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Edited Transcript of HOFT earnings conference call or presentation 30-Aug-18 6:00pm GMT

Q2 2018 Hooker Furniture Corp Earnings Call

Martinsville Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Hooker Furniture Corp earnings conference call or presentation Thursday, August 30, 2018 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Townsend

Hooker Furniture Corporation - Co-President of Home Meridian International

* Michael W. Delgatti

Hooker Furniture Corporation - President of Hooker Brands

* Paul A. Huckfeldt

Hooker Furniture Corporation - CFO & Senior VP of Finance & Accounting

* Paul B. Toms

Hooker Furniture Corporation - Chairman & CEO

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Conference Call Participants

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* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Equity Analyst

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Presentation

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Operator [1]

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Greetings ladies and gentlemen, and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the fiscal 2019 second quarter and first half. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President and Chief Financial Officer for Hooker.

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO & Senior VP of Finance & Accounting [2]

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Thank you, Joelle. Good afternoon, and welcome to our quarterly conference call to review our sales and earnings for our fiscal 2019 second quarter, which ended July 29, 2018. We certainly appreciate your participation today.

Paul Toms, our Chairman and CEO, will join me for our prepared remarks. For the question-and-answer portion of the call, several of our business unit heads will be available to take questions, including Michael Delgatti, President of Hooker Domestic Upholstery and Emerging Channels; HMI Co-Presidents Doug Townsend and Lee Boone; and Jeremy Hoff, President of Our Hooker Branded Casegoods and Upholstery Division.

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 2019 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 after today's call.

This morning, we reported consolidated net sales of $168.7 million and net income of $8.7 million or $0.74 per diluted share for the fiscal 2019 second quarter, which ended July 29, 2018. For the quarter, consolidated net sales increased 8% compared to a year ago primarily due to increased sales in our Home Meridian segment and our All Other business units. Earnings per share increased to $0.74 per share compared to $0.67 in the prior year quarter.

Now Paul Toms will comment on our second quarter results.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [3]

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Thank you, Paul, and good afternoon, everyone. Thanks for joining us today. We're pleased to report a solid quarter with sales up 8% and net income up almost 12%. Retail business was challenging throughout the summer, and we're encouraged that year-over-year order rates have trended up briskly in most divisions since the beginning of August, with incoming orders in our Hooker Branded segment up 20% so far in the third quarter and Home Meridian's order backlog 15% over the same period in the prior year.

During the quarter, sales softened in the Hooker Branded segment following 4 consecutive quarters of year-over-year revenue growth. The Home Meridian segment rebounded a bit from the small sales dip in Q1, reporting an approximate 4.8% net sales increase. HMI has resolved the disruptions with Asian suppliers that negatively impacted shipments in the first quarter. In All Other, our sales increase was primarily driven by the addition of Shenandoah's net sales, which we acquired in last year's third quarter.

Consolidated operating income stayed essentially flat in the second quarter. Higher consolidated employee medical benefit cost, weather-related property damage at one of our warehouses, price increases for materials and components in the domestic upholstery divisions all negatively impacted consolidated operating income in the quarter. This was partially offset by increased operating profit in the Home Meridian segment.

Taking a closer look at each of our segments, I'll begin with the Hooker Branded segment. As I mentioned, sales leveled off at both Hooker Casegoods and import upholstery during the quarter after 2 consecutive quarters of growth. However, we're encouraged in August by a 28% uptick in orders for Hooker Upholstery and an 18% uptick in orders at Hooker Casegoods versus the first 4 weeks of Q3 last year. We're focused on growing Hooker Branded sales with some timely promotions, taking advantage of a strong in-stock position on best-selling items and groups.

During the summer and at a recently concluded design meeting in High Point, we previewed several new Hooker Casegoods collections to approximately 80 retailers. Based on very positive feedback from those retailers and as part of our strategy to increase speed to market, we're presently ordering 2 major Casegoods collections being introduced at the upcoming October High Point Furniture Market. This will allow us to ship these products to our retailers 2 to 3 months earlier than is typical, thereby increasing turns next year and taking advantage of traditionally strong retail sales in the first quarter. We expect a positive impact as we begin shipping these collections to our largest retailers and direct containers out of Asia by the end of this calendar year and shipping from our U.S. warehouses to other retailers by the end of the fiscal 2019 period in early February.

