Ladies and gentlemen, thank you for standing by and welcome to the Hooker Furniture Corporation’s Second Quarter 2021 Earnings Webcast Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] I will now like to hand the conference over to your speaker today, Mr. Paul Huckfeldt, Chief Financial Officer. Thank you. Please go ahead..

Thank you, Jimmy. Good morning and welcome to our quarterly conference call to review the financial results for our fiscal 2021 second quarter, which began on May 4, 2020 and ended on August 2. We certainly appreciate your participation today.

Paul Toms, our Chairman and CEO; Jeremy Hoff, President of our Hooker Legacy Brands; and Lee Boone, Co-President of our Home Meridian Division, are joining me today for the prepared remarks.

For the question-and-answer portion of the call, our other executive officers will be available to take questions, including Anne Smith, our Chief Administrative Officer; and Doug Townsend, Co-President of Home Meridian. 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 press release and SEC filing announcing our fiscal 2021 second quarter results.

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

This morning we reported consolidated net sales of $130.5 million and net income of $5.8 million or $0.48 per diluted share for our fiscal 2021 second quarter which ended on August 2, 2020. Compared to last year's second quarter, our net sales decreased to $21.7 million or 14%, while net income increased $1.6 million 39%.

Earnings per diluted share increased 37% from $0.35 a year ago. For the fiscal 2021 first half, consolidated net sales were $235 million down $52 million or 18% compared to last year’s first half. For the first half, we reported a loss of $29 million or $2.46 per diluted share compared to $0.52 earnings per diluted share in the prior year first half.

The year-to-date loss was driven by a $34 million or $44 million pre-tax non-cash intangible asset impairment charge we reported in Q1 as a result of the material impact of the COVID-19 pandemic on our financial performance, market valuation and other factors in our 2021 first quarter which triggered the need to perform an intangibles asset valuation analysis as of the end of the quarter.

As a result of that analysis, we wrote down goodwill and certain tradenames in the Home Meridian segment and goodwill in the in the Shenandoah Furniture division of the Hooker Domestic Upholstery segment. Now, Paul Toms will comment on our fiscal 2021 second quarter results..

Thank you, Paul, and good morning, everyone. While the COVID-19 pandemic continued to impact the economy and our operations, our business began to rebound in mid-May and hasn't let up since. Consolidated fiscal Q2 incoming orders were up 24% and backlogs were up 35% compared to a year ago.

Based on this unusually robust order rate for the summer months, we continue to believe that furniture is an advantage sector in the economy during the pandemic-related economic downturn and safer-at-home practices due to pent-up demand, robust housing market, and less competition from other discretionary spending, such as travel, dining out, and sporting events.

Some of our divisions were able to capitalize on the surge in demand sooner than others.

We’re able to better capitalize on the exceptional demand for our products in those divisions that ship stock from our warehouses including Hooker Branded Casegoods and Imported Upholstery and some Home Meridian divisions such as Accentrics Home focused on e-commerce.

The positive impact of higher demand was not felt as immediately in the Domestic Upholstery segment and in the HMI units as service customers via container direct orders. After our upholstery factory shutdown for four weeks in the spring, production slowly ramped up during the summer to approximately 90% of capacity by the end of the quarter.

Sales will also lag demand in our container direct businesses at Home Meridian. Container direct orders canceled by large customers early in the pandemic in March and April were reinstated during the summer months and we'll have a more positive impact on revenue in the second half of our fiscal year as production begins to flow through the pipeline.

We're gratified to report solid profitability performance this quarter during challenging conditions. Consolidated operating income increased by $1.7 million or 30% as compared to the prior year second quarter. The Home Meridian segment reported operating income of $1.1 million compared to a small operating loss in the prior year second quarter.

The Hooker branded segments operating margin performance continued at a high level and the Domestic Upholstery segment reported essentially breakeven operating results for the second quarter, despite decreased net sales and the inefficiencies from operating at significantly reduced volumes early in the COVID-19 crisis.

