Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its Operating Results for the Second Quarter. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President, Finance and Chief Financial Officer for Hooker Furniture Corporation.

Thank you, Michelle. Good morning, and welcome to our quarterly call to review financial results for our fiscal 2020 second quarter, which ended on August 4, 2019. We appreciate your participation today. Paul Toms, our Chairman and CEO; and Doug Townsend, Co-President of our Home Meridian division, will join me for our prepared remarks. For the question-and-answer portion of the call, several of our business units heads will be available to take questions, including Michael Delgatti, President of Hooker Domestic Upholstery and Emerging Channels; Home Meridian Co-President, Lee Boone; Jeremy Hoff, President of our Hooker Branded segment; and Anne Jacobson, our Chief Administrative Officer. 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 2020 second quarter results. Any forward-looking statement speaks only as of today, we undertake no obligation to update, revise any forward-looking statement to reflect events or circumstances after today's call. This morning, we reported consolidated net sales of $152 million and net income of $4.2 million or $0.35 per diluted share for our fiscal 2020 second quarter, which ended August 4, 2019. Compared to last year's second quarter, our net sales decreased $16.4 million or 9.7%, and net income decreased $4.5 million or 52%. Earnings per diluted share decreased 52% from $0.74 a year ago. For the fiscal 2020 first half, consolidated net sales were $288 million, with net income of $6.1 million or $0.52 per diluted share. Net sales were down 7.6% or $23.8 million, compared to last year's first half. Earnings per diluted share decreased to $0.52 from $1.34 last year, a 61% decline from the prior year first half. Paul Toms will now comment on our fiscal 2020 second quarter results.

Thanks, Paul, and good morning, everyone. As we expected after our first quarter, business in the second quarter was significantly impacted by tariffs on finished goods and component parts imported from China, as well as weak retail demand through the first eight months of this year. In addition, lingering effects of several cost-related issues that began late last year at Home Meridian deflated our performance in the quarter. We believe the macroeconomic challenges related to the tariffs and soft retail conditions are affecting many companies in the furniture industry. Looking across our industry, many public furniture companies are reporting weaker sales and reduced earnings. Business disruptions from the 10% tariff imposed last September and the additional 15% tariff imposed June 15 this year have impacted both our top and bottom line. Revenues have been negatively affected by tariff rhetoric and turbulence in the marketplace and by tariff-related price increases. These tariff dynamics have reduced retailer and consumer demand. Profitability has been negatively impacted by higher costs, which have also lowered margins. Despite all the headwinds, I believe we're doing incredible job, executing various measures to mitigate the impact of the tariff on our business going forward. These include negotiating vendor price concessions, passing through modest price increases to our retail customers, the first of which was put in place last fall and the most recent one in mid-June. And most importantly, we're well on schedule in shifting production away from China. While slightly over 40% of our product line was imported from China at the end of our most recent fiscal year, we expect about 22% of our products will be produced in China by the end of this fiscal year. The lower year-over-year sales trend that began in the first quarter continued in the second quarter. Home Meridian's 14%…

Thanks, Paul. HMI sales in Q2 were $87.2 million, down $13.8 million or 14% versus last year. Continued softness at retail across all residential channels of distribution, compounded by ongoing industry disruptions resulting from the China tariffs, were the primary causes of the sales decreases. The retail softness negatively impacted four of our five business units, with sales down across all traditional furniture retail segments. SLH, our hospitality business unit, reported strong sales growth in the second quarter with sales up 44% in the quarter as new sales initiatives and new customers increased demand in that segment. For the quarter, consolidated incoming order for flat versus the prior year and backlog at the end of Q2 was down 9.7%. Both the order and backlog trends have improved significantly from Q1. Q2 operating results improved to breakeven, also a substantial improvement from the loss reported in Q1. Second quarter income performance, while a step in the right direction was nonetheless reduced by lower top line sales, continued tariff-related product costs, continued warehousing-related expenses from our Q4 product return, and other operational disruptions caused by the tariffs. Major initiatives to improve results are well underway and can be summarized as follows. Firstly, our China exit strategy. Our strategy to avoid tariffs on imports from China, as well as reduce the uncertainty resulting from our country's current trade relationship with China is to resource production away from China as much as feasible. Prior to the tariffs, approximately 44% of HMI products were manufactured in China. As of August, approximately 29% of our production remains in China and that number will continue to come down. Our progress resourcing upholstery production for our PRI division has made even more dramatic progress than that. Prior to the tariffs, 100% of PRI production was manufactured in China,…

Thank you, Doug. Consolidated average selling prices increased 4%, mostly due to favorable product and customer mix, but that was not sufficient to offset the unit volume decrease of 13.6%, which resulted from lower order volumes in both of our reporting segments and All Other. Unit volumes were down high single digits to low double digits across our segments. Consolidated gross profit decreased $6.8 million to $28.8 million in the fiscal 2020 second quarter and decreased from 21.1% to 18.9% as a percentage of net sales. Hooker Branded gross profit decreased both in absolute terms and as a percentage of net sales due to lower Hooker Casegoods sales and to a lesser extent increased product costs, partially offset by increased sales and higher gross margin in our Hooker Upholstery division, which is benefiting from the well placed product introductions last year and has made good progress mitigating the impact of tariffs. In the Home Meridian segment, gross profit declined significantly in absolute terms and as a percentage of net sales. Home Meridian's gross margin was negatively impacted by several factors in addition to un-recovered tariff and freight costs and some lower gross – and some lower margin sales programs that we've been working to improve. Some of those items included about $900,000 in quality chargebacks, excess freight and handling costs of about $950,000 and about $350,000 of higher warehouse costs during the quarter. Despite the sales decline, gross margin increased in absolute terms and as a percentage of net sales in All Other, due primarily to lower material costs in our domestic upholstery units as well as increased sales and profitability in our H Contracts. These gains were partially offset by higher direct labor and overhead costs as a percent of sales attributable to the lower production and order volumes.…