Hooker Upholstery continues to have good momentum with 3 consecutive strong High Point markets. We attribute the flat sales in the second quarter to the typical seasonal pattern of lower sales of leather upholstery in the summer months. We have an optimistic outlook for Hooker Upholstery heading into the fall selling season, with a strong inventory position on bestsellers and a good lineup of new product introductions for the October market.

Our long-range strategy to develop and grow our business in emerging and winning channels of distribution for Hooker, Bradington-Young, Sam Moore and Shenandoah is gaining traction, particularly in the interior design and e-commerce channels. Sales in these channels were up 12% and over 25%, respectively. To further foster growth in these channels, we're launching several comprehensive programs at the October High Point Furniture Market. For the interior design channel, we're launching Design Pro, a paid membership program that provides interior design clients with features and benefits, including sales aids, special promotional periods, higher service levels and more. We're also set to launch a new line of modern upholstery and premium bedding called Marq, M-A-R-Q, designed especially for and available exclusively to the interior design trade.

This October, we're launching [Eagle], a rollout of websites featuring B2B e-commerce. Designers, small to mid-sized retailers and retail sales associates will be able to shop our site, view our entire product line and place orders online. On those sites, designers and retailers will see pricing at their tier and be able to see and order sales aids, samples and much more. This is a significant investment into a best-of-class B2B e-commerce platform for the Hooker Legacy Brands.

During the quarter, we were happy to add some fresh new management talent to an already strong team in the Hooker Branded segment. At Hooker Upholstery, we added a leather upholstery specialist with over 25 years of experience to direct merchandising and product development. At Hooker Casegoods, we welcomed a new merchandising executive with strength in developing upscale, higher-end products and merchandise for international accounts. Both of these individuals report to Jeremy Hoff, who was recently promoted to serve as President of both Hooker Casegoods and Hooker Upholstery, a new position.

Turning now to the Home Meridian segment. We also added a top executive to run the Samuel Lawrence Furniture division, replacing Lee Boone after his promotion to Co-President of HMI in June. Net sales at Home Meridian were up 4.8% over the prior year, and operating margin for the quarter was 5.6%, a significant improvement from the first quarter. On a year-to-date basis, sales were even with last year and operating profit is below prior year, the result of higher spending and investments we've made in the emerging channels of the business. Our current backlog is up 15% over prior year. Orders for the second quarter were soft, down approximately 14.7%. However, orders have bounced back in August. Fiscal year-to-date orders were up approximately 8%. The episodic nature of large orders from our largest customers creates small distortions in year-over-year comparisons at Home Meridian.

Emerging channels continue to deliver better sales growth compared to traditional channels. Based on this established trend, we're making significant investments in our business units focused on the emerging channels. Our e-commerce business is the fastest growing and delivers consistently good margins. This channel was clearly advantaged based on the rapidly changing buying habits of consumers today. We continue to invest into human resources, digital marketing and data analytics vital to developing this channel. Further, we're building out increased capabilities for 3D imaging technology in our Asia offices and will deliver additional sales growth on a relatively low-cost basis, thus enabling us to maintain premium margins in the channel.

SLH, our hospitality business, enjoyed significant sales and margin improvements in the second quarter, the result of investments made earlier this year. The Samuel Lawrence Hospitality backlog was up 54.8% over prior year, and incoming orders in the second quarter were up 24.5% over the prior year. This growth is supported by both an increase in hotel projects and the new kitchen cabinet business we entered earlier this year. We expect this business to continue growing significantly into next year.

Our club channel business at HMI is also enjoying record orders and backlog that will deliver strong performance in the second half. Clubs are another channel increasingly favored by today's consumer, and we believe we're well positioned to capture incremental sales based on this trend. Our model for spotting solid trends early, creating new proprietary products and delivering them quickly to advantaged channels diversifies our business risk while providing exciting growth opportunities.

Sales in our traditional channels were down 2.9% on a year-to-date basis. This is an improvement from the first quarter, and we expect further improvements in the second half of the year based on strong retail performance of several new collections. Within the traditional retail channel, the biggest retailers continue to outperform the smaller stores, and our mega account strategy of providing proprietary products and services for those retailers puts us in a strong competitive position.

