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Hooker Furniture (NASDAQ:HOFT)

Q2 2014 Earnings Call

September 04, 2013 1:00 pm ET

Executives

Paul A. Huckfeldt - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance & Accounting

Paul B. Toms - Chairman and Chief Executive Officer

Alan D. Cole - President

Michael W. Delgatti - Executive Vice President of Corporate Sales and President of Hooker Upholstery

Analysts

Matthew Schon McCall - BB&T Capital Markets, Research Division

Todd A. Schwartzman - Sidoti & Company, LLC

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the Hooker Furniture Quarterly Investor Conference Call reporting its operating results for the second quarter 2014 period. [Operator Instructions] 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.

Paul A. Huckfeldt

Thanks, 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 of Sales for Hooker Furniture Corporation; and Alan Cole, President of Hooker Furniture Corporation.

During our call today, we may make forward-looking statements which are subject to risks and uncertainties. A discussion of factors that could cause our actual results to differ materially from management's expectations is contained in our SEC filings and in the press release announcing our 2014 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.

Earlier today, we reported net sales of over $55 million for fiscal second quarter, which is about $5 million, or 10% higher than the same period of 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 partially offset 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 of 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.

Paul B. Toms

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 in retail business progressively slow as we move 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.

The cost of 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, and 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 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 bestsellers, 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 or a needs-based purchase. However, we're pleased to have had consistent sales growth in casegoods beginning in the second half of last year through the first 6 months of this year. In 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 Mélange and Sanctuary lines. These improvements were somewhat tempered by 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 results, which Paul Huckfeldt will discuss later in the call.

Our casegoods 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 bestsellers. Though 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 health care 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 the 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?

Alan D. Cole

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 2 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 in 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 2 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 1 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.

Michael W. Delgatti

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 domestic operations, and we believe we're on a solid path of sustained profitability. Both Bradington-Young and Sam Moore recorded increased sales for the quarter, including a robust 28% year-over-year sales planned 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 a double-digit sales increases becoming the norm at Sam Moore.

I'll begin with Bradington-Young as we look at our 3 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-price fabrics and leather substitute covers.

However, during this time, Bradington-Young has actually gained retail floor space through our Comfort@Home in-store leather seating galleries, which now number nearly 150. Growth among our Comfort@Home dealers had outpaced the rest of our dealer base, and the Comfort@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 will launch, for 2 weeks in October, a luxury Leather Your Way national leather event. We expect that all of our Comfort@Home dealers and preferred partner dealers will participate offering savings on all special orders during the event. We have provided advertising materials to the dealers to run in their local area, and we'll support the campaign with digital promotions at 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, as it is positioned as a more affordable, moderately priced leather line and is 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 hold its own. We grew this quarter and incoming orders are up modestly.

At Sam Moore, we are disappointed that the 28% sales increase only translated to a breakeven profit performance this quarter. But we are definitely making progress and in proving, 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 1 year ago. For the last several quarters, we have continued to hire people, but it typically takes at least 3 months before a sewer or upholsterer makes a direct contribution, and we've had significant training and overtime costs. Our goal was 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 to 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.

Paul A. Huckfeldt

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 to 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.

Gross margin line. Gross margins for the quarter increased to 24% of net sales, compared to 22% 1 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 at 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 smaller booking inventory. Even though this approach pushes more of the discounting into a shorter time frame, we think it's the best approach to getting out of several end-of-lifecycle groups and making room for several well-received lines that were introduced in the spring furniture line.

Our selling and administrative expenses were up about $1.7 million compared to the prior year quarter, an increase as a percent of sales from 17.8% to slightly over 19%. The increase in spending was principally due to startup costs for our H Contract and Homeware divisions, which are still in startup mode, so they have limited revenues to offset these expenses. These costs were reported on our casegoods segment results, somewhat skews the casegoods results for the quarter.

