Greetings, ladies and gentlemen, and welcome to Hooker Furniture's Quarterly Investor Conference Call reporting its operating results for the fiscal fourth quarter and year-end 2012. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Huckfeldt, Vice President of Finance and Chief Financial Officer. Please go ahead.

Good morning. Thank you, Stephanie. Welcome to our quarterly conference call to review our sales and earnings for the 2012 fiscal year and the fourth quarter, both of which ended on January 29, 2012. We certainly appreciate your participation this morning. Joining me today are Paul Toms, our Chairman and CEO; and our President, Alan Cole. During our call today, 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 expectation is contained in our SEC filing and press release announcing the 2012 annual and fourth quarter results. Any forward-looking statements speak 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. Yesterday, we reported net sales of $222.5 million and net income of $5.1 million or $0.47 a share for our 52-week fiscal year ending on January 29, 2012. Net sales for the year increased $7.1 million or slightly over 3% compared to the $215 million we reported in 2011 with unit volume growth across all the business. Net income for the year increased 56% to $5.1 million compared to $3.2 million in fiscal 2011. Earnings per share were $0.47 compared to $0.37 in the -- $0.30 in the prior year. For the 2012 fourth quarter, sales decreased $606,000 to $54.4 million, a 1.1% decrease compared to sales of $55 million in the fourth quarter of last year. We reported net income of $628,000 in the fourth quarter of fiscal 2012 compared to a net loss of $182,000 in the fourth quarter of fiscal 2011. Net income for the fiscal 2012 quarter was negatively impacted by a $1.8 million charge, that's $1.1 million after-tax or $0.10 a share, for an intangible asset write-down of our Bradington-Young trade name. We'll discuss that write-down further in more detail later in the call. Now, Paul Toms will comment on our 2012 results.

Thanks, Paul, and good morning, everyone. Considering both external economic challenges and changing business conditions that required internal adjustments throughout 2011 and early 2012, we had a very good fiscal year. Progress in several of our operational goals enabled us to grow net income 56% on a 3% sales increase. As the year moved forward, we reduced excess inventory, improved cash flow, cut operating losses in our upholstery division. Operating income for our casegoods division was over 10% higher than a year ago even while discounting to reduce inventory levels in dealing with the unfavorable impact of volatile ocean freight rates in the first half of the year. We were able to generate significant cash flow this year as we turned inventory into cash and reduced operating losses in our upholstery division. In order to reduce the risk of future surpluses and further improve the availability of best-selling items, we've implemented new inventory management systems, and now believe the composition of our inventory is much cleaner and focused on active and best-selling products even if we are a little bit low on inventory at this time. We're gratified that both the casegoods and upholstery divisions had unit sales increases for the year and are particularly pleased with the growth at Sam Moore, where shipments of our domestically-produced custom upholstery line increased over 13% for the year with sales increases every quarter compared to the prior year. Sales of Bradington-Young's imported leather line increased over 9% for the year. Shipments of Bradington-Young's domestically-produced line decreased approximately 7% year-over-year. The 7% sales dip for Bradington-Young's domestically-produced leather line was not unexpected, considering the dramatic raw material price increases in the leather market and the resulting shift at retail from higher-end leathers to more promotionally-priced bonded leather, faux leather and fabric covers. However,…

Thank you, Paul, and good morning, everyone. Paul is right, the upcoming April market will be one of the most exciting in years for Hooker Furniture as the wood and upholstery divisions now share an 80,000 square-foot redesigned and renovated showroom. We've moved our casegood showroom from the space that it occupied for over 30 years to a higher traffic location on the same floor for a unified presentation to the marketplace that better reflects who we are as a company. The showroom will feature compelling displays, open sight lines, a dealer and designer resource center, a glass-walled entrance hub and a company history display, a welcoming lobby, lounge and café. This showroom reflects our revitalized product direction and the energy and excitement about our future. It positions upholstery as an integral part of the company and Hooker as a unified resource. It signals a fresh, new era at Hooker Furniture built on a wonderful legacy. Another exciting aspect of the upcoming market is that Sam Moore, known primarily as a chair resource for 70 years, will now become a full-line upholstery company with the introduction of 12 new sofa groups encompassing over 100 items. These sofa groups include sofas in both standard and studio sizes, correlating chairs and sectionals. The expansion into sofas is a logical extension not only of our chair line but also of the modular seating accommodations program we introduced a couple of years ago. The sofa line will be another important vehicle for building on the momentum of Sam Moore's double-digit growth last year. As Paul mentioned earlier, Bradington-Young's imported leather had sales -- had very nice sales growth in the past year of nearly 9%. Our ongoing strategy to position this lower-priced line as a complement, not a replacement, to our domestic leather line…

