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Executives

Douglas I. Payne – Executive Vice President – Finance & Administration & Secretary

Jeffery R. Scheffer – Chairman of the Board, President & Chief Executive Officer

Albert L. Prillaman – Lead Director

Analysts

Budd Bugatch – Raymond James

Analyst for John Baugh – Stifel Nicolaus & Company, Inc.

Joseph Weiss – JRW Associates

Todd Schwartzmann – Sidoti & Company

Stanley Furniture Company, Inc. (STLY) Q2 2008 Earnings Call July 15, 2008 9:00 AM ET

Operator

Welcome to the Stanley Furniture second quarter investor conference call. (Operator Instructions) It is now my pleasure to introduce your host Douglas Payne, Executive Vice President for Stanley Furniture.

Douglas I. Payne

Welcome to our quarterly conference call to review our second quarter 2008 operating results. We appreciate your participation. Joining me this morning is Jeff Scheffer, our President and CEO and Albert Prillaman, our Chairman.

During our call this morning we may make forward-looking statements which are subject to risk and uncertainties. A discussion of factors that could cause actual results to differ materially from our expectations are contained in the company’s SEC filings and the press release announcing our second quarter 2008 results. Any forward-looking statements speak only as of today and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after today’s call.

With that out of the way, at this time Jeff has some opening comments.

Jeffery R. Scheffer

I’ll make just a few comments on current business conditions, our announcement of last week and our revised guidance for the year. Doug will then take you through the balance sheet before we open the call to your questions. As you are undoubtedly aware, business conditions remain extremely difficult. The perfect storm of historically low levels of housing activity, consumer confidence and personal disposal income has us still searching for a bottom in this current cycle. And frankly, we don’t see much out there that would suggest business turning up any time soon. That said, we’re determined to remain profitable at these lower volume levels and are committed to taking the steps necessary to lower our cost structure.

We’re looking at our business from top to bottom and last week announced the consolidation of our Lexington North Carolina production in to our Robbinsville North Carolina facility. Once completed, this consolidation will result in $5 to $6 million in annual pre-tax savings while still providing us enough capacity to grow our volume back to historical levels and beyond. We are also eliminating two executive level positions, offering a voluntary early retirement incentive to qualified salary associates and we are continuing to look at ways throughout the business to enhance our profitability and competitiveness. As difficult as these actions are now, I’m confident we are positioning the business for success.

As for the revised guidance we provided in last evening’s release, you should know it reflects business conditions continuing at current levels and not taking another leg down.

Douglas I. Payne

Our balance sheet continues to be in excellent shape and reflects our view that now is the time to be more conservative and maintain a very strong financial position in these uncertain and somewhat unprecedented times. Cash from operations during the first half of 2008 was used to pay cash dividends of $2.1 million, make scheduled debt payments of $1.4 million, fund capital expenditures of $584,000 and increase cash on hand by $2.2 million. Working capital excluding cash and current maturities of long term debt decreased to $57.3 million at the end of the second quarter compared to $71.6 million a year ago.

Inventories declined 19% to $51.1 million down from $62.9 million at the end of the second quarter of 2007. Accounts receivables also declined 16% to $25.9 million from $31 million a year ago. Our days sales outstanding in accounts receivables equal 43 days at the end of the second quarter representing a slight improvement over the prior year and well within our normal historical range. Approximately $19 million is currently authorized by our board of directors to repurchase stock. We curtailed our share repurchases in the later portion of 2007. We believe now is the time to be more conservative and to maintain a very strong financial position as we work our way through the current business environment.

Jeffery R. Scheffer

We’ll open the call to questions.

Question-and-Answer Session

(Operator Instructions) Your first question comes from Budd Bugatch – Raymond James.

Budd Bugatch – Raymond James

I don’t know that there’s any questions to really ask about the current state, I think we all understand what’s going on. My real question goes to the outlook for the business or the structure of the business somewhat longer term. Whenever it is we come out of this what does the business look like in terms of its gross margin potential, SG&A, operating margin potential and returns on capital? I’m sure the board is looking at this, I would hope the board is looking at it longer term and saying, “Okay what does it look like?” I think ultimately before you peaked out 25% or 26% or 27% gross margins and 12% or 13% op margins. What do we look for down the road?

Jeffery R. Scheffer

Bud, I think a couple of assumptions first of all. One, business we believe will come back, exactly when we’re clueless at this point but we believe it will come back. We’re not sure it will come back as typically as hard as it has in the past. We think this recovery is going to be probably slower than the ones we’ve been through prior. The actions we’re taking now are to structure our company not just for these times but also for those times when we come out.

We think historical gross margins are certainly possible. We would see SG&A in that 13%, 14% going forward. I don’t know, we’ve got a lot of moving parts right now, it’s tough to see too far down the road but we’re taking the actions now to return this company to where we have been in the past from a standpoint of profitability.

Budd Bugatch – Raymond James

And when you get there can you comment on the variability of cost versus the fixed nature of it historically?

Douglas I. Payne

Bud, I don’t know if we can break it down to that level of granularity for you but I think it’s safe to say that the actions that we’ve taken today already and those we announced last week will certainly reduce our fixed cost structure and will make, when the ultimate rebound does occur, will allow more of that to drop through to the bottom line.

I think the other thing you touched on was return on capital. I think clearly what we’re trying to do today, while we can’t give you precise guidance of where this is going, clearly I think from the board’s perspective and from us as a management team, we’re clearly not satisfied with breakeven profit performance and we’re trying to position the business to get back to double digit operating margins but for us to try and tell you when that’s going to happen would be a somewhat a fruitless exercise I think.

