Paul A. Huckfeldt - CFO and SVP, Finance and Accounting Paul B. Toms, Jr. - Chairman and CEO Michael W. Delgatti, Jr. - President.

Todd A. Schwartzman - Sidoti & Company.

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the second quarter of 2015 earnings period. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Senior Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation..

Thank you, Jamie. Good afternoon and welcome to our conference call to review our sales and earnings for the fiscal 2015 second quarter and first half, both of which ended on August 3, 2014. We appreciate your participation this afternoon. Joining me today are Paul Toms, our Chairman and CEO; and Michael Delgatti, our President.

During our call, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our SEC filings and in the press release announcing our 2015 second quarter results.

Any forward-looking statement speaks only as of today, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances that occur after today's call.

Earlier today, we reported net sales of nearly $55 million for the second quarter, which was essentially flat, about 1% lower, than the same period a year ago. Net income for the quarter increased nearly 35% or almost $600,000 to $2.3 million from $1.7 million last year, due primarily to lower discounting and lower selling and administrative costs.

For the fiscal first half, sales increased 4% to just over $116 million and net income increased over $1 million to around $5 million, representing a 33% increase compared to last year.

We reported earnings per share of $0.21 in the fiscal second quarter compared to $0.16 last year, and year-to-date EPS is $0.47 a share compared to $0.35 a share last year. Now I'll ask Paul Toms to comment on our results..

Thanks, Paul, and good afternoon, everyone. During our first quarter conference call in early June, we were gratified to report a nearly 10% consolidated sales increase and a 32% gain in net income.

However, I mentioned in the outlook that we're seeing a slowdown in orders during the late spring early summer and that demand was not as robust as we would have hoped given our strong furniture market in April. That trend continued throughout most of the summer which was characterized by fairly sluggish retail condition.

Given the lacklustre demand of the summer months, we were pleased to deliver a nearly 35% net income increase for the quarter. The income gain was driven by a solid performance in our imported casegoods division and operating profit improvements at both H Contract and our Sam Moore upholstery unit.

As we reported in yesterday's press release, casegoods operating profitability increased by 46% year-over-year for both the quarter and the first half, and upholstery had improved results compared to the previous three quarters primarily because Sam Moore achieved operating income in its domestic manufacturing operations.

The improvements at Sam Moore came on the strength of a low double-digit sales increase, better capacity utilization, labor efficiency and lower medical costs. Despite going through a slow period like we did this summer, we were able to deliver consolidated operating income of 6%, building on the momentum of last quarter.

We've definitely seen demand pick up more recently. While demand remained subdued through July, we saw an uptick in incoming orders beginning in early August that has continued through September to date. We're seeing an improvement both sequentially and year-over-year in incoming orders in the mid single digit range, 5% to 7%.

In particular, our casegoods container direct shipments were pretty brisk in August as we began shipping the first wave of several well-placed April product introductions to our largest customers. These new products should only gain momentum as we deliver them to more of our customer base from our U.S.

distribution centers in the coming weeks and months. Our container direct casegoods shipments to retailers from our Asia warehouse program have been on the upswing throughout the first half contributing to our 4% consolidated sales increase year-to-date. Despite the slow summer business, we're still bullish that recovery is underway in casegoods.

The uptick in our container direct business indicates to us a greater willingness by retailers to commit to large orders and their ability to sell higher ticket bedroom, dining room and home office furniture. Our new business ventures, H Contract and Homeware, contributed $1.1 million to net sales in the second quarter and $2.1 million year-to-date.

Operating losses for these ventures totaled $320,000 and $677,000 respectively for the second quarter and the year-to-date period. H Contract is operationally profitable and we believe it is gaining momentum as both sales and incoming orders are increasing.

At Homeware, we're still investing significant amounts in building brand awareness and Web-site traffic and have not yet reached breakeven in that operation. At this time, I'd like to call on Michael Delgatti, our President, to give more details on the factors driving our results this quarter..

Thank you, Paul, and good afternoon everyone. Certainly Sam Moore's performance was the highlight of the quarter as we reached two important goals. First, we achieved operating profitability, and second, we improved our service to retailers.

We've reduced our shipment lead times from 10 weeks at the end of the last fiscal year to five weeks or less currently, while reducing our order backlogs by 26% this quarter. Our objective all along has been to ship orders in four to five weeks and we have now achieved that goal.

Importantly, we are getting credit for this improvement from our retail customer. We believe that the retail sales associates are once again recommending and selling Sam Moore products with greater confidence and without hesitation.

Gaining the confidence of retail sales associates is critical since they are such a key frontline advocate for our brand. We believe that the profitability, efficiency and service improvements at Sam Moore are sustainable. Our expectation is that we will have steady improvement sequentially over the next several quarters.