Thanks, Alan. Sales for the year were up in both our casegoods and upholstery businesses, thanks to increased unit volumes and higher average selling prices in both segments. Overall, average selling prices increased nearly 10% in the fourth quarter and 2.5% for the fiscal year as compared to the prior year period. Much of this improvement was due to the mix of products shipped. In particular, the increase in net sales for upholstery segment represents increases in fabric upholstery average selling prices of 7.3% and an increase in unit volume of 4.2% compared to the prior year. Gross profit for fiscal 2012 fourth quarter increased both in absolute terms and as a percent of net sales to $12.9 million or 23.8% of net sales. This compares to $10.9 million or 19.8% of net sales in the same period a year ago. The improvement was driven by lower freight costs on imported furniture, higher average selling prices particularly in upholstery and lower upholstery manufacturing costs due to the many cost-reduction initiatives underway. For the full year, gross profit increased by $2 million or $48.9 million, while profit margin was up slightly to 22% of net sales from 21.8% in the prior year. Margins in our casegoods business were down just under 1% as a result of heavy discounting to reduce excess inventory, most of that [indiscernible]. This was partially offset by lower freight costs on imported products particularly in the second half of the year. In the upholstery division, margins improved primarily through cost-reduction efforts and higher fabric upholstery selling prices. These improvements were partially offset by increased raw material costs and a casualty loss expense of $181,000 related to a sprinkler malfunction at one of our warehouses this summer. Selling and administrative expenses decreased both in absolute terms and as…

Thank you, Paul. Our sourcing transition from some of our vendors in China to vendors in Vietnam and Indonesia continue to result in extended lead times and some shipping delays, which will impact sales throughout the first quarter and to a diminishing degree in the second quarter. We expect our new Vice President of Asian Operations, Bill Reece, to help that transition go as quickly and as smoothly as possible as he helps us with our vendor performance and alignment. While most macroeconomic indicators are continuing the long fall that began a year or so ago, certain concerns still exist such as the slow rebound of the housing market, global economic instability and most recently, rising fuel costs. We expect consumer confidence and the furniture retail demand to improve as we progress through the year. On the sell side, we're going up against a 13.4% sales increase in the comparable quarter a year ago that was driven by heavy discounting at the time. Yet due to our operational improvements, reduced discounting activity and more favorable ocean freight rates, we're hopeful we can deliver better profitability even on reduced sales in the short term. That ends the formal part of our discussion. And at this time, I will turn the call back over to our operator, Stephanie, for questions. Thank you.

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

So on the delays out of Asia, can you quantify what the input you think the impact was on the top line in Q4?

Matt, probably it's hard to quantify. I can tell you in absolute orders, we probably impacted sales to the tune of a couple million dollars. But then you questioned if those products had gotten out onto retail floors and had some activity, how much would we have experienced in reorders. So really gone beyond the quarters that were actually delayed within the quarter. I don't know that I can speculate on how much they would have sold and would have generated in sold orders.

So the answer is probably the same to this one, but can you give -- do you have any idea how many of those orders were actually lost or canceled because of the delays?

I do have that, and it's very few have been canceled. I think the opportunity cost though at retail is the one that's harder to measure. But, no, we haven't experienced a lot of cancellations. It's just delayed shipments into a subsequent quarter.

Got it. Okay. So you highlighted, I think, Paul Huckfeldt maybe highlighted the benefit from lower freight rates year-over-year. I think, we've seen ocean freight rates move higher through the first part of this year. Could you talk about what we should assume hits your cost to those lines and move through the next few quarters?

Right now, we're still selling inventory that we brought in and, in fact, we'll continue to bring in at current freight rates. So in the short term, we feel like that we're going to have an advantage in the comps over last year. Last year, we were selling very high-priced inventory. It was probably at 2% -- there's at least a 2% margin swing, I think, from quarter-to-quarter just based on the freight differential. Right now, the freight lines are negotiating rates. Of course, they're pushing to raise rates because they haven't made a lot of money in the last couple of -- in the last year. But it's very demand-driven, and so we're not sure yet what -- how much of those freight rates are going to stick. But right now, we're selling at sort of normal freight costs. I think the freight rates haven't changed, the inventory that we have in place and inventory that we're bringing in now and over the next month or 2 is going to be at current prices. So we should have some favorable comparability for, at least, that point. We need to stay tuned to see what happens later in the year.

Matt, this is Paul Toms. Like you, we're reading the same articles projecting rate increases of $400 to $800 per container. But there's always a lot of posturing right ahead of when everybody signs contracts in May. And to date, we really haven't experienced a lot of increase, maybe $100, $150 a container. And we do have some of our freight lines presenting us contracts for next year that are not at significantly inflated rates.

Okay. What about other influence, similar articles about the cost of poly from costs going higher, obviously that's going to hit upholstery more. But outside poly, other inputs, what are you seeing on the inflation front from other items?