Operator

Your next question comes from John Baugh – Stifel Nicolaus & Company, Inc.

Analyst for John Baugh – Stifel Nicolaus & Company, Inc.

Can you comment on the number of doors you’re selling through today versus say a year ago?

Douglas I. Payne

Stanley, they would be about the same.

Analyst for John Baugh – Stifel Nicolaus & Company, Inc.

What about the amount of receivables write-downs, are you seeing anything on that front?

Douglas I. Payne

We’re certainly watching that very closely. So far through the first half of the year they’ve been well within our normal write offs and expense level. I think our bad debt expense for the first half of the year has been approximately $240,000 which is about the same as it was through the first half of last year both of which are well within our normal historical patterns.

That being said, we have increased our bad debt reserves and we’re keeping a very close eye on that part of our business because the longer this slowdown continues and the deeper it gets, the more concerns you have about various folks getting in to financial difficult. Having said that, one of the advantages that we do have is that we are very broadly distributed and no single customer gets up to more than probably 3% or 4% of our total revenues so we don’t have any really large customers that we’re concerned about at the moment. That’s about all I can tell you at this stage.

Analyst for John Baugh – Stifel Nicolaus & Company, Inc.

And as far as the inventory declines that was fantastic, was that more finished goods or can you give a little more color on that?

Douglas I. Payne

It’s a combination but it is mostly finished goods.

Analyst for John Baugh – Stifel Nicolaus & Company, Inc.

What should we look at as a tax rate going forward for the remaining of the year and even in to ‘09 if you have that?

Douglas I. Payne

I’m not sure I can help you too much with ‘09. For the remainder of the year it would be what we’ve used for the first half which would be 45%. What drove the effective tax rate up was really a function of our projected income dropping primarily as a result of the anticipated restructuring charges.

Operator

Your next question comes from Joseph Weiss – JRW Associates.

Joseph Weiss – JRW Associates

Are there any geographical areas or items that are stronger than others?

Jeffery R. Scheffer

Well, maybe another way Joseph would be to say there are some that are weaker than others. You can pretty much track housing, California remains very difficult as does Arizona and Las Vegas and Florida. Those are probably the hardest hit areas at this point and when we talk about our sense that the recovery will be a bit slower, that is due in part to those very large markets probably not recovering at the same time the rest of the country does, whenever that happens.

Joseph Weiss – JRW Associates

And let’s say in the Northeast you’re not finding any down at all? Or, you’re not saying that?

Jeffery R. Scheffer

It’s certainly not as tough as the areas that I mentioned.

Joseph Weiss – JRW Associates

And any items are stronger than others are or less weak than others, product line.

Jeffery R. Scheffer

Well, what’s typical and we’re seeing it again in this cycle is that our Young America business holds up better than the adult side of our business and it’s very logical. Youth, especially when you get in to cribs and toddler beds, its very time sensitive, you have a baby you buy a crib. That’s unfortunately not the case with categories like formal dining room or master bedroom, they’re just much more postponable.

Joseph Weiss – JRW Associates

And do you give out a percentage what Young America is of your total sales?

Jeffery R. Scheffer

We don’t break that out.

Joseph Weiss – JRW Associates

So do you believe at all that you’re losing market share?

Jeffery R. Scheffer

We don’t think we are Joseph. We’re an industry that’s tough to get our arms around but when we look at our numbers versus the other public companies out there, combine that with getting out and doing some shoe leather research, we don’t get the sense we’re losing share now.

Joseph Weiss – JRW Associates

And the CDS08, anything on that?

Jeffery R. Scheffer

No updates on the CDS08. The disclosures that we made in our 10K filing are still as accurate as we know how to handicap that.

Joseph Weiss – JRW Associates

Stock buybacks, I can assume that there’s not going to be a buyback as far down as the stock could go until the economy picks up? That’s a little broad what I said but could you give us like a basic idea how long you’ll be conserving cash flow.

Jeffery R. Scheffer

I’m not sure I can answer your questions specifically. The timing of when we choose to go in and out of the market buying our stock is something we probably don’t want to disclose publically. Having said that, I think it’s safe to say we’re going to try to manage our balance sheet in such a fashion that we keep a very strong and robust financial position to make sure that we can weather our way through this storm.

Operator

Your last question comes from Todd Schwartzmann – Sidoti & Company.

Todd Schwartzmann – Sidoti & Company

Could you talk about uses for cash for the next few years including your approach to acquisitions and how that might have changed, if at all, over time?

Jeffery R. Scheffer

Well, I don’t know if anything has changed since we last commented on this Todd. We’re open to anything. I think it’s safe to say at this point our entire focus is on getting the house we currently own in order and prepared for the eventual upturn.

Douglas I. Payne

Todd, I would add to that, we’ve got a long history of generating very positive cash flow streams and of returning those cash flow streams to our shareholders primarily by buying back stock and to a lesser extent with cash dividends and I would not foresee us changing our thinking or the way we manage the business going forward in that regard.

Todd Schwartzmann – Sidoti & Company

Doug, as far as the dividend did you target any long term growth rate? Or, do you look at payout ratio annually? What’s your approach to that?

Douglas I. Payne

Well Todd, the board has looked at a number of factors including the ones that you’ve mentioned and regularly revisits our dividend policy. But, as you might imagine, it’s a split camp. We get a group of investors that like having cash dividends and we get another group of investors that are really in it for the capital appreciation and could really care less about a cash dividend.

Operator

There are no further questions at this time.

Jeffery R. Scheffer

Thank you everyone on the call for your interest in Stanley and what we’re doing. We look forward to talking to you again in October.

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