Obviously this depends on a solid rate of incoming orders to continue to perform at these higher levels of efficiency. So far the first month of the third quarter, incoming orders have been encouraging.

We were gratified with the low double-digit sales increase at Sam Moore this quarter despite sluggish retail conditions, continuing the top line momentum we've had over the last couple of years. At Bradington-Young, we also had a good quarter with solid profitability.

A highlight of the summer at Bradington-Young was the new reclining chair program we introduced in July called Elements targeting more moderate price points which is selling very well. Also this summer we introduced BYX or Bradington-Young Express, an in-stock quick-ship program and some of our best-selling reclining chairs.

After introducing this program, we experienced a 200% rate of sale increase on the recliners in this program which was outstanding and positively impacted our second quarter order rate, particularly in July and then continuing into the current quarter.

At the High Point Premarket, which will be held next Monday and Tuesday, we plan to introduce a stationary leather sofa program to strengthen our opening price points, offering several sofas with superior construction and cover selection to choose from at what we believe is a key wholesale price point.

As we continue to deal with steady increases in leather raw material cost, we're finding it important to fine-tune our value equation in both B-Y domestically produced line and the Hooker Upholstery imported leather line. Because of these increases, the price gap between our domestic and imported leather lines is narrowing.

Therefore we are strengthening our opening price points in both lines to offer a better value proposition for both. We're also seeking to be more creative and innovative in our design and color direction. Overall, we are doing whatever we can to mitigate rising leather costs without sacrificing gross margin.

On the casegoods side, we believe the prospects for the fall selling season are very positive.

As Paul mentioned earlier, the incoming order rate for casegoods was up in August and some of the collections introduced at the April market that were extremely well-placed at retail are beginning to shift from our Asia suppliers to our largest customers through container direct and soon from our Vietnam, the Martinsville, Virginia warehouses.

While the China warehouse program focuses on the best price points in our good-better-best assortment, our new Vietnam warehouse container direct program will focus on the good and better price points.

Throughout most of the summer, we began flowing product into the warehouse and expect to start shipping product to customers in the next 30 to 45 days. This is actually a bit of a delay from our original timetable due to the turmoil in Vietnam earlier this summer.

However, these shipments should positively impact balance of the year and we expect a boost in revenues from the Vietnam warehouse program which will strengthen our value proposition on retail floors from the good and better price ranges.

Also in casegoods, we have begun shipping some proprietary products to large customers and will be ramping up those shipments for the balance of the fiscal year. In the marketing arena, we are also well-positioned for the fall selling season.

At the end of the second quarter, we introduced a new state-of-the-art consumer centric Web-site designed for Hooker Furniture. The new Web-site has the most advanced consumer engagement capabilities available in the digital space today.

These include responsive Web design, a feature that enables the Web-site to instantly respond to whatever device the consumer is using, from desktop computer to tablet to smartphone including the new i6, and automatically resize and realign to provide an optimal view and user experience for that device.

Other features include an advanced dealer locator and 'Find it now' tool that empowers visitors to immediately locate stores and specific product selections within the Hooker Furniture dealer network.

An advanced Google locator technology instantly locates the visitor without them having to enter any information and provides the closest authorized retailer in order of distance. The Web-site also has live chat, room planner and wishlist features for optimum consumer engagement.

Also in the area of marketing and support, we are again planning national sale campaigns this fall for Bradington-Young, our home entertainment category, and our Rhapsody collection which is our second best-selling casegoods collection. We expect to achieve both branding and sales lift from these online digital campaigns.

Overall, we feel good about the upcoming fall selling season for all our brands. While the second quarter was more challenging than anticipated, we're encouraged by the uptick in demand for most of our lines and believe we are well positioned to benefit from continuing improvements at retail.

At this time, I would like to call on Paul Huckfeldt to give us more details about the factors driving our operational results..

Thanks Mike. Our quarterly results were driven by a number of factors. I'll review them by income statement category. Net sales decreased slightly due to lower unit volume in both segments but partially offset with higher selling prices in our upholstery segment.

Consolidated unit volume decreased 3.5% with unit volume down 5% in the upholstery segment and 3%in casegoods. Average selling prices had increased in the upholstery segment due to price increases as well as the continuing shift in the product mix towards higher-priced products.

Our new initiative, H Contract and Homeware, together contributed $1.1 million to our consolidated sales this quarter compared to about $250,000 as they were starting up last year.

Gross profit margin for the quarter increased to 24.9% of net sales compared to 24% a year ago, primarily due to lower casegoods segment discounting as a result of our successful efforts to reduce slow-moving inventory late last year and into the first quarter of fiscal 2015 and the lower casegoods segment cost of goods sold as a percentage of net sales due to changes in the product mix and the impact of price increases flowing through our cost of goods sold.