Other spending was -- increases include: higher commissions due to increased sales volumes; higher accrued bonus expense due to favorable earnings performance; higher professional services due to increase 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 1 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.

For 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 spending. 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 that remains in place until July 2018.

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

Paul B. Toms

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. Housing market has slowed slightly with rising mortgage rates and rising housing costs. 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're well positioned to capitalize quickly on any upturn in business for our strong inventory on bestsellers, 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.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Matt McCall from BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So I can't remember who talked about it, but the casegoods -- I think, Paul Huckfeldt, I think it was you who talked about the mix impact on casegoods and you talked about how it provided a -- or I'm not sure who's -- all of the 8%, but you talked about an 8% help to ASP there, was there pricing in that as well? And 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?

Paul A. Huckfeldt

Pricing is a pretty small part of that average price increase. No, 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, 1% due to -- just to in-line price increases, the rest of it is due to higher-priced new product introductions. And also the shift, we're pretty much out of that whole Envision product line and our bestsellers 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.

Matthew Schon McCall - BB&T Capital Markets, Research Division

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

Paul A. Huckfeldt

I don't think it was that much. I think we continue to shift more towards -- to the higher-end product, the Rhapsody and Mélange sanctuary products are our bestsellers.

Alan D. Cole

Matt, this is Alan Cole. 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 particular, it seemed like that our higher-end products were better placed, shipped better, and in general, just more demand.

Matthew Schon McCall - BB&T Capital Markets, Research Division

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

Paul A. Huckfeldt

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

Paul B. Toms

Matt, this is Paul Toms. And we do have a little more inventory than I would classify as slow selling than we have had for the last 3 or 4 quarters. Part of that is that I think we've done a better job through our sales and operation planning monthly process of identifying groups as post peak earlier. In trying to move them to discontinued earlier in the process, and we have historically maybe discounted 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 bestsellers, 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.

Paul A. Huckfeldt

Just on the appetite of the market for the product.

Paul B. Toms

Yes, what's hard to quantify is how much of that type of 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.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. Okay. So on the $0.12 to $0.15 -- I think, Alan, you highlighted this, the $0.12 to $0.15 for '14 from H Contract and Homeware, is the way to look at that, as we look out in the next year, that it's -- there's a potential for a net benefit of $0.12 to $0.15? Or are you going to see continued spending as you move out into '15?

Alan D. Cole

Well, 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.

Operator

The next question comes from Todd Schwartzman from Sidoti & Company.

Todd A. Schwartzman - Sidoti & Company, LLC

First question on casegoods. If I heard correctly, the delta on sales volume for the quarter that was about flat, is that accurate?

Paul A. Huckfeldt

Yes. Unit volume, yes.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. So units were down very slightly, correct?

Paul A. Huckfeldt

Right.

Todd A. Schwartzman - Sidoti & Company, LLC

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

Paul A. Huckfeldt

Correct.

Todd A. Schwartzman - Sidoti & Company, LLC

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

Paul B. Toms

No, 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 the recently good spring, we felt pretty encouraged and a lot of 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 definitely, as we progress through the summer, it seemed like the demand was less. In talking with retailers, it's not that demand is terrible. Our orders, I think, we said for this 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 timeframe.

Todd A. Schwartzman - Sidoti & Company, LLC

In terms of delivered sales of casegoods, looking out -- looking back over back over the last 2 years or so, what percentage of your casegoods sales would you say where products introduced in the past 24 months, give or take?

Paul B. Toms

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 3 years per product. It takes us about 6 months after we introduce a product before we have first production onto retail floors. But as far as what percentage those products represent this year, that were introduced over the last 2 years, I don't have that number.

Todd A. Schwartzman - Sidoti & Company, LLC

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?

Paul B. Toms

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 of 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 2 months out of 3 that we were that aggressive. We have a plan in place for the next 2 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, 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 is all made to order and our import upholstery, we don't have the same sort of issues with too much excess and slower sell-in SKUs.

Paul A. Huckfeldt

And smaller amount of orders.