Our biggest product launch in the traditional channel will be a relaunch of our exclusive Eric Church Highway to Home brand that will begin shipping in Q4. This relaunch is ideally timed to take advantage of the new Eric Church album and tour scheduled for early next year. A social media promotional campaign is being planned to tie in with Eric Church's activities, which should grow sales from this brand substantially next year. In addition, we've identified a new set of target mega accounts that we are in the initial stages of selling, both traditional and emerging channels. We expect sales from these accounts to be a foundation of our growth in the next fiscal year.

Finally, our new China retail initiative, where we've licensed our designs to one of the largest Chinese retailers, started shipping in Q3 and will give us significant growth opportunities in the fastest-growing consumer market in history. We have a strong partnership with an established China-based retail company that gives us immediate access to that business and additional growth opportunities. Overall, based on the incoming order rate and time-phased backlog at HMI, we expect Q3 to remain soft. However, we have enough backlog and new program launches that allow us to expect Q4 will be very good.

Finally, All Other, which includes our domestic upholstery operations, Bradington-Young, Sam Moore and Shenandoah Furniture, along with H Contract, reported a sales increase primarily driven by the addition of Shenandoah's net sales barring last year's third quarter. While Bradington-Young sales were up only slightly, they continue along a steady path of growth. Incoming orders increased 6.6% year-over-year during the quarter, and their backlog is up over 35%. In addition, Bradington-Young has broken ground on a factory expansion that will increase their capacity by about 50%. All Upholstery divisions experienced a negative impact on margins from price increases in materials and components such as foam, plywood and steel. We experienced a lag between those cost increases and our own price increases to customers. However, we expect to catch up by the third quarter.

Additionally, Sam Moore and Shenandoah changed their vacation schedules, and both had approximately 1 less week of production than in the same quarter a year ago. Higher medical benefit costs also impacted the segment, and the loss of a key retail customer, who has decided to shift to an in-house supplier model, had a material impact on Sam Moore during the quarter. However, signs are encouraging with 2 strong back-to-back High Point markets and new placements with key accounts.

Shenandoah's order rates and sales are steadily improving as we progress through the year, and we're in good position with major retail customers who have expanded their assortments as we head into the fall selling season. At H Contract, we're planning several new product launches in the next few months and plan to dramatically pick up the pace of product introductions over the next year. This should help to continue growing H Contract sales in both the short and long term.

At this point, I'll turn the call back over to Paul Huckfeldt, who will give more details on our financial performance for the quarter.

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO & Senior VP of Finance & Accounting [4]

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Thanks, Paul. Consolidated average selling price decreased 6.7% mostly due to lower ASP at Home Meridian. Unit volume increased 8.4% primarily due to a 10.9% increase in unit sales at Home Meridian, which continues to trend towards higher volume but lower priced -- lower unit priced items. Hooker Branded segment ASP increased due to lower discounting, and its unit volume decreased slightly as business slowed a bit from last quarter. In All Other, the inclusion of Shenandoah Furniture this quarter and increased sales of higher-priced Bradington-Young products helped to offset the sales decrease at Sam Moore.

As Paul noted earlier, consolidated gross profit increased $2.5 million in the quarter mostly due to increased sales in the Home Meridian segment and All Other. Hooker Branded segment gross profit stayed flat in absolute dollars and increased slightly as a percentage of sales. Consolidated selling and administrative expenses increased in absolute dollars and as a percentage of net sales. Higher employee benefit costs, investments in people and systems, particularly at HMI, and higher compliance-related costs drove the increased spending, but we're able to better leverage fixed costs on the higher sales this quarter. Amortization of acquisition-related intangibles was higher in this year's fiscal first quarter -- in this year's fiscal quarter due to adding amortization of Shenandoah's intangibles from our acquisition of that business in the third quarter last year.

For these reasons, operating income for the fiscal 2019 second quarter stayed flat at $11.9 million or 7% of net sales. For the fiscal 2019 first half, consolidated operating income increased $2.1 million to $21.2 million or 6.8% of net sales, thanks primarily to a $24 million increase in net sales.

Our balance sheet remained strong despite the use of cash and additional long-term debt incurred to acquire the business of Shenandoah Furniture last year and the unscheduled $10 million debt payment made earlier this year. At the end of the quarter, we had cash and cash equivalents of over $29 million available to provide the required working capital and to service our acquisition-related debt. We also have in excess of $28.5 million on our revolving credit facility and $23 million of cash surrender value of company-owned life insurance, which gives us additional financial flexibility. In today's press release, we also announced a quarterly dividend of $0.14 per share, which represents about a 1.5% dividend yield.