These improvements were partially offset by decreased upholstery segment gross profit due primarily to some modest manufacturing cost increases and lower sales of imported upholstery. Our selling and administrative expenses were about $400,000 lower than the prior year quarter and decreased as a percentage of sales from 19.2% last year to 18.7%.

The decrease in spending was principally due to lower selling, professional service expenses and benefits expenses in our casegoods segment, partially offset by a $60,000 increase in operating expenses for our new initiatives H Contract and Homeware.

The higher gross profit and lower operating expenses combined to contribute, to create a 30% increase in operating margin for the quarter over last year. Our balance sheet remained strong and stable. At quarter end we had cash of nearly $37 million, up $13 million from year-end.

The higher cash balance is due primarily to lower accounts receivable and a reduction in inventory levels since the end of last year, which has more than offset our capital spending and dividend payment during the current year.

For the remainder of the year, we expect to spend between $1 million and $2 million on capital expenditures, primarily on our ERP implementation and on projects to improve our manufacturing capacity and efficiency.

We continue to be debt free and have slightly over $13 million available under our revolving line of credit, which remains in place until July of 2018, and last week our Board declared a quarterly dividend of $0.10 per share which represents an annualized dividend yield of about 2.6%. Now I'll turn the discussion back to Paul Toms for his outlook..

Thanks, Paul. Based on the increases in incoming orders we're seeing in both divisions, sequentially and year-over-year, we're encouraged about our prospects for fall business. Economically the fundamentals are in place for an improved housing market and consumer confidence continues to strengthen.

We're in a very good service position and all divisions are our best sellers, we enjoy a strong product line for all brands and solid marketing support, all of which combine to position us well to benefit from what we expect to be an improved fall season at retail.

This ends the formal remarks and at this point I'll turn our call back over to Jamie for questions. Thank you..

(Operator Instructions) Our first question comes from Todd Schwartzman from Sidoti & Company..

Could you give some numbers maybe to the decline in units by segment for Q2?.

Don't have those at the tip of my tongue..

We can, it might take a few seconds, Todd. Maybe we'll bounce to the next question and we'll come back with that information..

Okay.

Also kind of on a related subject, I know you cited the strength in ASPs in the upholstery side, you may have also mentioned casegoods in passing, but what can you say about casegoods pricing in Q2 and what the outlook is in the near-term?.

I think average selling price on casegoods was up a little bit in Q2 over the prior year and actually I would expect a little bit further advance in average selling price given the more mix because we did have a price increase for our casegoods and imported leather on September 1.

It's a very modest price increase, so I don't think it's going to be a huge impact, but it was a modest increase..

And the upcoming stationary sofa line that you highlighted, what are the price points initially going to be there?.

The retail price points will be around $2,200, $2,200 to $2,500..

It sounded as though it was going to be a little bit more promotional, maybe I misheard you..

For B-Y domestic eight-way hand-tied products, those price points fall into a more moderate range. Our opening price points, regional price points for an all leather sofa from $1,799 to $1,999 are covered through our import line, Hooker Upholstery, then we step up to our domestic bench-made eight-way hand-tied product..

Great, thanks.

What do your customers tell you, the retailers, say about their own sales and traffic patterns during the Labor Day weekend as opposed to the rest of August?.

Clearly an improvement. For most, Labor Day sales were good, based on retailers I have spoken to as well as our sales team..

Any sense of to what extent promotional activity on the customers' part played into that or what the other puts and takes were, because it does seem that industry-wide things really perked up for the holiday, is it pent-up demand, are you seeing other factors there?.

Generally Labor Day like other major promotional events, there is a lot of advertising activity which certainly stimulates sales, and we do continue to believe that there is pent-up demand out there. As we move towards the fall selling season, we do anticipate continuing improvement in retail activity..

Clearly there was something going on this year. There have been retailers, at least a couple, that have cited pretty decent mid to high single-digit year-over-year gains versus last Labor Day. I just can't recall whether it was a mitigating circumstance or if there's anything else going on a year ago..

Not that I'm aware of..

Okay.

As far as Homeware, how dilutive to EPS was it in Q2 and what was that contribution a year ago?.

It's about $0.02 this year. Last year it was about the same. It is a little different dynamic because last year it was all startup costs.

This year they've got revenue and they've got – they've still got startup costs but it's a little different dynamic now with revenue and net cost is about – we wind up in the same place but they are generating revenue..

So is there some added – in addition to the startup costs, are there other types of related cost that were not in existence a year ago?.

Heavy brand building costs, a lot of Google advertising and Internet advertising to build the brand..

