Hooker Furnishings Corp (HOFT) 2014 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Hooker Furniture quarterly investor conference call reporting its operating results for the second quarter 2014 period. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation and instructions will be given at that time. As a reminder, this conference 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. Please go ahead, sir.

Thank you, Jamie. Good afternoon and welcome to our conference call to review our sales and earnings for the fiscal 2014 second quarter and first half, both of which ended on August 4, 2013. We certainly appreciate your participation this afternoon. Joining me today is Paul Toms, our Chairman and CEO; Michael Delgatti, President of Hooker Upholstery and Executive Vice President in Sales for Hooker Furniture Corporation and Alan Cole, President of Hooker Furniture Corporation.

During our call we may make forward-looking statements which are subject to risks and uncertainty. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our SEC filings and the press release announcing our 2014 second quarter results. Any forward-looking statement speaks only as of today. We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after today's call.

Earlier today we reported net sales of over $55 million in the fiscal second quarter which is about $5 million, or 10%, higher than the same period last year. And income for the quarter also increased by almost $213,000 to $1.7 million from $1.5 million last year due primarily to the growth in sales and lower domestic manufacturing costs as a percentage of net sales, which is partially offset by higher selling and administrative costs. For the fiscal first half, sales increased 9.5% to over $111 million and net income was $3.8 million representing a 53% increase compared to last year. We reported earnings per share of $0.16 in the fiscal 2014 quarter, compared to $0.14 last year. And year-to-date EPS is $0.35 a share compared to $0.23 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 fairly bullish due to increased demand and sales at both our upholstery and casegoods operations and a significantly improved retail environment. We enjoyed brisk incoming orders in May but saw demand and retail business progressively slow as we moved through the summer. We don't think this was unique to Hooker Furniture. The slowed consumer demand in the second half of the summer seemed prevalent throughout the furniture industry. Because some macroeconomic fundamentals still are generally positive, we expect that the fall selling season that opened Labor Day weekend will bring an uptick in business as it usually does, but we're not going into the fall with the same sort of momentum we had coming out of our first quarter. That being said, I'm gratified we have achieved sales increases at all of our operating units and an overall 10% consolidated sales increase in the current environment.

Our ability to achieve a consolidated sales increase in the 9% to 10% range for the third consecutive quarter despite softer demand is a reflection of our solid inventory position on best sellers, our increased upholstery manufacturing capacity and our promotion of what we believe to be our strongest product line in years. As is typical for the industry currently, recent sales increases in our casegoods segment have not been as robust as in our upholstery segment since upholstery is generally a lower ticket, more needs based purchase. However, we're pleased to have consistent sales growth in casegoods, beginning in the second half of last year through the first six months of this year. For the first half, our casegoods shipments are up just under 8% which we believe is higher than average for the casegoods industry as a whole. In the second quarter, wood furniture orders were up an even more promising 11% over the prior year quarter. We're shipping much better than last year too thanks to a much improved inventory position and some strong products such as our Rhapsody whole home collection and the continuing strength of our Melange and Sanctuary lines.

These improvements were somewhat tempered by the higher discounting as we clear out some slower moving and end-of-life cycle product lines and by some higher costs reported in the casegoods result which Paul Huckfeldt will discuss later in the call. Our casegood segment is well positioned to capitalize on improvements in the economy as they occur due to our improved delivery times and our inventory position on best sellers. While we're not as bullish in the short-term due to the summer downturn, we are very optimistic about our longer term future, both with our core businesses and our new ventures with H Contract, brand targeting the healthcare and senior living market and the Homeware online-only brand. At this time, I'd like to call on Alan Cole, our President, to give us more details on progress with H Contract and Homeware brands this quarter as well as an update on the enterprise resource planning, or ERP, implementation at our upholstery operations. Alan?

