, to $20 million. The Company completed these repurchases in August 2008. During the 2009 fiscal year the Company spent a total of $14.1 million, excluding commissions, to repurchase 798,000 shares of Company common stock under these authorizations at an average price of $17.62 per share.

On June 30, 2008, the Company held its Annual Meeting of Shareholders. At the meeting, each of the following directors of the Company was elected for a one year term. The votes cast for the election of each director were:

 

*Filed herewith