The measures we took to reduce spending in response to the economic shutdown had a significant positive impact on profitability in the quarter, as did lower cost of goods sold, as we have steadily shifted offshore production to non-tariff countries since last year.

Year-to-date, approximately 22% of our Casegoods and imported Upholstery products have been subject to the 25% tariff on finished goods imported from China. A significant reduction compared to 35% imported goods subject to tariffs during the same period a year ago.

Some of our cost cutting was temporary, such as furloughs and reductions in executive salaries and director fees, which have now been reinstated. Other cuts will stay in place until higher volume warrants increased spending.

The flexibility of our variable cost model has once again proven successful during this crisis, our ability to scale our business correctly to demand.

During this unusual period, when we're unable to travel and conduct business as normal, we were determined to use the time as an opportunity to improve the efficiencies, effectiveness and sustainability of our business.

We did this through long range strategic planning, identifying opportunities to coordinate more internal activities, launching numerous growth initiatives and focusing our efforts and resources on the products, customers and vendors driving our business.

As part of our focus on the long range future of Hooker Furniture, this June we announced that /the Board of Directors has elected Jeremy Hoff as the next Chief Executive Officer of the company, effective upon my retirement on January 31, 2021. I will remain as Chairman of the Board.

Jeremy joined Hooker Furniture three years ago and currently, serves as President for Legacy Brands. He will become the fourth Chief Executive Officer of the company in our 96-year history. In the time Jeremy has been at Hooker, he's proven to be a great leader, has knowledge of both casegoods and upholstery.

He is both a strategic and operationally focused executive who can balance growing sales with being profitable. Importantly, I know he values the culture that has driven so much of our success over the years. I'm confident Jeremy and the entire leadership team will take Hooker Furniture and all its operating divisions to the next level.

And with that, I'll ask Jeremy to comment on results for our Hooker Legacy Brands for the quarter..

Thank you, Paul. In the Hooker branded segment, income in orders increased by nearly 12% year-over-year and the segment finished the quarter with an order backlog of 47% higher than the comparable period a year ago. Net sales from the segment were essentially flat compared to a year ago dipping by $584,000 or 1.5% in the fiscal 2021 second quarter.

Many of the traditional furniture stores that closed during the economic shutdown reopened during the fiscal 2021 second quarter leading to increased demand from the segment's largest distribution channel.

Because of the disruption of the industry’s product introduction cycle due to the cancellation of Spring High Point Market, our team developed creative ways to keep interest high in new products and stay top-of-mind with customers.

We have done this through digital marketing with upscale photography, and 360-degree videos in a virtual showroom on our website showcasing four new collections. We also participated in a three day mini market held in High Point showrooms during June.

We were gratified to receive solid orders on the new collection and expect to begin shipping them to retail stores by October.

The dynamics of the interrupted product introduction cycle along with pent-up retailer and consumer demand for new furniture styles has significantly increased the importance of the upcoming mid-September High Point pre-market. While we typically see around 40 retail customers in pre-market, we expect to see over 100 this time.

According to industry reports, approximately 235 exhibitors planned to show the market preview compared to the 25 exhibitors typically in the past.

We intend to enter these major home office program and pre-market in response to surge demand for multi-functional furniture that facilitates more home-based work as the ranks of those working remotely from home has risen during the pandemic.

In addition, Hooker casegoods will display the four new collections we first introduced virtually at the upcoming pre-market. In our Domestic Upholstery segment, net sales decreased by $5.2 million or 22.8% in the second quarter as compared to the same prior year period.

At the end of the second quarter, Domestic Upholstery’s backlog was about 45% higher than a year ago this time, incoming orders decreased by 5.9% as compared to the prior year period.

In response to the COVID-19 pandemic as well as reduced orders in March and April, Bradington-Young and Shenandoah’s manufacturing plants were temporarily closed in April and Sam Moore operated at reduced capacity. Upholstery production facilities gradually resumed operations starting in May.

As of early September, all three divisions were operating near capacity. Division management implemented cost reduction measures earlier in the year to mitigate expected operating inefficiencies and the segment operating results were within 10,000 of breakeven for the quarter.