Thank you, Paul, and good afternoon. We had a successful launch of the H Contract brand at the end of the first quarter and we're off and running and beginning to see orders as well as strategic market exposure through our team of 51 veteran sales representatives. The brand has been very well received in initial meetings with designers, architects and end users across the country and H Contract products have been included in a number of upcoming major projects. As these projects unfold, there are positive sales implications for H Contract well into next year. The Homeware e-commerce only brand launched on schedule, August 1, at the very end of the current quarter. In addition to the two major home decor e-commerce websites that initially carried Homeware products, we have added a third e-commerce partner, a preeminent flash site player in the home furnishings category.

Flash sites, which hold short-term online offerings of product advertised to consumer members through large e-mail blasts, are currently the fastest growing aspect of the e-commerce industry. So we're pleased to be aligned with one of the leading players. Homeware is also participating in our first major promotion, a Labor Day promotion that launched on Monday, and will continue through much of this week. Initial exposure and sales for the brand were positive and we'll have a better idea when the promotion is complete how well Homeware performed. We fully expect that it will take some time to build demand and exposure for the Homeware brand. As we reported in this morning's press release, startup costs associated with both brands were approximately $563,000 before tax, or $363,000 after tax, $0.03 per share in the second quarter. For the first half the impact was $0.06 per share and we project startup costs of $0.12 to $0.15 a share for the full fiscal year for these initiatives to reach a broader consumer base.

Another initiative well underway that strengthens our long-term position and competitiveness is Phase II of our Microsoft Dynamics AX enterprise resource planning, or ERP, implementation. At our upholstery operations, Sam Moore and Bradington-Young, we are progressing well with the second phase and are about halfway through the project. Having completed the Phase I casegoods implementation last year, we are now in the final phase of the project. And once complete, we believe we will have a unified operating system that will allow us to present a seamless, more efficient and single face to our customers. At this time, I'd like to call on Mike Delgatti to give us an overview of our upholstery performance this quarter.

Thank you, Alan. As we head into what is historically the industry's strongest selling season, we feel very good about our momentum and market position in the upholstery operations. We were particularly gratified to have achieved this quarter our 12th consecutive month of operating profitability at Bradington-Young's domestic operations where we believe we're on a solid path of sustained profitability. Both Bradington-Young and Sam Moore reported increased sales for the quarter including a robust 28% year-over-year sales plan gain at Sam Moore. Consumer demand for the Sam Moore product line continues to grow with incoming orders up 24% for the quarter. We believe that both brands are gaining market share. Bradington-Young has achieved sustained single digit sales increases during a period of time in which the overall premium leather upholstery market has not grown.

And at Sam Moore our expansion from a chair-only line to a full line upholstery resource offering sofas, sectionals, recliners and chairs has led to double-digit sales increases becoming the norm at Sam Moore. I'll begin with Bradington-Young as we look at our three upholstery units, Bradington-Young domestic leather upholstery, Seven Seas imported leather upholstery and Sam Moore custom upholstery one at a time. As I mentioned earlier, the overall premium leather upholstery market has experienced a loss of retail floor space in the last couple of years as escalating leather costs have prompted retailers to give more floor space to upholstery featuring lower priced fabric and leather substitute covers. However, during this time Bradington-Young has actually gained retail floor space through our Comfort at Home in-store leather seating galleries, which now number nearly 150. Growth among our Comfort at Home dealers has outpaced the rest of our dealer base and the Comfort at Home program now drives 35% of our domestic leather business. Another strategy that has helped us to successfully address rising prices has been our effort to position Bradington-Young as a luxury brand in the trade and increasingly to the consumer. In fact, we have a launch for two weeks in October a Luxury Leather Your Way national leather event.

We expect that all of our Comfort at Home dealers and preferred partner dealers will participate by offering savings on all special orders during the event. We have provided advertising materials to the dealers to run in their local area and will support the campaign with digital promotions on the Bradington-Young website and social media venues. As we've mentioned in other conference calls, the rising costs are even more of a challenge for our Seven Seas Seating line, since it is positioned as a more affordable, moderately priced leather line in a more price sensitive niche. In order to keep our value proposition strong for Seven Seas Seating, we have become aggressive in our product development efforts and are planning for the up and coming October market to introduce stationary sofas and sectionals at some very attractive wholesale price points that are about 10% to 15% lower than what we've offered in the past. The Seven Seas line continues to be profitable and to hold its own. We grew this quarter and incoming orders are up modestly.