Now I'll turn the discussion back to Paul Toms for his outlook.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [5]

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Thanks, Paul. Given improving conditions at retail, recent incoming order trends and increased backlogs at 6 of our 10 divisions, we're encouraged with our position going into the fall season. We do have some concern about the prospects of tariffs being imposed on finished goods and component parts imported from China. This would have a negative impact on a significant portion of our business, elevating costs both on finished goods imports from China and on component parts and materials used in our domestic upholstery manufacturing. We've been actively involved in submitting briefs for the hearings about tariffs in Washington, D.C., and we do have strategies in place to mitigate the impact of tariffs if imposed.

A generally positive macro environment is driven by GDP growth of 4.1% from Q2, a stock market pushing all-time highs, strong employment and consumer confidence at record levels. Retail is improving, and demographic trends definitely favor our industry. Our expectation for the fall selling season and the balance of the year is guardedly optimistic.

This ends the formal part of our discussion. At this time, I'll turn the call back over to our operator, Joelle, for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Anthony Lebiedzinski with Sidoti.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [2]

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So first, I guess I wanted to follow up about or get a better sense as to the order rate trends. Obviously, they have picked up since early August. Is this just a timing issue? Or maybe you can perhaps better explain the order flow that you've seen so far and perhaps the reasons for that.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [3]

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Okay, Anthony, this is Paul Toms. And order trends have improved significantly in August over the prior August. And as I noted in our comments, we were with about 40 or 50 key retailers at a design meeting in early August, and almost to a person, they reported improving conditions at retail over what they experienced through the summer. So that's encouraging. Business always improves in the fall. It seems like in the summer, people are on vacation and not really focused on the interior of their homes as they are once they get back from vacation, the kids are in school and they start thinking about the holidays. So it's pretty typical. But again, we're comparing to the same season last year. So I would say summer was a little slower than we would have expected. And since early August, it's been better than we had expected. Within our businesses, Hooker gets a more immediate read on business because most of our customers don't order things until they've sold something, and we ship about 85% of our orders out of our warehouses in Virginia. Home Meridian, on the other hand, is dealing with large customers that are programming orders out months in advance, and I don't know that we feel the impact immediately from those large customers of what they're experiencing at retail every day. And Home Meridian's orders, if you have 2 or 3 large orders fall in one quarter versus another, it can make a significant dent in the order trends for that quarter. So we're probably -- Hooker may be a better read in a short period, 3 to 4 weeks, than Home Meridian. But orders have improved in both divisions and up fairly significantly.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [4]

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Okay. That's certainly good to hear. And so it does sound like there is more lumpiness with the HMI business. So as far as the All Other segment, you talked about the factory expansion for B-Y. What's the timing as to when you expect to complete that? And then I have a couple of other questions as well.

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Michael W. Delgatti, Hooker Furniture Corporation - President of Hooker Brands [5]

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This is Mike Delgatti. We expect to complete the expansion in early 2019. The manufacturing portion of the expansion should be complete before that, and we hope that we'll start producing some product before the end of the calendar year. And then the move to consolidate our corporate office into this new facility probably takes place in February of 2019.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [6]

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Got it, okay. And as far as the change in vacation schedules at Sam Moore and Shenandoah, was this simply a shift from 2Q -- I'm sorry, from 3Q into 2Q or maybe there was some other timing issue? But any -- is there any way you guys can quantify as to what the impact of that was as far as the top and bottom line?

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Michael W. Delgatti, Hooker Furniture Corporation - President of Hooker Brands [7]

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It certainly had an impact on both operations. Shenandoah over the years has always leveled out their business, so to speak, during vacation periods, so this is the first time they ever had a 3-week period. Sam Moore also went along with Shenandoah to the same vacation policy plan that we have had at B-Y over the years, whereby we shut down for a week in July and shut down for a week in December as well. And obviously, those shutdowns had an impact on shipping and, in turn, profitability because of lower sales volume against fixed expenses.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [8]

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I guess to add on to that, Mike, previously they would have just rotated people's vacations throughout the year. So it's actually a full week down, extra full week down, over what they had previously.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [9]

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Okay. And as far as the loss of a key retail customer, it appears that's only for that Sam -- for the Sam Moore brand. Is that correct? Or is there any spillover to any other...