Now I'd like to call on Lee Boone to give more detail on the HMI segment this quarter..

Thank you, Jeremy. Home Meridian second quarter sales were $71 million down 18% from prior year. Operating profit improved to $1.1 million from the breakeven Q2 prior year in spite of the reduced sales volume.

Second quarter profitability was partially the result of cost cuts and spending reductions that were implemented in Q1 to combat the effects of the pandemic. Significant progress has been made in several areas that previously impacted our bottom line.

Most notably a significant reduction of China tariff expense, excess warehousing and freight charges combined a favorably impact the bottom line. Furthermore margins improved in the second quarter. The Q2 sales decline was primarily the result that disruptions from COVID-19.

Both our non-traditional customers slow store reopening, as well as on our factories many of which struggled to rebuild production capacity to pre-COVID levels. Fortunately Home Meridian was in a strong inventory position prior to the pandemic, which enabled us to shift significant quantities from our U.S. warehouses.

However, inventories were significantly reduced in Q2, which will impact our near-term warehouse shipments until we can replenish in Q3. We are replenishing our stock levels as fast as possible, but the surge in demand continues to outpace supply.

At this point, given the current unusually high retail demand, we anticipate struggling to rebuild inventories to prior year levels until Q1 of next year. Consequently, we have aggressively placed new production orders with our factories to ship as quickly as possible, which we expect to improve our service levels mid-Q3 and throughout Q4.

SLF, our largest business unit by sales volume delivered strong profitability in the second quarter, despite a 30% decline in net shipments versus prior year. SLF Q2 profits, which exceeded prior-year, are the result of improved margins and significant spending reductions.

ACH our e-commerce focused business unit also delivered good results driven by exceptionally strong e-commerce sales in the second quarter. This online demand largely driven by the pandemic shutdowns and the work from home trend is expected to continue to remain strong for the duration of the current national health crisis.

It should also be noted that our e-commerce demand did slow toward the end of Q2 as we began to run out of our bestselling inventory. PRI, our upholstery division has demonstrated significant performance improvement in fiscal 2021.

This turnaround is particularly noteworthy given the struggles in this business unit from last year from the China tariffs and associated supply disruptions.

This year's improved results are largely the result of stabilized production supply, strong retail demand from a couple of mega retailers and improved margin management from the new PRI leadership team.

While these results are extremely encouraging, PRI faces the same challenges for production, inventory and service levels and we expect may temper results in Q3 before we begin to catch up product availability to demand.

SLH our hospitality business unit reported a small profit in the second quarter, despite the major negative impact of coronavirus on the hotel and motel sector. This profit was the result of projects already underway when the pandemic hit along with good cost management within the company.

We expect our hospitality sales to struggle for the next few quarters until travel conditions return closer to normal. HMidea, our clubs and mass focus division reported a loss for Q2 the result of a sales decline combined with customer allowances above plan.

We do see a path to long-term profitability for HMidea once business conditions return to normal. Finally, Pulaski Furniture, our step-up casegoods unit reported an operating profit in Q2 despite sales being down 32% versus prior year.

As mentioned before, the sales decrease was the result of order cancellations from large customers in early Q2 and the disruptions of the pandemic on factory output over the last five months. The PFC profit although small was hard earned through relentless margin and cost management from the PFC team.

Home Meridian incoming orders were extremely strong in Q2 and exceeded orders in the same period last year by 37%. These orders were driven by strong e-commerce demand, as well as surprisingly strong demand from our brick-and-mortar retailers as they reopen their stores following four to six weeks of pandemic shutdowns.

Home Meridian order backlog continued to build in Q2 the result of continuing strong incoming demand from our customers, many of whom are placing orders for shipment well into the future. We finished Q2 with $122 million backlog up 32% over prior year.

Looking forward, our order backlog continues to build and we are working diligently with our partner factories to maximize production and shipments to satisfy the unprecedented demand. HMI current backlog exceeded $150 million last week, which was a new record for the company. This is the result of the $28 million backlog increase in August alone.