At Sam Moore, we are disappointed that a 28% sales increase only translated to a breakeven profit performance this quarter. While we are definitely making progress and improving, it has not been as quickly as we would like. The challenge of ramping up production, expanding capacity and manufacturing productivity has proven greater than expected. Today our backlog is 75% higher than it was a year ago. Over the last several quarters we have continued to hire people but it typically takes at least three months before a sewer or upholsterer makes a direct contribution and we've had significant training and overtime costs.

Our goal is to take our current backlog of approximately 8.5 weeks down to 5 weeks. We believe that once we reduce backlog and increase capacity, the additional shipment volume and improved labor efficiency will result in increased profitability. As we move forward, we will also expect to reduce our training and overtime costs for additional savings. While the progress has been slower than we would like, we are quite bullish about the long-term future for both sales and profitability at Sam Moore. Short-term, as we head into both the fall selling season and prepare for the October furniture market, we believe all the upholstery brands are well positioned with retail placements around the country to fully participate in any upturn in business. At this time, Paul Huckfeldt is going to share further details that drove our performance this quarter as well as review our balance sheet. Thank you.

Thanks, Mike. Quarterly results are driven by a number of factors. I'll review them by income statement category. Net sales increased due to higher average selling prices in both operating segments as well as increased volume in the upholstery segment. Consolidated unit volume increased nearly 3%, with unit volumes increasing in both domestic upholstery operations. Average selling prices have increased due to price increases as well as a shift in our product mix to higher priced items. Leather upholstery volume increased by slightly over 5.5% and upholstered fabric volume was up over 18%. Average selling prices were up about 2% due to product mix and price increases. Casegoods unit volume was nearly stagnant with a decrease of less than 0.5% compared to the prior year quarter. But because our product mix is shifting towards some of our higher priced offerings, casegoods average selling prices increased nearly 8%, more than offsetting the impact of lower unit sales.

The gross margin line; gross margins for the quarter increased to 24% of net sales, compared to 22% a year ago, primarily due to lower domestic manufacturing costs as a percentage of net sales in our upholstery operations as well as lower cost of goods sold as a percent of net sales due to decreased warehousing and distribution expense in our casegoods segment. These lower costs were partially offset by higher discounting in the casegoods segment as we took a more aggressive approach to selling slower moving inventory. Even though this approach pushes more of the discounts into a shorter time frame, we think it's the best approach to getting out of several end-of-life cycle groups and making room for several well-received lines that were introduced in the spring furniture market. Our selling administrative expenses were up about $1.7 million, compared to the prior year quarter, and increased as a percent of sales from 17.8% to slightly over 19%.

Increase in spending was principally due to startup costs for our H Contract and Homeware division, which are still in startup mode so they have limited revenues to offset these expenses. These costs were reported in our casegoods segment results which somewhat skews the casegoods results for the quarter. Other spending increases include higher commissions due to increased sales volume. Higher accrued bonus expense due to favorable earnings performances, higher professional services due to increased regulatory compliance costs and these unfavorable items were offset by lower bad debt expense. That continues to perform pretty well.

All these factors contributed to a slight increase in operating margin in the second quarter compared to the same quarter a year ago. On the balance sheet, our balance sheet remains strong and stable. At quarter end we had nearly $29 million in cash, up $2.6 million from year-end, due primarily to lower accounts receivable balances and a reduction in inventory levels from year-end which more than offset our capital spending and dividend payments. During the remainder of the year, we expect to spend between $1.5 million to $2 million in capital expenditures, primarily on our ERP implementations and projects to improve manufacturing efficiency along with some normal maintenance spend. We continue to be debt free and have $13 million available under our $15 million revolving line of credit which we amended earlier this quarter and now remains in place until July of 2018. Now I'll turn the discussion back over to Paul Toms for his outlook.