Thanks, Paul. We remain cautiously optimistic about the second half of the year and still expect that retail business and demand will improve to better levels beginning this fall, traditionally the strongest season of the year for furniture sales. Request from some large retailers to expedite orders, so they'll have adequate inventory for the fall selling season have been encouraging. Our tariff mitigation strategies and sourcing shift away from China are well underway and we are reducing costs and nonessential spending, along with delaying some capital expenditures until the environment improves. We expect the benefits of our tariff mitigation strategies and resourcing efforts will begin to be felt in the third quarter and increasingly thereafter. Even with the uncertain economic environment, we're proactively taking many steps to expand our company, including launching new business units and product line extensions. At the Fall Market, we will introduce the product licensing program at PRI division with Terry Bradshaw that Doug mentioned, launch a new HMI division targeting mass merchants and introduce an expanded upholstery offering at Sam Moore. We remain highly engaged as a management team in strategic planning and continue to benefit from having a diverse portfolio of 11 operating units across many different distribution channels, price points and product categories. We remain confident in our business model, our market position and the strategies we have and believe we will adapt successfully to any challenges ahead. This ends the formal part of our discussion. At this time, I'll turn the call back over to our operator Michelle for questions.

[Operator Instructions] Our first question comes from Anthony Lebiedzinski of Sidoti. Your line is open.

Hi. Yes. Good morning and thank you for taking the questions. So, first on the Home Meridian, so you mentioned that it was hit harder by the tariff disruptions. I know there was obviously much greater exposure to the large retailer. So, I just wanted to get a better sense as to what percentage of specifically HMI sales come from China as far as for the quarter?

I don't know that we broke out for this quarter, the amount of …

Or maybe for last year, like just to get a better sense for just HMI specifically?

Doug?

Yeah. Q3, Q4 was in the 44% range and around -- in this quarter and last couple of months in the 29% range from China.

Okay. Got it. Got it. Okay. And as far as the excess freight costs, do you have any expectation where that will be in the third quarter?

Looks to be about $600,000, that's going to wrap -- I think that's going to wrap that up.

Got it. Okay. All right. And so obviously, you're moving as scheduled, as planned for your shift away from China. And you said it was going to be about 22% as far as your exposure by the end of the year. Would you expect that number to decrease further next year or would it be kind of more or less kind of stable at that level?

It will decrease slightly from there. There will always be some products from China, and even with the tariff rates on them, they'll still be a better value there than other places. But yeah, it will keep decreasing, but slowly from there.

Got it. Okay. Thank you for that. And as far as your overall penetration as far as exposure to the e-commerce retail, which is certainly one of your bright spots, so what percentage of your consolidated sales are tied to e-commerce channel?

Anthony, this is Paul Toms. I think that number on a consolidated basis would be about 15% of sales in the channel.

Got it. Got it. Okay. And you talked about some of -- some new sales initiatives. Obviously, you mentioned the Terry Bradshaw line as well. So, overall, the number of SKUs that you will introduce at the Fall Market, is that going to be kind of more or less consistent with other markets or would you say that number will be higher as far as new product introductions?

I can -- well, maybe it would be better to address that almost by segment. Jeremy, Hooker Casegoods, and import upholstery, number of product introductions would be comparable to past markets.

Very comparable.

Okay.

Pretty similar, same number of collections, pretty relative number of SKUs as well.

Okay. And Mike on domestic upholstery, what's your sense?

Comparable one exception would be Sam orders, less emphasis on chairs, more emphasis on sofas and sectionals.

Got it. Okay.

For HMI, Lee?

This is Lee Boone from Home Meridian. From Home Meridian, the overall SKU count introduction will be about the same and Terry Bradshaw collection will represent about 75 SKUs of motion upholstery and entertainment, accent items within our total count.

Got it. Okay. And as far as the incoming order improvement that you cited, I think, Doug you had mentioned actually for HMI specifically the August numbers were up 6.4% versus the prior year. Do you have, Paul, perhaps maybe just numbers for the -- on a consolidated basis, would you be able to share that how that's trending in August versus a year ago?

For the quarter, consolidated orders were about flat to last year, which is a big improvement over the first quarter.

Okay. But you don't have specifically for -- do you have for -- because you called out the HMI numbers, which are certainly encouraging the 6.4% improvement in August versus a year ago, but I'd be curious if you have those…

Yeah. For July specifically was up 20%, a little bit…

Yeah.

For the total company.

…for the total company. A little bit some of that in domestic upholstery is the timing of when orders are received, there is a vacation shut down either in June or July.

Okay.

But yeah, they were up 20% just for the month of July. So, either way I think that's encouraging.

Yes. Okay. All right. Well, thank you very much and best of luck.

Thanks, Anthony.

[Operator Instructions] There are no further questions. I'd like to turn the call back over to Paul Toms for any closing remarks.

All right. We really have no further remarks. We appreciate everybody joining us this morning. We've changed the schedule slightly from prior conference calls, where we try to put our conference call closer to the release of earnings, that was a request we received from several investors, and we'll continue to tweak that. We look forward to being back with you in early December and reporting better results than we did this quarter. Thanks for joining us today.

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