As Jeremy mentioned earlier, our expectations are that retail attendance at next week's High Point’s Pre-Market will be up four to five fold. HMI is booking advance appointments for Pre-Market and our initial indications are for an exceptionally well attended Pre-Market event. Our sales teams, samples and showrooms are ready.

At this time, I'd like to turn the call over to Paul Huckfeldt who will elaborate further on quarterly results..

Thanks Lee. Our cash balance was $82 million at the end of the quarter, an increase of $46 million from the fiscal 2020 year-end. So far this year, we’ve generated $53 million in cash from operating activities, much of it from the reduction of inventory levels and the collection of accounts receivable.

As noted above, we plan to utilize some of this cash to increase inventories to meet the rest demand we've experienced since mid-May. We're revisiting sales forecasts weekly and adjusting production orders based on incoming demand.

Our Hooker Branded business income is in somewhat better position, because we didn't cancel or postpone orders with our Asian vendors at the onset of the pandemic, while the HMI direct business will take a little longer to get back to normal production floor, both businesses are reacting to the strong demand we've experienced since the initial pandemic shut down by focusing on getting best-selling products back in stock, which we expect to do within the next 60 days.

But given current lead times with Asian partners, we have and may continue to experience some out of stocks with respect to certain imported products. Average selling prices were down to 1.4% in the Hooker Branded segment and up 1% in the Home Meridian segment for the quarter.

On a consolidated basis, average selling prices increased 1.3% mostly due to a favorable change in mix by division as the unit volume in the higher priced Hooker Branded segment stayed essentially flat, but was down 14% in the Home Meridian segment.

The average selling price decreased in the Hooker Branded segment was driven by higher discounting on e-commerce and discontinued product sales. The increased average selling price in the Home Meridian segment was attributable to product mix.

The Domestic Upholstery segment average selling price decreased by 6.1% due to a smaller mix of the higher priced Bradington-Young products. Unit volumes were down 17.9% in the Domestic Upholstery segment resulting from lower orders volumes and operating below capacity during - full capacity during the quarter.

Consolidated gross profit increased $1.8 million to $27 million in the second quarter, but increased from 18.9% to 20.7% as a percentage of net sales.

Most of the decrease in dollars was due to the - was in the Domestic Upholstery segment due primarily to the sales decline and unabsorbed fixed costs resulting from operating at the lower production levels.

Hooker Branded gross profit increased both in absolute terms and as a percentage of net sales attributable to favorable casegoods product cost and to a lesser extent reduced warehousing and distribution expenses during the pandemic, partially offset by increased product costs at Hooker upholstery due to a higher mix of product sourced from China, which carries tariffs imposed over the last two years, as we continue to move from China to Vietnam.

In the Home Meridian segment, despite an 18% net sales decline gross profit decreased slightly in absolute terms and increased 220 basis points as a percentage of net sales. We believe the sourcing transition from China the non-tariff actually has been successful in restoring gross margins to normal level.

And several issues which negatively impacted Home Meridian’s gross margin in the prior year including higher freight, warehousing and handling costs on excess inventory didn't recur in fiscal 2021 second quarter. These improvements were partially offset by some lower margin sales burdens.

And all other net sales stayed essentially flat for the quarter. Gross profit decreased slightly in absolute terms and as a percentage of net sales due to an unfavorable product mix although a smaller part of our consolidated results all other reported in operating income due to the continued solid performance of our H Contract business.

Consolidated selling and administrative expenses decreased in absolute terms and as a percent of net sales in the quarter. The decreases were mostly due to lower selling expenses on lower volume and cost reduction efforts we made in response to the COVID-19 pandemic.

The decreases were partially offset by higher professional service expenses and to a lesser extent increased bad debt expense including the recognition of currently expected credit losses under the newly adopted accounting standards ASC326.

For these reasons, operating income for fiscal 2021 second quarter increased $1.7 million to $7.5 million compared to $5.8 million in the prior year quarter. Operating margin improved from 3.8% to 5.8%.