Thanks, Paul. As I noted earlier, we're a little less bullish today than we were coming out of the first quarter due to the decreased demand at retail we experienced as we moved through the summer, the housing market has slowed slightly with rising mortgage rates and rising housing cost. We do believe our industry is tied closer to housing than any other. However, the economic indicators are generally positive. Housing affordability is still favorable from a historical perspective along with the improvements we continue to see in consumer confidence. We believe we are well positioned to capitalize quickly on any upturn in business for our strong inventory on best sellers, our increased production capacity in domestic upholstery and our sellable core product line as well as new business ventures to expand our market reach. That concludes our formal remarks and at this time I'll turn the call back over to our operator, Jamie, for questions. Thank you.

(Operator Instructions)

Matt McCall, BB&T Capital Markets.

Thank you. Good afternoon, everybody.

Good afternoon.

So I can't remember who talked about it but the casegoods, I think Paul Huckfeldt, I think it was you, you talked about the mix impact on casegoods. You talked about how it provided the -- I'm not sure who's -- all of the 8%, but you talked about an 8% help to ASP there. Was there some pricing in that as well? I'm really more curious about the mix impact. That seems like a pretty dramatic change from a mix perspective. Can you help me out in understanding it?

Pricing's pretty small part of that average price increase. The way we cycle through our product, a lot of our price increases are just built into the pricing of new products rather than price increases of old products. I would say maybe 1% is due to in-line price increase. The rest of it's due to higher priced new product introduction and also the shift. We're pretty much out of that whole Envision product line and our best sellers are all the top of the line in our good, better, best strategy. Best seems to be taking most of the real growth. So it's product mix but it's because we're shifting away from the lower priced products.

Okay. And when -- I don't recall, but when do you start to anniversary that benefit? I don't think the benefit was that much last quarter, was it?

I don't think it was that much. I think we continue to shift more towards higher -- to the higher end product, the Rhapsody and the Melange and Sanctuary products are our best sellers.

Matt, this is Alan Cole.

Hi, Alan.

In addition to that, we have featured some of our top selling and our highest priced collections in some national advertising promotions that we've been running which has increased the penetration and I don't think that we'll see a continued jump of that sort in our average selling price. But in this quarter in particularly it seemed like that our higher end products were better placed, shipped better and in general just in more demand.

Okay. Thank you, Alan. So the discounting pressures, you talked about some discounting pressure in Q2. Sounded like those were maybe going to accelerate. Maybe for you again, Paul Huckfeldt, what was the total discounting pressure and what do you expect that to be in the back half of this year relative to that Q2 run rate?

I would say excess discounting was around $1 million over Q1. I think we're still -- we're going to more aggressively dispose of product. I'd like to ask Mike or Alan or Paul or anybody but me (laughter) to address what they think is going to go forward.

Matt, this is Paul Toms. We do have a little more inventory that I would classify as slow selling than we have had for the last three or four quarters. Part of that is I think we've done a better job through our sales and operation planning monthly process of identifying groups as post peak earlier and trying to move them to discontinued earlier in the process than we have historically and maybe discount them less. But I would say right now our product line for casegoods, which is where we're carrying most of the inventory, we've reduced the SKU count by almost 20% over the last -- this time last year and we know we can become more efficient if we can continue to focus our business on fewer SKUs and on our best sellers, focus our inventory also. So it has created maybe a little more obsolescence or prediscontinued type merchandise than we've had in the past but I think in the total scheme of things, once we get through the next couple of quarters and I suspect the impact will be slightly more than it was in the second quarter, I think it will benefit us long term.

Okay.

Just on the appetite in the market for products.

What's hard to quantify is how much of that type inventory can we sell every month at a discount that we're willing to live with and then how much regular price business are we going to have to offset it.

Okay. Thank you. So on the $0.12 to $0.15, I think Alan you highlighted this, the $0.12 to $0.15 in 2014 from H Contract and Homeware, is the way to look at that as we look out into next year that it's a -- that there's a potential for a net benefit of $0.12 to $0.15? Or are you going to see continued spending as we move out into 2015?