Matt, this is Alan. We are seeing some pressures on raw materials that are petroleum-based such as foam seating, such as different kinds of upholstery materials. So we take that into account in our pricing adjustments at the April market. And so we should be able to cover that through our selling price increases. As far as leather is concerned, which is a component that we're always concerned about, we saw some small relief in leather prices later last year. Now we're seeing some relatively modest increases in leather. But having said that, as compared to a year ago, leather prices are up considerably and we really are not hearing that, that's going to swing dramatically one way or the other. So I think the leather pricing has finally stabilized and probably will go up some over the course of the year, but not nearly as dramatically as it did a year ago.

Okay. And then one other one in the gross profit line. I looked back at the last few years and maybe you can help me understand the seasonality here. Q4 to Q1, it looks like there's -- and I know we've been in a rocky period here. But the last few years, it looks like there's been a couple 100 basis points of pressure Q4 to Q1 and, of course, profit line. What is it about that seasonality that we should keep in mind as we're forecasting out Q1 margins?

That's interesting, and I don't know that I've ever really noticed that the way you have, but the fourth quarter, there seems like there's always some adjustments for LIFO, maybe adjustments for obsolescence and there may be some unusual things going on in the fourth quarter that we wouldn't typically see in the first quarter even at a gross margin level.

Okay. All right. And last one for me. You talked about the showroom consolidation. Was there any impact on the P&L in Q4 that we should adjust for as we move forward?

We got a little bit of accelerated depreciation on the balance of the improvements at our old showroom that we had to go ahead and...

A couple of hundred thousand.

$200,000.

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

On the sourcing shift, can you give a sense of what percentage -- quantify what percentage of all Chinese-sourced sales volume has been moved to other countries?

Okay. I'm glad you asked that Todd because I'd like the opportunity to clarify. It -- we probably, in 2010, sourced 90% of our product, imported product in China. Last year, we're not moving product from China to Indonesia and Vietnam, we're just bringing new products out much more in Vietnam and Indonesia factories than we are in China factories. So it's really as we develop new product, we're bringing it out from factories in those other countries. And we still have probably 65% to 70% of our volume coming out of China. We have one factory in particular that's been an excellent vendor for years, and we continue to source a lot of our product with that factory in China, including our major introduction in this market. So we expect that at the end of the day, it's probably going to be maybe 60% this year will be produced in China and maybe 30% in Vietnam and 10% in Indonesia. So the majority actually is not moving, but there is some that's moving and that part is the part that's been a little bit problematic in terms of just getting delivery in the normal timeframe as we bring new vendors online and put end processes and just -- and there's a little bit of a learning curve for both of us.

Okay. And with that in mind, these new items, are these existing vendor relationships in Indonesia and Vietnam?

Some of them are Taiwanese businessmen that have opened factories in Vietnam, and others are new vendors. So a little bit of both.

So aside from the delay element, are there learning curve issues that you're experiencing now as well in terms of the new relationships?

I just think, even when you have the same ownership, a factory in Vietnam is different than a factory in China, and we have to get in there and get people comfortable with what our expectations are for quality and engineering and finishing and whatnot and it's -- so there's actually a learning curve, whether it's a new vendor or whether it's an existing vendor but a new country and a new factory. And I would say that probably the delays are running 1 month to 2 months, maybe 6 weeks on average.

Has that delay been fairly stable or what's the trend been in recent weeks?

I would say it's probably stable for right now. We expect that to improve as we continue to work with these factories, and I think having Bill Reece involved is going to help us to -- we've spent a fair amount of our time traveling back and forth to Asia also to work with people and have some of them come over here. But my sense is that right now, we're still experiencing delays in that 1- to 2-month range. But we expect that we'll be able to bring them to more normal lead times within probably by the middle of the second quarter.

Just looking at the big picture, is this really a diversification issue? Is it primarily labor cost? Just kind of give us a sense, if you would, the rationale for spreading things out and for launching some of the new products sourced from just changing that mix around a little bit?

Well, it's probably not diversification so much in terms of we still have this one vendor that will do a significant amount of our business with in China and that we really don't see that changing in the short term because although there is some inflation in China that's impacted the more promotional and mid-priced parts of our line, the higher-end parts, if we can develop product that really warrants the price, which we're able to at this one vendor, we can still, I think, show a good value out of China. But in the more mid-priced parts of our line, the inflation in China has taken the value away. And that's why we've moved our Envision product to Vietnam, probably, all the new introductions starting about 1.5 years ago. And I see more of that in the future. I also think Indonesia is probably better for our mid-priced product and maybe even some of our higher-end product. Their costs are maybe not as low as Vietnam, but I think the skills are better in some ways and the factories are probably a little more compatible to our middle and upper priced part of our line than Vietnam is.