And our balance sheet in addition to the $82 million cash balance we had access to almost $26 million on our revolving credit facility and $25 million of cash surrender value of company owned life insurance, which gives us additional financial flexibility.

We're confident that our strong financial condition can weather the expected short-term effects of impacts of COVID-19; however, an extended impact could continue to materially and adversely affect our sales, earnings and liquidity. Now, I’ll turn this over to back Paul Toms for his outlook..

Thanks Paul. Given the robust housing market, strong demand since mid-May, and backlogs of 35%, we enter the fall with momentum and a great deal of optimism.

As I mentioned earlier, we used the shutdown period to identify growth strategies, improve efficiencies, and effectiveness across all our businesses, from expense reduction to long range strategic planning to focusing our efforts and resources on the products, customers, and vendors driving our business.

All these initiatives will yield positive long-term results. We are concerned about the human and economic toll of COVID-19, both currently, and the future possibility of additional surges of the virus that may delay re-openings and have adverse effects in certain regions or states.

However, we have a very strong team, and are in excellent financial condition. We weathered the disruption of tariffs last year and the pandemic so far this year. We are well-prepared to face an uncertain future, and well-positioned to benefit from furniture’s emergence as an advantaged category.

This ends the formal part of our discussion today and I'll turn the call back over to our operator, Jimmy for questions. Thank you..

[Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Company. Your line is now open..

So obviously it's encouraging to see the backlog up 35% for the quarter. So how should we think about you know the timing of when you will be able to book that as revenue. Obviously, I know you talked about some supply chain constraints and with demand outpacing supply.

So I just wanted to get a better handle as this - so how should we think about - translating that backlog into revenue?.

Okay, Anthony, this is Paul Toms. Thanks for joining us and thanks for your question. It really varies across our different businesses that come - probably the most immediate impact we're going to see is on the Hooker Branded side, in-transit inventories are up, probably double what they normally are.

And Hooker ships much more out of the warehouses, so that in-transit inventory, I think were positive. We're already starting to have seen receipts that are double what our normal receipts are in the warehouses in Virginia. So I think, the impact on the Hooker Branded side will be over the next couple of months.

We should be able to get back in stock, a lot of what we receive will immediately go back out, I'm not sure we'll build the inventories a lot, but will receive the products we need to fulfill the demand that’s in-house.

Home Meridian, maybe a little further out, maybe 30 to 60 days, although they're starting to receive some of, their best sellers with an e-com channel into West Coast facilities this month.

And then the container direct, which is a huge part of Home Meridian’s record backlog that will shift some in Q3, probably more in Q4 and some of that backlog is actually targeted for next year. We’re seeing large customers, live orders and for further Alison and typically would maybe normal ordering would be four months.

And today it maybe five, six, seven months because of the backlogs and the factories in Asia have. Probably one of the areas I'm most optimistic about too is our Domestic Upholstery. I'm looking at the volume that they produced in Q1 and Q2 and it's not anywhere close to what their capacity is.

We were impacted pretty equally the way our quarters fall where you had April fall into the first quarter and May fall into the second quarter. Those were the two months where we were the most impacted with production shutdowns.

And so, I think we entered the third quarter producing at what we say 90% of capacity and borrowing absenteeism around COVID. I think we're in excellent position, great backlogs in all three of the Domestic Upholstery divisions, record backlog.

And I don’t know the records, but there's a huge backlogs way bigger than last year and it should allow us to run very full schedules for the entire third quarter..

Got it yes, thank you for that color, definitely appreciate that. So, the gross margin was up nicely in the quarter.

How sustainable do you think that expansion is, I know you talked about moving production out of China into other countries, but just wanted to get a better understanding as to how we should think about gross margins going forward?.

I think they're pretty sustainable. This is all progress that we've made on moving out of China and moving to the non-tariff countries. There’s still some friction in some places. The capacity has got to catch up, but I believe over the long-term that they should be sustainable..