The rate of spending will certainly slow down because most of the initial spending has been catalogs, photography, all the startup costs that you get into. So at a minimum, I would expect the rate of spend to be much more moderate into next year. I don't think it will go away completely because we're still adding some products to fill out the product lines and from time to time we have to add additional staff in advance of the growth. So there will be some spending but not at this level. And as far as the offset, the margins in both businesses are equal to or actually greater than the margins in our residential business, so as we build volume they certainly should contribute. I can't tell you exactly where that tipping point is, but as the volume builds there will be good margin contribution there.

Okay. Thank you all.

Thank you.

Todd Schwartzman, Sidoti & Company.

Hi, good morning, guys. Good afternoon, rather. First question on casegoods if I heard correctly, the delta on sales volume for the quarter, that was about flat. Is that accurate?

Unit volume, yes.

Okay. So units were down very slightly, correct?

Right.

Okay. Great. And the reference to the backlog up 75%, again, just to make sure I heard it correctly, was that just Sam Moore?

Correct.

Okay. And Paul Toms, your reference to the second half of the summer showing somewhat of a decline in demand, you're talking mid-July through late September essentially?

More mid-July through late August. I think we always have the benefit when we do these earnings calls of having a month under our belt of the next quarter and when we did the call in June, May was exceptionally strong. Coming out of market we had one of the best post-market periods for casegoods and upholstery that I can remember recently. So that along with a reasonably good spring, we felt pretty encouraged. A lot of the other factors, housing, interest rates, consumer confidence were positive as well.

But as we -- I would say June was a little bit weaker on a per day average than May. July was weaker than June and August was not much better than July. So it definitely -- as we progressed through the summer, it seemed like the demand was less and I -- in talking with retailers, it's not that demand is terrible. Our orders I think we said for the quarter, casegoods orders were up about 11% over the prior year. But it just was not as strong as what we had seen in that May and even June time frame.

And in terms of delivered sales of casegoods, looking out -- looking back over the last two years or so, what percentage of your casegood sales would you say were products introduced in the past 24 months, give or take?

I don't have that information at my fingertips, Todd. I can tell you our average life is probably just a little bit less than three years of a product. It takes us about six months after we introduce a product before we have the first production onto retail floors. But as far as what percentage those products represent this year that were introduced over the last two years, I don't have that number.

And as far as the closeouts, how would you suggest thinking about the rate at which that kind of goes away over the next couple of quarters or beyond?

You know, I think for the third quarter and fourth quarter, we'll sell more than we did in the second quarter. In the first quarter we had very little of that type business. Second quarter, I think we identified early in the quarter that we needed to be more aggressive and so but I would say we probably had two months out of three that we were that aggressive. We have a plan in place for the next two quarters to work through that sort of merchandise and if we execute on the plan, it will have a bigger impact than what we saw in the second quarter. But it's hard to quantify because, again, I really don't know if we'll hit the plan, if we do, at what percentage it will take and I have -- I can't really nail down what our regular full price business is going to be during the third and fourth quarter either. So I would expect it will have an impact and it might be a little more significant than in the second quarter. It is primarily casegoods we're talking about. Our domestic upholstery's all made to order and our import upholstery we don't have the same sort of issues with too much excess and slower selling SKUs.

Smaller minimum orders.

Got it. On Homeware, I must say that the website looks terrific, so I think that certainly looks promising, but just wondering if you could speak to philosophically what you're trying to accomplish with the site, how you're positioning yourselves with the brand. Specifically, looking at a lot of the price points, it's certainly good to see the prices on the site, but it seems that some of the chairs, for example, may be a little bit higher price points than what I for one was expecting to see. Could you speak to how you're positioning? Is it between price points of some other RTA Products that are out there made by others and fully assembled chairs? Or is there some other stated objective as far as how you're trying to compete in the marketplace?