Okay. And for inventory, what trend should we expect to see throughout the year?

I think you should expect to see it increase over the next couple of quarters. We've kind of overshot our targets for inventory levels. And some of it's because of the delays we've experienced on new products. But I would say right now, we're probably under inventory by $7 million to $8 million. And so I'd expect to see cash come down and inventories to go up by about that amount over the next 2 quarters.

And also, if you would, for the fourth quarter, could you quantify the upholstery loss versus a year ago?

Yes, we can. Give us just a second to lay our hands on it. I know it was significantly less, and I think probably more improvement at Bradington-Young than Sam Moore. Part of that had to do with the comp fourth quarter a year ago for Bradington-Young, we were in transition of closing our Cherryville plant and consolidating all the production into Hickory. And there were some costs in there that were one-time or unusual costs that we didn't have this year. At Sam Moore, improvement fourth quarter last year over fourth quarter this year, but probably not as dramatic.

It improved by about $1.3 million, including the restructuring charges that went from $5.3 million to -- in 2011 to $4 million for the full year.

For the full year. He was asking the fourth quarter. Todd, I'm sorry, we don't have that information at our fingertips but...

Yes, sorry, about that Tom.

All right. I can check back with you on that.

What we probably can say, we'd like to point out is that we're making tremendous improvement in upholstery. We had expected to be at breakeven or better in the second half of the year, and we didn't get there. But I think sequentially, every quarter is better, and we're very close to breakeven at both companies with domestic operations.

Right. Including the restructuring charge, it was $1.9 million this year versus $3 million last year.

And the restructuring was $1.8 million.

Restructuring charge was $1.8 million, right.

Okay. CapEx, tax rate for fiscal '13, any thoughts there?

CapEx is going be comparable to this year, probably $3 million to $5 million. We've got this ERP, which is going to be the bulk of our CapEx. The tax rate with the improved profitability in upholstery, we expect that to return closer to normal levels. This year was unusually low. We expect it to be back up in the 30s, probably the mid- to low-30s, probably not back to the -- our full marginal rate.

Okay. And ERP, any kind of sense, any update on the timeline? Where you are, where it's going?

I think it's going like most ERP implementations go, optimism and then maybe a little bit of disappointment. But we're -- I think, we're go live Phase 1 sometime this summer. And then I think we've got a pretty good head start on Phase 2, which we'll probably go live, I mean, realistically, probably early next year.

Phase 2 being upholstery.

Phase 2 is, right, is our upholstery, which is the customization and manufacturing modules plus what we already have in place in Phase l in finance and order processing.

[Operator Instructions] Our next question comes from John Frizzell from Fifth Third Bank.

Would you talk -- in the shift of both product mix and manufacturing location, could you talk a little bit about the pricing freedom you've got or foresee in those mid-line product ranges going forward? It sounds like you've got a little top line juliard [ph] of some sort, what you're responding to by product mix and relocation of manufacturing.

I'm not sure that I fully understand your question, but I can say that the [indiscernible]...

It's mostly about price. It's mostly about your pricing freedom in the market for your mid-range products and the products that you're sourcing out of Indonesia and Vietnam.

Right. And really, to date, there's a lot more of our mid-price and starting price point product that we have started introducing in Vietnam than there is Indonesia. We're really getting ready to produce our first group in Indonesia, which is a higher price point group within our line. But Vietnam, I think, generally is viewed as a country, forced [ph] Country for more moderately-priced furniture. And in our line, what we've tried to do is to develop product lines that are targeted at a younger, slightly less affluent customer, Gen X and Gen Y consumer going back for about the last couple of years. And those products, they're smaller scale, they're cleaner designs and they're also less expensive by probably 15% to 20% than our typical Hooker products. And they are more price sensitive to, first, to get placed with the retailers; and second, that consumer, I think, there's probably less discretionary income or they are more price conscious and maybe our core baby boomer consumer. So as we're seeing prices go up in China, that type of product we felt like we could produce in Vietnam at slightly lower cost.

I'm showing no further questions at this time. I will now turn the call back over to management for closing remarks.

All right. Well, we really don't have a lot of closing remarks. We appreciate everybody joining us today. We're a little disappointed in our fourth quarter that we had some of the interruptions we did and weren't able to deliver even stronger results, but I think, all in all, the year was a good year. We made progress on a lot of fronts. I think we ended the year in much better shape inventory-wise and cost-wise and manufacturing efficiency in our upholstery division than we entered the year. So we're optimistic about the current year and the fiscal year 2013. And I know that we've got some short-term hurdles to get over, but I think some internal operational improvements and a little bit better conditions at retail and hopefully, we can deliver another good quarter. Thank you for joining us.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and have a wonderful day.