Todd A. Schwartzman - Sidoti & Company, LLC

Got it. On Homeware, I must say that the website looks terrific, so I think that certainly looks promising. But just wonder if you could speak to, philosophically, what you're trying to accomplish with the site? How you're positioning yourselves with the brand, specifically you're looking at a lot of the price points and 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 made by others and -- fully assembled chairs? Or is it -- is there some other stated objective as far as how you're trying to compete in the marketplace?

Alan D. Cole

I think your observations are very much on point. And we talked a lot about where to position the products. We've -- Todd, we did believe that starting out, we wanted to position the product as more lifestyle, design and oriented, you could 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 times 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 its 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. And 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. So -- 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.

Todd A. Schwartzman - Sidoti & Company, LLC

And I realize it's early in the game here with regards to product availability and what categories are on the website, and 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 neo-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 and what was designed to be essentially a ready to -- a collection of ready-to-assemble furniture, like, can you walk us through how that was chosen, what's up next over the next 6 months or so as far as adding on additional products?

Alan D. Cole

Yes, it's -- again, I think those are great questions. And bear in mind that, early on, we had 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'd 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 really 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 slate 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 rollout. This was -- we felt that we needed to get through the learning curve. We picked the product we're very familiar, 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 a 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 like, to ship to you and show it to you. It is -- even though you could call it technically RTA, 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 2 or 3 fairly simple steps, and it allows it to be delivered by UPS rather than common carrier or home delivery, which if you've ever had that, that'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 the little bit over time, we're pretty comfortable that we've got a great formula.

Todd A. Schwartzman - Sidoti & Company, LLC

And because it is an impulse buy, and I know that certainly won't apply to perhaps other categories that you'll 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, 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?

Alan D. Cole

That's, again, I think your questions are dead on. We have a marketing plan. We have planned expenses. We have a full slate of social media support. We're answering -- 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 5 minutes. We are -- we've gone purposely to the largest e-retailers. We're actually selling the 3 largest e-retailers, or the 2 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 now, I'm getting a little above my pay grade, we've got a Vice President of Marketing that's excellent on these things. 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 putting 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...

Todd A. Schwartzman - Sidoti & Company, LLC

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

Alan D. Cole

In the early going, that's true. But now, we are investing. Along with their efforts, we're investing also.

Todd A. Schwartzman - Sidoti & Company, LLC

Got it. Last question, Paul Huckfeldt, the compliance and regulatory cost 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?

Paul A. Huckfeldt

Quantifying, 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 the recent PCAOB rulings and guidance, that required extra audit work this year. I certainly hope that, that doesn't recur. That was -- there are some, I hope, some investment in the future, you've acquired documentation of internal controls, which I hope we can carry forward. But PCAOB is continuing to make additional rules and offer additional guidance. So we worry about that, but we don't know any reason that should recur. And the other $100,000 are legal fees related to California Proposition 65, which relates to labeling of all upholstery products. Labeling of certain chemical compounds in products sold in California. I guess the way that was handled is, after the bill was passed, lawyers in California went out looking for non-compliant products, we happened to have a single piece, as far as we know it's only piece that we didn't have labeled properly and so we're having to deal with the fallout from that.

Todd A. Schwartzman - Sidoti & Company, LLC

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

Paul A. Huckfeldt

Yes.

Operator

The next question comes from Budd Bugatch from Raymond James.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

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

Alan D. Cole

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 is 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, 6 months away from any meaningful business and, in many cases, as long 1 year. So we really believe it will be probably fourth quarter before we start to get any volume of any significance at all. 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'll 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.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

And, Alan, just last question for me. Are you responsible for the fulfilling of the product from the consumer when they pick the purchase, do you fulfill direct the consumer or do you fulfill through the DC, or distribution capability, of the website?

Alan D. Cole

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

Operator

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

Paul B. Toms

All right. Well, that really concludes all of our formal remarks and 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.

Operator

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

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