I think your observations are very much on point and we talked a lot about where to position the products. Todd, we did believe that starting out we wanted to position the product as more lifestyle designed and oriented and you can tell that by the photography, appealing to a younger customer. We were really more interested in, I guess, some of the better known names in that arena or people like maybe Crate & Barrel or Pottery Barn. We were looking for a customer that's at that level of demographic and trying to appeal to them in a sense of greater style, more hip, more with it, knowing that as we get our sea legs as time goes along, that we can -- you can certainly look at ways to broaden your price point structure. But going in, we didn't want to go in with a promotional product because it's not. We used expensive fabrics. We used what we considered designs that were much more stylish and much more appealing to a younger audience and we believe that if you look at the complete landscape on the internet, there's a lot of cheap products out there.

But for a quality customer, those price points are not unreachable at all. In fact, they're pretty much into what we would consider the sweet spot. So the marketing plan is definitely to come in slightly above the fray but not so far above the fray that you become marginal. And our initial feedback has been that we are connecting with that customer. Now, granted it's early on and it takes some time to really get traction on the internet, but you saw from our website that we put a lot of effort into positioning, into graphics, into design because for the customer who buys over the internet, the whole ballgame is perceived value. So our choice was to start at a better perceived value. We'll learn as we go along but we believe we're not far off, if at all. But I like your observations because that's exactly where we felt we were coming in, just slightly above some of the more promotional marketplace but with product that has great perceived value and certainly appears to be a higher quality product on the website.

And I realize it's early in the game here with regard to product availability and what categories are on the website. Maybe I just answered my own question. But I find it curious the choice of pillows to go initially along with chairs. I think typically of pillows as add-on, bolt-on accessory purchases that a whole home type vertically integrated retailer would use to pad their ticket size. In terms of a more passive-type, consumer-type purchase, I wonder if you could speak to the inclusion of pillows on what was designed to be essentially a ready to -- a collection of ready-to-assemble furniture? Can you walk us through how that was chosen and what's up next over the next six months or so as far as adding on additional products?

Yes, it's -- again, I think those are great questions and bear in mind that we're early on. We have a lot of plans to grow our product breadth. We really had to pick areas where we knew that we could respond quickly. One thing that we haven't talked about is the -- that we ship these products in 48 hours from receiving the order. And that's -- in the upholstery business, that would be considered lightning quick. And as to the pillows, it was a fairly easy extension of the way that particularly female consumers decorate their home because when they put a new chair in place, they want to tie it in with existing upholstery and existing products and we actually have some promotions planned where in the future for the purchase of a chair you get free pillows. So it's a bit of a way to enhance the basic chair package.

So, yes, it's -- I think your observations are very much right on. There is a master plan to very much broaden our product offerings over the next year. We have new products that will be going on in November. We have a new spate of products that will be going on in February or March, I believe of next year, and then in May of next year. So we have a planned roll-out. This was -- we felt that we needed to get through the learning curve. We picked a product we're very familiar with, which is chairs, because we knew that from our customers, some of the largest e-retailers, we knew that the major dollar furniture products are not as big of sellers on the internet as what we call -- what we would call more accent and occasional products. They're more impulse items, if you will. So we chose to start there.

And one other thing I should say, we've got a product and we'll be happy to take an order for one if you'd like to ship to you and show it to you, it is -- even though you could call it technically RTA, it is a -- it's a wonderfully simple product. It requires no tools to assemble. There's no small pieces. We have a video on the website which you may have seen that explains how the chair is assembled. It's basically two or three fairly simple steps. It allows it to be delivered by UPS rather than common carrier home delivery, which if you've ever had that it's a real pain in the neck. So it's UPS delivery to the door. It's easily assembled. It's product that really looks the part, higher quality product and even though our positioning may need to be dialed in a little bit over time, we're pretty comfortable that we've got a great formula.

And because it is an impulse buy, and I know that certainly won't apply to perhaps other categories that you add over time, but just looking at the pillows it seems awareness certainly really is the name of the game; awareness of the site, knowing where to look. Could you maybe give us a little bit more color than you have thus far in terms of the totality of your marketing and advertising efforts and intended efforts on how you're going to reach these consumers and also maybe include in that what if any involvement the designer customers are going to have in the process?