Got it, okay..

Yes, we are focused on margin that is true. So we’re evaluating these programs and making sure that that, we’ve got the product, price right and we’ve got the right costs. So I think it’s sustainable..

And then Domestic Upholstery it should improve as production schedules are fallen..

Right..

And in terms of - supply chain constraints are you seeing anything either domestically or outside the U.S.

in terms of ability to get the raw materials and you think that you want to call out as far as any cost headwinds or maybe tailwinds?.

Probably the only thing I would call out would be anytime you have an industry at large doing well labor is probably a challenge in Vietnam right now. Although we're hearing from some vendors it is and other vendors are saying it's not, that they're able to attract the labor they need.

And I guess there are sectors of the economy that haven't done as well and maybe some of those are not, seeing a huge surge in demand as furniture is. Rate is also been a challenge for getting the containers that we need to move product out of Asia and availability on the vessels.

But I believe everything I've read is that the steamship lines will be bringing more vessels on line as they see a sustained need for it. And everything I'm looking at is that maybe the pricing of containers have already peaked, that they expect it to be a little bit less going forward..

And then can you remind us as far as where you are in terms of your sales penetration to e-commerce retailers?.

I could give you a guess, but I'm not sure that I know that exact number. It's probably less than it was last quarter. I think last quarter we may have said that it was 15% to 20% of our total business. But last quarter you had lot of bricks and mortar retailers closed it basically reopened starting in mid-May.

So for at least two-thirds of the quarter you have traditional stores of bricks and mortar reopened and their businesses has been stellar also. So, I would say e-com has probably come down a little bit this quarter as a percent of sales..

And then two more questions from me. So, I think Jeremy, you talked about the Home Office category, you're expanding more into that.

Can you give us a sense - as to where you are now in terms of your penetration of Home Office products and how should we think about that going forward?.

Anthony, I would say that we’ve been really good in our upper end part of our line. We focus more on the best category. The program we're bringing out and actually we've already ordered. We’ll focus more on - better, so in the middle and it’s - it will definitely be able to capture more market share which is what we're trying to do.

So, I think for our business as a category, it is impactful..

And lastly, how should we think about your capital allocation priorities. I know you talked about building up some inventory.

But yes, so you guys have a very healthy balance sheet So what are you looking as far as cash flow usage, and maybe comment on any potential acquisitions?.

Well, firstly our first priority is to support the business we have, so building inventory and supporting the busy fall selling season will be our primary objective. Beyond that, I think we've said pretty consistently that growth by acquisition will be a priority. I don't think - there is nothing we can comment on as far as a specific acquisition.

But I think that that's certainly something that we have in mind and could look for in the future. I think those are the two primary that whilst just keeping a - solid stable balance sheet. I think that served us really well through a long history of the company and most recently through the last recession and through this pandemic.

I think having a solid balance sheet has been one of our really great strength. So, I think that that's always going to be a priority is maintaining a solid balance sheet. But beyond that, I think a smart acquisition is probably the next best thing..

And just one quick follow-up to that and as far as the dividend, I mean would you look to increase that over time as well?.

Our history has been to first of all maintain the dividend. I think we've done that for 50 years. And then secondly to grow it annually and we went through a spell during the 2008-2009 recession where we weren't able to grow it, we did maintain it.

And we've grown it pretty consistently for the last seven or eight years and certainly intend to do that going forward..

Our next question comes from Sandy Mehta with Evaluate Research. Your line is now open..

Can you comment specifically on importing from Vietnam versus China specifically in terms of the profitability, are the gross margins about the same or maybe a little bit less and from - when you're importing from Vietnam?.

The gross margins are better because we don't have the tariffs product that we’re importing from Vietnam that we have on product coming out of China.

There are also some other - so the tariffs are 25% and then some of the other products - some of the products we import out of China have additional duties, like bedroom has a duty of about 7% from one of our major vendors, in the hospitality business or some other duties on court stops, I think and some cabinets and so the margins - the first cost may be a little bit higher out of Vietnam on some products, but the margins are significantly better..