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [10]

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That's correct.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [11]

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Okay. Okay.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [12]

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No spillover, Sam Moore only.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [13]

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Okay. And the impact of that as far as annual sales volume, is there any way you could quantify that?

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO & Senior VP of Finance & Accounting [14]

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This account represented around 8% of their total business last year. However, fortunately, on a year-to-date basis, we have made up about half of that loss and well on our way to making up all of it, we believe, into early next year.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [15]

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Okay. So can you give us a better sense as -- Sam Moore, how big of a brand is it in the big scheme of things? What's the typical sales volume that you do just for Sam Moore?

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Paul A. Huckfeldt, Hooker Furniture Corporation - CFO & Senior VP of Finance & Accounting [16]

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Sam Moore is around a $35 million business for us. As you know, Anthony, it's a chair company. That's what drives the vast majority of their volume. So they're a good-sized company considering they produce primarily chairs.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [17]

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Got it, okay. And as far as the commentary about Home Meridian, one of the things that you touched on was increased spending. Is this something that we should expect on a year-round basis? Or did you spend more to gain business in the second quarter than what you would have previously spent?

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Douglas Townsend, Hooker Furniture Corporation - Co-President of Home Meridian International [18]

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This is Doug Townsend. Our spending is up and as we've mentioned, a lot of it is investments into some of our emerging channels and emerging customers. I think now in terms of where we are, it'll stay where it is. And we have different spending control programs in place to make sure that we stay within our limits. So we don't foresee making major additional investments at this time.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Equity Analyst [19]

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Got it, okay. And lastly, as far as the potential tariff impact, can you give us a sense as to -- if these tariffs do get implemented, if you could give us a better sense as to how this would impact your business. If you could give us some quantifiable measures, that'd be great.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [20]

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Sure, Anthony. This is Paul Toms again. The tariffs, if implemented, will impact different parts of our business in different ways. We have several divisions that import upholstery. And most of the imported upholstery, I would venture maybe 90% of the upholstery that's imported into the U.S. comes out of China. Our general strategy is to put surcharges on our furniture that's impacted by tariffs equal to about the amount of the tariff. In the case of a category like import upholstery, where everybody is impacted, it's easier to do that. There's other parts of our business like Casegoods in the Hooker division, over half of our volume comes out of China. And in that case, our competitors don't all have as high a percentage of their volume out of China, so there's a little less ability to pass through every bit of a surcharge or the impact through a surcharge. We'll do that. We'll work with our vendors to try to negotiate a little bit better price to offset some of the impact of the tariffs. We'll continue to -- we brought in a good bit of inventory to try to get ahead of any prospective tariffs. We have a very good inventory position already in the U.S. on products from China that, of course, wouldn't be subject to tariffs because they were already brought in. That'll help us for a while, but it really varies by division. Even in our domestic upholstery division, the 3 companies are impacted differently. But they -- we import a lot of fabrics from China. We import some of the mechanisms from China. We import some of the other component parts, frames and screws and springs that we use. And so it kind of varies by division, but there's some impact in most of the parts of our business. And our strategies are to pass those increases due to tariffs along and a surcharge to negotiate with our suppliers in Asia to try to offset some of that impact so we don't have to raise the price of products as much and then to continue to lobby. We were present in Washington for the hearings and we've filed written briefs, both as an individual company and also through our trade association as part of the industry. As far as the exact financial impact, I'm not sure that we can say that and it'll -- in our HMI business, they don't ship a lot out of warehouses in the U.S., so they're -- they will see it more immediately. But a lot of their customers are the importer of record, so the tariffs will actually be borne by whoever is the importer of record. And that helps mitigate a little bit of that with Home Meridian.

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Operator [21]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Toms for closing remarks.

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Paul B. Toms, Hooker Furniture Corporation - Chairman & CEO [22]

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All right. Well, we appreciate everybody joining us today. We weren't completely satisfied with the quarter. We'd like it done a little bit better. But all things considered, I think we did reasonably well. We've got good momentum heading into the third quarter. We're encouraged about August as well as the rest of the quarter. We look forward to getting back with you in December and updating you on the results from that. Thanks again for joining us.

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Operator [23]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.