That's, again, I think your questions are dead on. We have a marketing plan. We have planned expenses. We have a full spate of social media support. We were just at the customer service center today looking at the early social media responses. We have a goal of answering or responding to every social media inquiry, whether it's Twitter or Facebook, within five minutes. We've gone purposefully to the largest e-retailers. We're actually selling the three largest e-retailers, or the two largest and then the third is the largest flash site, because they will build the Homeware brand critical mass, if you will. So that a customer that's searching for the keywords that we put in Homeware will pop up. Now, that's not going to happen immediately, but we've got a goal of -- and I'm -- now I'm getting a little above my pay grade. We've got a Vice President of Marketing that's excellent on these things. But we've got a goal of hitting certain impression levels by the end of the year, significant impression levels, and we're pretty much on track to do that.

So there is a whole marketing plan behind Homeware. It's not a field of dreams strategy. It's not a strategy of put it on the internet and they will come because, as you know, those days are gone. But we do have a whole strategy behind that product. I don't know if I'm giving you enough information but --

Yes, I think so. It sounds like what you're saying is that a good portion of the responsibility for creating that awareness lies with your partners.

In the early going, that's true.

Okay.

Early going that's true. But now, we are investing along with their efforts, we're investing also.

Got it. Thanks. Last question, Paul Huckfeldt, the compliance to regulatory costs that you called out for Q2. Can you quantify that year-over-year increase and also what's going on there on a year-over-year basis in Q3?

Quantifying it, we spent about $200,000 extra in professional and compliance costs, split between audit costs that were -- extra audit costs that were incurred to comply with recent PCAOB rulings and guidance that required extra audit work this year. I certainly hope that doesn't recur. There's some -- I hope some investment in future, you know it required documentation of internal controls which I hope we can carry forward. But PCAOB is continuing to make additional rules and offer additional guidance. So worry about that, we don't know of any reason that should recur.

And the other $100,000 are legal fees related to California Proposition 65, which relates to labeling of upholstery products, labeling of certain chemical compounds in products sold in California. The way that was handled is after the law was passed, lawyers in California went out looking for noncompliant product. We happen to have a single piece, as far as we know it's the only piece that we didn't have labeled properly. And so we're having to deal with the fallout from that.

And you're just simply complying on a national level?

Yes.

Okay. Great. Thank you very much.

Thanks, Todd.

Budd Bugatch, Raymond James.

Good afternoon, Paul and Alan and Paul. I guess my question, just -- and I don't know if I heard it or if I just missed it. Is there any volume that you can talk through with H Contract and Homeware and if so, maybe what the same location sales were without H Contract and Homeware year-over-year in the second quarter?

In the second quarter it was negligible. There was a little bit of contract business but not even meaningful, not material. And we really expect, of course you know that the contract sales cycle's much different from the residential side. Once you go into the business and get recognized by the market and get specified for jobs, you can be on the near side six months away from any meaningful business and many cases as long as a year. So we really believe it will be probably fourth quarter before we start to get any volume of any significance at all. And even then, I think it's early on. The bigger impact most likely will be into next year. And that's true actually with H Contract and with Homeware. Homeware, we knew because of the limited product offering, a good product offering but a limited offering, and because of what I think what the e-retailers call the spool-up period, getting recognition, getting the name out there and so forth, we didn't expect a lot of significant activity on the internet products until into the fourth quarter. And so in both cases there was almost no impact from a revenue standpoint on the second quarter. There will be probably very limited impact in the third quarter. I think in the fourth quarter you'll start to see some more substance from both.

And Alan, just last question from me, are you responsible for the fulfilling of the product from the consumer when they make the purchase? Do you fulfill direct to the consumer or do you fulfill to the DC or distribution capability of the website?

That's a great question. We go direct to the consumer.

Got you. Okay. Thank you very much. Good luck on that.

Thank you.

Thanks, Budd.

And at this time I am showing no further questions. I would now like to turn the call back over to Paul Toms.

All right. Well, that really concludes all of our formal remarks and we appreciate the questions at the end. We look forward to getting back together with you in early December and hopefully updating you on our initiatives as well as reporting another solid quarter performance in our core business. Thanks for joining us today.

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