Krause’s Furniture Auditor Questions Chance of Survival
Krause’s Furniture Inc., battered by losses and trying to gain traction in its turnaround efforts, said Wednesday that its auditors have questioned its ability to continue operations as a going concern.
The statement by its independent accounting firm, Arthur Andersen LLP, comes as the company also disclosed that it is closing 15 unprofitable stores and that its stock may be removed from the American Stock Exchange.
The Brea furniture maker and retailer, which had delayed filing its annual report with regulators to arrange financing, said it filed the report Tuesday without the opinion.
Krause’s said it filed an amended report late Wednesday with a qualified opinion from Andersen that questioned the company’s current viability.
“We’re in continuing discussions with Arthur Andersen on what would be required to remove that qualified opinion and are actively pursuing that possibility,” Krause’s chief executive, Philip M. Hawley, said.
The company said it is close to reaching agreements that would provide additional capital and certain waivers and consents from creditors that would improve the company’s financial condition. But it said that Andersen made no commitments to reissue its opinion after any agreements are reached.
Krause’s, meantime, said the American Stock Exchange may delist its sagging stock because of the company’s sizable losses--$48.3 million over the last five years.
Despite closing 15 stores to cut losses, the current climate is less than ideal for a comeback in the highly competitive furniture business, which is vulnerable to economic downturns.
Krause’s said in a statement that its fourth-quarter and full-year results were adversely affected by an industrywide slowdown that began almost a year ago and has persisted into the second quarter.
Trading in the company’s stock was halted Wednesday. The stock closed Tuesday at 40 cents a share.
The furniture industry has been struggling, as the sluggish economy prompted consumers to delay purchases, said David Perry, executive editor of Furniture/Today, a weekly trade publication.
“This year is shaping up as a difficult one for the industry,” he said.
On Tuesday, Heilig-Meyers Co. announced plans to close its 375 remaining stores. The struggling company, which was the nation’s largest furniture retailer just two years ago, filed for bankruptcy protection in August and has already closed 418 stores.
But Krause’s problems began long before the downturn. The company has not had a profitable year since 1994.
For the fourth quarter ended Dec. 24, Krause’s posted a loss of $4.4 million, or 19 cents a share, compared with a loss of $4.5 million, or 20 cents a share, for the fourth quarter the previous year, which was shortened by five weeks as the company shifted fiscal years.
The loss in the most recent fourth quarter includes a $2-million noncash charge, or 9 cents a share, related primarily to leasehold improvements at the 15 showrooms the company is closing. The store closures will result in an additional charge of about $3.1 million in the first quarter.
Sales totaled $40.4 million, compared to $22.1 million.
For the year, Krause’s reported that its net loss widened to $12.9 million, or 68 cents a share, from $9.4 million, or 43 cents a share, the prior year. Sales rose to $155.3 million from $130.3 million.
The company said it is saddled with a hefty debt load, limiting funds for operations and future business opportunities. Krause’s said it is taking steps to restructure its financial obligations but cannot provide any assurance that it will be successful.
According to its annual report filed Tuesday, Krause’s had $25.2 million in long-term debt and a negative net worth of $17.8 million as of Dec. 24, not including such intangible assets as goodwill.
Krause’s, which employs about 1,000 workers, said it plans to cut costs by about $4 million annually. The company did not provide specifics.
The company said it had reached tentative agreements with lenders and investors that would free up $6 million in funds that had been restricted to its Internet business as well as deferring principal and interest payments on subordinated debt.
One analyst said the company should survive if it can restructure its financial obligations.
“They are going after the hospitality industry and the health care industry, and I think there’s some good growth potential there over the next couple of years,” said Sheldon S. Traube with First Liberty Investment Group Inc.
Krause’s, which has 98 stores nationally, has been in business for nearly three decades.
But the company has struggled in recent years even as a strong economy and healthy housing markets have boosted business for high-end furniture retailers and small shops that make unique designs, analysts have said.
New management and investors jumped on board in 1996 with cash to upgrade products and remodel stores. Sales improved, but not at the same pace as rivals’ sales.
In January, Krause’s announced launch of wholesale and retail Web sites that give consumers multiple ways to shop for its custom-crafted products.
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Taking Its Lumps
Krause’s Furniture has been piling up losses over the years, prompting the American Stock Exchange to consider delisting the stock.