If it wasn't for the tariff would the profitability if you set out - set aside the tariff with the profitability from Vietnam versus China to be about the same then?.

It’ll be somewhat sure..

And one final question for me.

You - your company earned $3.38 in EPS in fiscal year 2019 and I understand some of that may have been preorders because of the whole tariff issue from China from the following year, but even adjusted for that do you - when you see or do you see a company having earnings potential of $3 per share in the future especially in light of the strong housing market as well.

Thank you..

So, well, obviously, we were affected first by the acquisition of the 25% tariff and the need to react to that, 25% tariff and the need to react to that, which involved you know in many cases having to absorb a lot of that tariff plus just all the disruption caused by that.

And then following above 10% tariff and then 25% tariff and then this pandemic has really disrupted the industry. So you know it's going to take - we've got a couple of years of underperformance, but I would expect that you know our basic business, business is good, the housing is good.

And I think that we will return to that, it’s not going to be this year. I’d say it's going to take a couple of years to get back to that. But yes, I believe we have the potential to spend, the business is there and back to ground..

Absolutely, this fall Toms. I absolutely agree with what Paul have tell just. I think though it takes us rebuilding our business. We're smaller top line company than we were when we earned $3.38 so we've got to regrow our business.

We well along in sourcing products out of China and other countries that don't have tariffs a lot of us in Vietnam but some in Malaysia and other countries. We have to complete that transition. But yes, the potential absolutely is there.

It takes us a few years, but we definitely believe that we can continue to the long-term growth of the company and increase earnings..

And our next question comes from JP Geygan with Global Value Investment. Your line is now open..

You discussed the period of time that you expect the past before you built inventory to a more normalized level. But I'm hoping that you might quantify what a more normalized level of inventory looks like and then considering that inventory might be somewhat constrained for the next three months to six months.

Will you expect any added pricing power that might be accretive to gross margins beyond what you're already focusing on defending your margins?.

Pricing power from us to our customers or from our vendors to us?.

From you to your customers?.

Certainly in this environment you have more pricing power. I think you know the backlog we have is a current prices. So we can't change that. We don't really have any plans or see a need presently to increase pricing to our customers.

Your other part of your question was on the level of inventories and I think if you were to look at inventories at the end of last year.

We probably were slightly over inventoried at Home Meridian and under inventory at Hooker Branded, but I think in total those inventory levels are probably pretty reasonable and especially with growth those are slightly more the kind of target.

I think it will take us a while because as we said in the call, the inventories we receive in the next three months to six months are going to turn around and shift pretty quickly. I think the first thing we'll do is fulfilling demand and the backlog that we already have. And then be able to build inventories.

I really look at the inventory build probably happening Q4 and into next year in total..

I would add that pricing power might be in the case of I think we're selling fewer close outs. We’re selling down our inventory. We are cleaning up our inventory. So in that way it's not exactly - it’s not leveraged.

But I think that margin should maintain going forward because we’re selling through some of our - we’re cleaning up the inventories and getting rid of our C and D inventories..

And also discounting less to move inventory promoting less because in this environment really don't need to discount the challenges have enough inventory. So it makes no sense to really discount things in this environment..

Paul Toms in your prepared remarks, you mentioned growth initiatives and you've been very clear on your intention to continue to grow through acquisition.

But is there anything else in terms of organic growth or other sort of growth initiatives that you can elaborate on or that investors should be aware of?.

There are numerous growth initiatives across many of our brands - and for branded segment. There is a new online initiative targeted at mid price, casual dining, seating, bar stools, chairs. There's another launch I think intended for October market Jeremy might be able to comment on that.

We're close to announcing a major license collection with Home Meridian. I think it would be a huge growth to our business. And then individual brands have this product line extensions that they’re looking in doing and all of that’s in addition to growth through acquisition.

Jeremy any additional comments on extensions through the Hooker Branded line?.