So I take it that's ramping up in conjunction with the Web-site being beefed up..

Actually the Web-site that we referenced in today's call was the Hooker Web-site not Homeware..

Right, my bad, you're right..

I think a year ago we didn't have the same number of personnel dedicated to Homeware that we do today. So we have increased our staffing there, hired a young lady to head up the Homeware.com site that wasn't here a year ago because we didn't had that site live until maybe November.

So I think a year ago it was more truly startup cost even before we had sold a piece of furniture, and then this year we continue to invest significant amounts of money in brand building and drive the traffic to the Web-site, just creating more brand awareness..

And just in general, Paul, have you received much pushback from the consumer regarding Homeware, the RTA nature of those products particularly vis-a-vis the price points or has that really been an easy sale for you?.

We were having that conversation yesterday with our Board and I don't think that we've gotten a lot of negative feedback on the RTA. Some of the retailers that we're selling through don't go – we don't think go quite far enough in identifying it as a to-be-assembled product in the home.

So I think some people are surprised, but in all the chairs that we've shipped, I think we received two back because they were unhappy with the fact that it was RTA product.

And on the question about price value for RTA and whether we're getting pushback being at the prices we are, which is for a better product than – it is a quality product both comfort of seating and the stability of the case, the design, the materials that we use, are all comparable to our Sam Moore chairs, we're not getting the feedback but we're also not selling as many as we would have hoped to sell at this point in the process.

So is that that we haven't done as good a job marketing or is it pushback at the price in general, maybe just buying chairs online people don't feel like they should be $600 to $800, maybe they are used to buying something at slightly less, lower price point. So I think those are things we're looking at and continuing to fine tune it.

We're a little bit later than we had hoped in bringing out multi-seat upholstery. We really had expected to have that this summer and now it looks like it's going to be more of October, November. That's part of the reason that we've missed our internal forecast for sales as well..

In terms of level of promotions at Homeware, is that something that you'll be experimenting with more, maybe adjusting upward or downward with greater regularity than you have thus far, understanding that you really don't know the reasons why someone may not be buying but just pick on it, test the waters a little bit with the price points that you've put up there and that have largely remained unchanged except for the occasional sale?.

I do think we'll tweak our value proposition.

We're also looking at doing focus groups to get consumer feedback on where is the right price point, what would they expect to pay for a chair, and we can also address the RTA part which we think is a huge plus in the delivery part of getting the chair into the home in the first place and also to be able to disassemble and move it easily, but we will get more feedback on all of that..

Our marketing activity and corresponding spend has been fairly consistent..

And the general manager is a specialist in that marketing, that's her background..

Right. .

Good.

And just turning to H Contract for a second, was that accretive to earnings in Q2?.

It was breakeven..

Okay, and that's a slight improvement from last year, correct?.

That's an improvement from last year and $0.01 or $0.015 improvement from last year and we're pleased with the progress..

I may have asked you this last quarter, Paul, but are you planning – from where you sit now, are you planning any changes to the selling process or the sales force with respect to H Contract going forward?.

No, I think we're pretty satisfied with the sales organization we have, which is I believe about 35 professional men and women that are selling it to the contract channel. So we could end up tweaking a person here or there but generally we're satisfied..

And sticking with H Contract as far as distribution channels, are you exploring any additional institutional categories within the healthcare arena?.

I think the focus is still the channel that we identified early on has been retirement community type projects.

We have had some success in selling into other channels on just kind of one-off basis but I think we've had some educational institutions, lobbies and common areas and then we may have come into like a boutique hotel type setting, but honestly we had some of that even before we established H Contract.

So I think we've got sales organization calling on designers and specifiers and people that are doing more than just retirement communities..

Let me get back to your first question on unit and average selling price for the quarter, I think we have an answer..

Right. Casegoods, unit volume was down 2.8% and the average selling price was effectively flat. Upholstery, unit volume was down 4.8% but average selling price was up 7.6%. So consolidated that's down 3.5% unit volume and 2.7% average ASP increase..

So upholstery, that ASP increase was 7.6% you said, correct?.

Right..

Okay, thank you for that. Last question is on Sam Moore. I thought I heard you cite labor cost as one of the factors for the improvement in profitability.

What's the source of that and how much of that's ongoing?.

We've been able to reduce overtime which has had a positive impact on labor costs and we also are on the backside of training. Over the last 12 to eight months, we have been training quite a few people, specifically upholsterers and sewers, and many of them are now up to speed which has significantly reduced our training cost..

Thank you very much..

At this time, I'm showing no further question. I would now like to turn the call back over to Paul Toms for closing remark..

Alright, we appreciate everybody joining us for the call today and we'll look forward to delivering third quarter results in early December. Thank you for joining us..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..