Well, one extension that I think you were referring to actually is April due COVID-19, but it actually targets millennials as well as Gen X - into different type of product category, more lifestyle product, different price point. We are actually branding it under e-commerce market brand. So that’s just an example.

We are trying to think on - always thinking on how we sell to different group of consumers and how we actually attract different audience without necessarily changing the direction of what we think we're good at currently..

Great..

Doug or Lee anything to add from Home Meridian beyond what I’ve already said?.

Yes, this is Lee Boone at Home Meridian. I would add that over the last several months, Home Meridian has experienced very encouraging results with new mass customers that we were either not selling or selling at a minimal level in the past.

They've been advantaged through the COVID pandemic shutdowns and has given us the opportunity to build relationships and new merchandising programs with mass customers that we would not have had otherwise. So that's going to definitely add sales to our future business..

You might also talk about HMidea and the new type of products that we are launching there?.

Sure.

Doug, do you want that one?.

Sure, yes, yes, yes. This is Doug Townsend. Last year, we launched a new division called HMidea. It's a brand new product category, ready to assemble furniture with easy assembly abilities.

So instead of taking two or three hours to put 100 screws into a desk or a chest, you can put it together and anywhere from 5 minutes to 30 minutes depending on the fastening system. So we spent all last year developing those products. Those products just started to hit the market, excuse me in the last couple of months.

They are mostly e-commerce focused right now, but we have high hopes for that division to be a big part of fueling our growth for the next couple years..

And our next question comes from John Deysher with Pinnacle. Your line is now open..

Hi, good morning and a solid quarter. I was just curious you mentioned bad debt in the prepared remarks.

What was the bad debt for the first half of the current year versus last year?.

Well, the biggest part of the bad adjustment is the adoption of the new accounting standard. We experienced, one bad debt typically that was out of line with our typical experience. But most of the rest of the adjustment was related to the new accounting standard which requires us to look forward. That was probably $400,000 in the first half..

Sorry excluding the accounting adjustment, what was the bad debt?.

I don't have - that information handy..

Well, broadly speaking what's the health of the underlying customer base at this point.

Retail is having its issues, but I'm just curious as to what your underlying customer strength is?.

My guess, this is Paul Toms - our customer strength is actually better - way better than we modeled back in March and April. And our furniture has come out of the pandemic a very advantaged category because of people being sheltering at home and realizing they need, a new dining furniture and new - work spaces.

And less things competing for discretionary spending as we mentioned with travel being way down, dining out being down, people - just don't have the discretionary spending. There's less things competing with furniture for those dollars.

So, I would say most of our retailers across almost every channel we sell and we sell a lot of different channels are doing better than they have a year or two ago and are advantaged and pretty good condition you can find exceptions. Obviously, look at retailers that have closed or gone through bankruptcy.

But I think furniture specifically is outperforming a lot of retail presently..

Yes, I’d say our experience to this point hasn't been different than the fiscal year. The one bankruptcy that I referenced was not related to COVID. I don't think that the pandemic has created any additional bad debt exposure.

But - and we’ll have to wait and see, but I think we're pretty comfortable, most of - we ensure some of our larger accounts and almost all of those have had after suspension of credit insurance during the initial pandemic shutdowns.

Most of that has been reinstated, I think the insurance and investment community is pretty positive about our customers as well..

Okay, good to hear.

And finally what was the exact backlog at the end of the quarter, I heard bits and pieces, but what was the total backlog companywide?.

I don't have that number in front of me. I know we said it was 35% higher than a year ago. And total at the end of Q2, but..

The total backlog was $160 million..

One-six-zero?.

One-six-zero..

Okay. And that was up 35% from a year ago..

Yes, correct..

Okay good. Thanks and good luck..

Thank you..

Thanks..

Thank you. And I’m showing no further questions in the queue at this time. I’d like to turn the call back to Paul Toms for any closing remarks..

No additional remarks to make. We appreciate everybody joining us today. We're encouraged by the quarter that we just reported, but we're certainly very optimistic going forward and believe that the coming quarters are going to be very good for the company. Thank you for joining us today..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect..