Hamilton Beach Brands Holding Co (HBB) Q2 2019 Earnings Call Transcript

Hamilton Beach Brands Holding Co (HBB -5.76%)
Q2 2019 Earnings Call
Aug 01, 2019, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Beach Brands Holding Company Q2 2019 earnings conference call. [Operator instructions] Ms.

Lou Ann Nabhan, head of investor relations, you may begin your conference.

Lou Ann Nabhan -- Head of Investor Relations

Thank you, Cheryl, and good morning, everyone. Welcome to the second-quarter 2019 earnings conference call and webcast for Hamilton Beach Brands Holding Company. Greg Trepp, president and chief executive officer; and Michelle Mosier, vice president, chief financial officer, and treasurer, will discuss the company's second-quarter results and our outlook. Also present for the Q&A will be Al Rankin, chairman of Hamilton Beach Brands Holding Company; and Scott Tidey, senior vice president, North America sales and marketing for Hamilton Beach Brands.

Yesterday, after the market closed, we issued an earnings release announcing our second-quarter 2019 results and filed a 10-Q with the SEC. Both documents can be found on our website at www.hamiltonbeachbrands.com. A replay of today's call will be posted on the website this afternoon, and when available, a transcript will be posted. Today's presentation contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in either the prepared remarks or during the Q&A.

Additional information regarding these risks and uncertainties is included in our earnings release and 10-Q. The company disclaims any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. And now I'll turn the call over to Greg.

Greg Trepp -- President and Chief Executive Officer

Thank you, Lou Ann. Good morning, everyone, and thanks for joining our call. My remarks will focus on the second-quarter performance and back half outlook of our two business segments, Hamilton Beach Brands and kitchen collection. At Hamilton Beach Brands, revenue was $130.9 million compared to $135.9 million in the second quarter of last year.

The decrease was attributable to lower sales in the U.S. consumer and global commercial markets partially offset by growth in some of our international consumer markets. In our U.S. consumer business, e-commerce sales were up from last year.

However, brick-and-mortar sales of some retailers were soft. The lower revenue in our Global Commercial business was primarily due to the timing of product shipments and new opportunities shifting into the second half of the year. Gross profit margin decreased to 21.2% from 22.4% primarily due to higher inbound freight costs and unfavorable currency movements. In the back half of 2019, we expect to deliver higher margins due to product mix and slightly favorable product costs, and we continue to expect our full-year 2019 gross margin percent to be comparable to 2018.

Hamilton Beach Brands' operating profit was $3 million compared to $4.2 million for last year -- last year's second quarter, primarily attributable to the lower revenue. As you know, our business is seasonal, and a majority of our revenue and operating profit is earned in the second half of the year when sales increase significantly for the full holiday selling season. For the past five years, on average, 60% of revenue and 86% of operating profit have been earned in the back half of the year. We're pleased with the placements and promotional support that we have secured for the second half, and we expect operating profit to increase over last year.

We are working on finalizing customer commitments and could revise our back half outlook once we receive final orders. As always, the ultimate success of the second half will depend on consumer confidence in the economy and household finances, which, at this time, continue to look positive. I'd like to provide additional details regarding our progress with our key long-term growth drivers. We provide a comprehensive offering of great portfolio brands and focus on price points from value to luxury.

We have a broad customer base and cover most channels. We're the No. 1 player in many of those channels, and we continue to gain share in many categories. In the second quarter, the Hamilton Beach brand continues to hold the No.

1 unit share position in the U.S. small kitchen appliance industry in both the brick-and-mortar and e-commerce channels. Through our intense focus on innovation, we're on track to introduce more than 80 new product platforms this year. We delivered 28 new platforms through the end of July and, by the end of this month, expect to have launched nearly 50 new products.

We have two new air fryers in the market. And they have been well received, has been a hot category, and we have some nice placements. In the second half, we will introduce three more air fryers and four pressure cookers, making us well represented in brands and sizes. To further strengthen our core and drive growth in new business areas, we're investing in six strategic initiatives, which are expected to significantly enhance our market position and financial performance over time.

We've added a new section in our earnings release, called investor perspective, which is designed to help you understand our progress with our initiatives and our plans and expectations going forward. I will provide some of the current highlights. First, in our Global Commercial business. Although second quarter was lower than expected, we believe our ability to deliver our historical 6% annual growth rate is still very reasonable.

We have a deep and exciting list of regional and global chain opportunities that we think will help drive growth in the back half of 2019 and into 2020. In fact, our list of placement opportunities is one of the strongest we ever had. We've been working to expand geographically, in line with the larger and regional chains, including many that are expanding in Asia. After several years of increased investment, we have recently further increased resources devoted to pursuing those opportunities.

We continue to expand our product lines, and we're entering new categories. Additionally, e-commerce is becoming an increasingly important part of commercial product sales, which plays to our strength. Next is our initiative to increase our share of the only the-best segment of the small kitchen appliance market. This year, we're introducing several new only the-best products, including a new wolf gourmet stand mixer, which will be in the market in the coming weeks.

Other new only the-best products for this year include two Hamilton Beach Professional hand mixers, a Weston electric food mill, a sous vide circulator and new CHI irons. We're selling the Bartesian premium cocktail delivery system through an exclusive multiyear agreement, and we expect to start shipping product this quarter. The Bartesian machine provides a single-serve cocktail by combining premix capsules with the appropriate spirits at a selected strength. Bartesian is getting great customer reviews, and we believe it'll be a popular new item for the holidays.

Switching to e-commerce. In the second quarter, our online sales increased significantly over last year throughout North America in our retail and commercial businesses. In 2018, in the U.S. e-commerce channel, the Hamilton Beach Brand was No.

1 in U.S. and a leader in dollars in the small kitchen appliance category. Online sales were expected to grow in 2019 and, in the coming years, at a significantly higher growth rate than the brick-and-mortar growth rate. We estimate that the e-commerce channel could account for approximately 40% of the U.S.

small kitchen appliance industry in the future, which should position us for significant growth gained by leveraging our market-leading position. In 2019, we expect to generate e-commerce sales growth in all of our markets. Turning to emerging markets, our international sales grew in the second quarter and are expected to grow for the balance of 2019. We're expanding in South America and China.

And just last month, we entered the market in India with a new product that we believe has great potential. In India, an appliance that you would see in almost every home is called a juicer mixer grinder. Our research revealed that 40% of consumers are not satisfied with their current one. We believe we've created the world's greatest juicer mixer grinder.

From a new category perspective, last year, we entered 12 new categories. This year is mostly on -- this area is mostly an online play that enables us to prove new product quickly and relatively inexpensively. This year, we are particularly excited to enter the oral care category, which is a large and growing presence in the e-commerce channel. We're about to launch a sonic rechargeable toothbrush under the Brightline brand name through the e-commerce channel.

The product just received the American Dental Association Seal of Acceptance, one of the few brands to have that distinction. Next, I'll discuss our kitchen collection segment. For the second quarter in a row, kitchen collection's operating loss improved over the prior-year period and was $3.2 million compared to $3.8 million for the second quarter of 2018. Revenue was $18.3 million compared to $22.8 million last year.

The decrease was due to the closure of underperforming stores and lower comparable store sales, both of which reflected the continued downward trend in customer traffic. Gross profit margin for the second quarter of 2019 was 43.8% compared to 45.6% last year mostly due to higher inbound freight costs. We continue to expect the full-year gross margin percent to be in line with 2018. Operating expenses decreased by $3 million compared to the prior-year period as a result of store closures and corporate expense reductions.

Kitchen collection continues to make meaningful steps to enhance its position, prospects and options for the future. We have reduced our store count to 162 as of June 30, 2019. We plan to close additional stores by the end of 2019, at which time, at least 85% of our stores will have a lease term of approximately one year. We have a detailed analysis for each store that models a potential to generate a reasonable return for shareholders.

Given current foot store traffic, we believe, a scenario that could play out is kitchen collection having a portfolio of 100 to 135 adequately profitable stores in outlet mall locations as a reasonable core. As traffic patterns, rent negotiations and other factors evolve, we will adjust our model, make decisions that are in the best interest of our shareholders and employees. We're committed to aggressively managing the store portfolio over this year and next to include only stores that can deliver an adequate profit level. With that overview of our two segments, I'll turn the call over to Michelle, who will discuss our consolidated results.

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

Thank you, Greg, and good morning, everyone. After discussing our consolidated results for the quarter, I will review our outlook for 2019. Consolidated revenue was $148.4 million compared to $157.9 million last year and reflect the decreases in both segments, as Greg discussed. Consolidated gross profit was $35.7 million compared to $40.9 million last year.

Consolidated selling, general and administrative expenses were $35.7 million compared to $40.1 million last year. That decline reflected the significant cost reduction at kitchen collection from a decrease in net corporate expenses and from closing unprofitable stores. Hamilton Beach Brands expenses also decreased. And in the second quarter, operating expenses were $24.7 million compared to $26.3 million last year.

The decline was mainly due to the favorable impact of a $3.7 million decrease in environmental reserves at one of our site and a $600,000 decrease in employee-related expenses, which included a decrease in accrued incentive compensation driven by a lower market price of the company's stock during the second quarter of 2019. These benefits were partially offset by a onetime charge of $3.2 million for contingent loss related to patent litigation. The decrease in the environmental reserve is a result of a change in the expected type and extent of investigation and remediation activities at one of our site. The company reported a consolidated operating loss of $306,000 compared to operating income of $384,000 last year.

Operating profit at Hamilton Beach Brands was offset by an operating loss at kitchen collection. Consolidated net interest expense remained consistent with the prior year. While we saw higher average interest rates, the impact to interest expense was mitigated by lower average borrowings at Hamilton Beach Brands. Other income net in the second quarter of 2019 was $126,000 compared to an expense of $687,000 last year driven by foreign currency movements.

We realized an income tax benefit of $140,000 on a loss before income taxes of $1.1 million. The effective tax rate in the second quarter of 2019 was 12.9% compared to 26.7% in the prior-year period. For the full-year 2019, we expect our consolidated effective tax rate to be 25.1%. Our consolidated net loss was $944,000 or $0.07 per diluted share compared to a consolidated net loss of $874,000 or $0.06 per diluted share for the second quarter of 2018.

Next, I'll discuss balance sheet and cash flow item. As discussed previously, we've been focused on getting our inventory, debt and cash flow back to our desired levels with inventory being the key element. We made strong progress in all these fronts in the second quarter. Consolidated inventories at June 30 were $140.8 million, a decrease of $24.4 million compared to the prior year.

Looking at the segment, Hamilton Beach Brands inventories decreased to $121.5 million from $138.7 million last year. At kitchen collection, inventories decreased to $9.3 million from $26.5 million. Consolidated debt at June 30, 2019, was $91 million compared to $105.5 million at the same time last year. The decrease was primarily due to lower net borrowings at Hamilton Beach Brands.

Net cash used for operating activities decreased $14.1 million in the first six months of 2019 compared to prior year primarily due to efficient management of net working capital in both the Hamilton Beach Brands and kitchen collection segment. Hamilton Beach Brands had a use of cash related to net working capital of $18.3 million in 2019 compared to $31.7 million in 2018. The improvement was driven by efficient management of inventory partially offset by changes in trade receivables due to timing of collections. kitchen collection had a use of cash related to net working capital of $4.7 million in 2019 compared to $8.8 million last year.

The reduction was primarily due to lower inventory as a result of store closures. Capital expenditures were $2.1 million in the first six months of this year compared to $4.6 million last year. The decrease was primarily due to the capital spending related to Hamilton Beach Brands' software development costs. Consolidated cash, use of cash before finance activities was $44.2 million compared to $60.7 million for the first six months of 2018, consistent with the lower inventory.

In May 2018, the board of directors authorized a stock buyback program to purchase up to $25 million of our outstanding Class A common stock through December 31, 2019. In the second quarter, we repurchased 129,697 shares for an aggregate purchase price of $2.3 million. We have continued to buy back shares. Through July 31, we purchased an additional 111,370 shares, bringing our year-to-date repurchase to a total of 241,057 shares for an aggregate purchase price of $4.2 million or approximately $17.28 per share.

During the second quarter of this year, the board also approved a 6% increase in our regular quarterly cash dividend. Net cash provided by financing activities decreased $12.3 million primarily due to decreased net borrowings at Hamilton Beach Brands. Cash on hand as of June 30, 2019, was $1.2 million compared to $2 million last year. And now let me turn to our outlook.

At Hamilton Beach Brands, we are reaffirming our full-year outlook. We expect revenue to grow moderately as a result of the continued successful implementation of our strategic initiatives. Full-year operating profit is expected to increase moderately over 2018. Cash flow before financing activity is expected to increase significantly compared to 2018.

Our goal is to exceed $20 million as we work to return to pre-2018 level. Capital expenditures are expected to be approximately $4.5 million primarily for the development of our ERP system and tooling for new products. Focusing on the second half. With the seasonality of our business, retail orders can move up or back by a few weeks, and these small shifts can have a big impact on a particular quarter.

As a reminder, in 2018, we had a strong third quarter and soft fourth quarter. Based on our 2018 performance and our known 2019 placements and promotions, we believe the 2019 fourth quarter will show more growth than the third quarter. For all these reasons, we prefer to focus on the back half in total. We expect second half revenue and operating profit to increase over last year.

Our second half outlook may change as customer commitments for the fall holiday selling season are finalized in the coming weeks. While it's too early to confirm the final picture, we have encountered no unfavorable issues that would pull our outlook down. Our position in e-commerce is strong and should be able to offset any unexpected softness in brick-and-mortar order flow. Turning to kitchen collection.

We continue to expect full-year 2019 revenue to decrease compared to 2018 due to store closures and lower comparable store sales. As a result of progress with our kitchen collection initiatives, including significant expense reduction, kitchen collection expects its operating loss and use of cash before financing activity in 2019 to improve compared to 2018. Capital expenditures are expected to be approximately $300,000. kitchen collection is working aggressively to significantly improved performance in 2019 and 2020.

Based on the outlook for the Hamilton Beach Brands and kitchen collection segment, Hamilton Beach Brands Holding company expects 2019 income to increase and cash flow before financing activities to increase significantly over 2018. That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Michael Fisherman from Zuckerman Investment. Your line is open.

Michael Fisherman -- Zuckerman Investment -- Analyst

Good morning.

Greg Trepp -- President and Chief Executive Officer

Good morning.

Michael Fisherman -- Zuckerman Investment -- Analyst

I'm sorry if I missed it. But have you stopped disclosing free cash flow by segment?

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

Yes, Mike, we have.

Michael Fisherman -- Zuckerman Investment -- Analyst

Could you maybe talk about your expectations for each brand for the second half, please?

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

I think we just said that we expected free cash flow for the Hamilton Beach Brands to be approximately -- or above our $20 million target, back in line with pre-2018 level.

Michael Fisherman -- Zuckerman Investment -- Analyst

And what about kitchen collection? I'm just trying to figure out how much free cash flow you guys expect to generate on a total company basis in the second half.

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

We expect it to improve compared to prior year for the kitchen collection segment.

Michael Fisherman -- Zuckerman Investment -- Analyst

So are you thinking maybe about $60 million of free cash flow for the total company for the second half?

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

Well, we haven't disclosed that number.

Greg Trepp -- President and Chief Executive Officer

Yes. I think we're -- I think just -- if you look at where we are today, Mike, and our goal to get HB over $20 million, in case we do improve, yes, that'll get you into the range of what the back half look like.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. And what do you expect to do with those proceeds?

Greg Trepp -- President and Chief Executive Officer

Well, we've talked in the past about our priorities. And so -- and it really depends on the business facts as they present themselves. But basically, we've talked about reinvesting in our initiatives is the first priority. Yes, we're continuing to fund our dividend.

And this year, as we talked about, it's at a 6% higher rate. When the stock price is at a level that we think makes sense, we'll continue to repurchase stock. And then if there's an acquisition opportunity that comes along, we would certainly use the cash for that reason.

Michael Fisherman -- Zuckerman Investment -- Analyst

And when I look back at the fourth-quarter press release, I think you talked about Hamilton Beach Brand free cash flow being up. And I think in Q1 and now in Q2 has been up significantly, and I appreciate that $20 million exceed $20 million. Has something changed from when you gave the original guidance or that was the same?

Greg Trepp -- President and Chief Executive Officer

Well, as we came into this year, Mike, as you know, we -- our inventory levels were not the level we want. And so we felt like if we could achieve the management of the inventory and debt levels down that we thought we could, that that would just give us more confidence and clarity on the ability to reach our goal for the full year. And at the first quarter, we made good progress. We made continued good progress in the second quarter.

So that just -- that puts us in a position where, as we model things out for the rest of the year, we feel more confident having that progress behind us.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. And when you look at Hamilton Beach Brands, the business itself, with the first half and then what you're guiding in the second half, maybe just explain why you expect things to inflect positive in the second half, vis-a-vis, the first half.

Greg Trepp -- President and Chief Executive Officer

So one of the important things we needed to take care of in the first half of the year is to work with our retailer -- retailers see what programs and placements that we can secure, see what competitive activity goes on, see how the consumer is reacting to our products and our brands and our retail partners. And so as we firmed up the back half placements and promotions across our divisions, we have a clearer picture. So as we came into this first half of the year, we knew that we would be a little softer than last year, bearing on revenue and our profit. As we move into the back half of the year, based on those placements and promotions, our expectations were that we could have a much stronger year.

Also, as Michelle mentioned, we had a -- well, we had a very nice third quarter last year. We had a fourth-quarter performance that was lower than we'd like it to have been. So we put that all together, particularly with the more knowledge around the placements and promotions, that gives us an opportunity to feel like we were well positioned to have a strong back half.

Michael Fisherman -- Zuckerman Investment -- Analyst

Nothing in the release or the commentary on tariffs. Could you just talk about tariffs impacting your business from top line and gross profit?

Greg Trepp -- President and Chief Executive Officer

Sure. On tariffs, right now, as the current set of tariffs exist, it's around 10% of our revenue. We have mitigated the impact of those through pricing. Sometimes, the pricing is stuck.

Sometimes, it is not. So we've adjusted that. But generally speaking, we've covered most of that tariff impact. With the delay or postponement, not sure exactly how to characterize the -- discussed remaining tariffs.

We are -- while we were ready to take action if we had to, right now, we put those on hold, and we'll monitor what happens in the negotiations and how that impacts the tariffs going forward. So for now, we feel as if we have things under control on where they need to be, and we'll just have to be ready to react if the tariff situation changes further.

Michael Fisherman -- Zuckerman Investment -- Analyst

And now with -- I know Hamilton Beach. It's a sell-in model. Given brick-and-mortar was down, obviously, in Q2, given the e-commerce strength, could you maybe give some commentary on the sell-through and what the inventory looks like in the channel?

Scott Tidey -- Senior Vice President, North America Sales and Marketing

Yes. Sure. This is Scott. I think the -- if you look at U.S.

consumer, you would see that the brick-and-mortar, there's a couple of retailers that have had some sluggish comps there. And I think we were seeing the results of that as some of that foot traffic was slower in some of those retailers. We just weren't seeing the pulls through our typical core business. Overall, I think we're not loaded in with inventory in those channels, and we think that we've looked at the back half of the year.

We think that -- unlike last year, we had the issues with the e-commerce channel in the fourth quarter. We think that the strength that we've had in the first half of the year will continue to go forward in the back half of the year.

Michael Fisherman -- Zuckerman Investment -- Analyst

How much was e-commerce up in Q2? And what's changed in Q1 and Q2 versus what happened in Q1 -- in Q4, I'm sorry, for e-commerce?

Scott Tidey -- Senior Vice President, North America Sales and Marketing

We don't break out the e-commerce specifically, but we looked at both the first quarter and second quarter. That part of the business continues to outpace the brick-and-mortar growth in our industry, and I think we continue to feel like we're well positioned in that. And so as a result, we're seeing growth as well with our core businesses, and that's really in all of North America. We're seeing that in Canada, U.S.

and Mexico. And then as we have discussed last year, in the fourth quarter, some of our bigger misses were some issues that we had on the online side of the business. And while we're still far from the fourth quarter, we feel like we've -- we're in a better position to avoid the issues that we had last year.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. And now I appreciate the added commentary on the investor perspective. The OTB growing 20%, and I think you said that should continue. If that does, how much would that help get you to that 4% to 5% organic growth you mentioned in the release?

Greg Trepp -- President and Chief Executive Officer

Yeah. That certainly would help, Mike. We're really counting on probably mostly the e-commerce and the OTB and commercial initiatives to ensure we deliver that 4% to 5%. I think the acquisitions, obviously, is a tough one to predict.

And the new categories is one that is -- we're pretty happy to where it's going, but it's really early on that one. So it's -- it has less of a top-line impact yet. So certainly, OTB success is one of the top three or four areas to drive top-line growth.

Michael Fisherman -- Zuckerman Investment -- Analyst

But how much is OTB as a percentage of Hamilton Beach Brands revenue in 2018?

Greg Trepp -- President and Chief Executive Officer

We haven't broken that out. We have talked that as about a third of the industry, and that we are -- just over the past three years, started to move in that in meaningful way. So -- but we have not broken out what the percent of our total is.

Michael Fisherman -- Zuckerman Investment -- Analyst

But it's -- let's say you grow 20% per year, is that going to add 100 bps, 200 bps, 50 bps? Can you at least give some color on how much it would help grow your organic growth?

Greg Trepp -- President and Chief Executive Officer

No. I think as each year-end comes up, we try to decide what additional color we want to add around some of these things. I think last year, we added a bunch more, and we'll sort of see how things go within this year, Mike. But right now, as we go quarter to quarter, we're not going to provide that data.

Michael Fisherman -- Zuckerman Investment -- Analyst

But clearly, given the current stock price -- you bought some stock personally. It looks like the company actually repurchased some. The market clearly doesn't believe your investor perspective. So it would be helpful if you could just be a little more transparent.

So maybe just disclosing OTB as percentage of sales, e-commerce as percentage of sales, emerging markets as percentage of sales and just quantify how much of those are going to impact your organic growth would be very helpful.

Greg Trepp -- President and Chief Executive Officer

OK. We'll keep looking at all the things we disclosed quarter to quarter and year to year. So I appreciate that input. And clearly, we've got -- we deliver our back half like we think we will, we think that's going to help the stock price.

But clearly, at the moment, it's not at a place that any of us are happy about.

Michael Fisherman -- Zuckerman Investment -- Analyst

And also, you brought up acquisitions. I think -- as Mr. Rankin's on the call, maybe I can get his perspective as well. But just given where your stock is, the multiple, the market not believing your investor perspective, the multiple of companies you're going to acquire, like why are you talking about being a buyer when maybe you should be talking about being a seller?

Al Rankin -- Chairman

We're trying to build the business. So this is Al Rankin. We're trying to build the business. Over time, if we see opportunities that are fairly valued, we would use the free cash flow that we're generating to take advantage of those opportunities.

It's really a pretty simple equation in that sense and one where we would try to continue to strengthen the company through the strategic initiatives that Greg has outlined and that are in the investor perspective. And we'd be opportunistic. It may not be that the right opportunities will come along in this environment. I think for the time being, the most important initiatives are those that develop new products and build the e-commerce channel.

And as I think Scott mentioned and Greg has mentioned, there's a lot of opportunity to build a business and build new categories ourselves in the e-commerce channel within -- in comparison, it's much harder to do that in the brick-and-mortar channel because shelf space is expensive and scarce from the retailer's point of view. When we're introducing new products, such as the electric toothbrush, we can develop first-class product. And then manage its promotion and sales development through the online channels. And I think as a practical matter, that is going to continue to be a major focus of building value in the company.

On the other hand, the company will continue to be opportunistic if something does come along.

Michael Fisherman -- Zuckerman Investment -- Analyst

But Al, I'm just curious. Are you -- when you look at to maximize shareholder value, are you juxtaposing the execution of this investor perspective plan versus what you could sell the company for?

Al Rankin -- Chairman

We don't think about selling the company in any active way. The objective is to build shareholder value through continuing to own the company.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. Greg, and -- do you have any comment on that? Or...

Greg Trepp -- President and Chief Executive Officer

I think Al said it very well.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. And then I noticed on kitchen collection, I think you've already lowered the amount of stores. I think it was 100, 150. Now it's 100 to 135.

Is that something that you think is going to continue to happen?

Greg Trepp -- President and Chief Executive Officer

Well, I think as we execute the strategy we've been saying all along, which is we're going to take it store by store, and as we go through the negotiations, see how the stores perform, we're going to keep adjusting that range based on what stores can return profit. So I would imagine you'd -- you might see that range stay the same for a couple of quarters. You might see it change when we know more. We talked -- we're talking to landlords as we speak.

So as each month goes by and negotiation goes by, they'll affect the projected number. But right now, based on where we stand, we think that 100 to 135 is our best view as of today.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. Thank you.

Greg Trepp -- President and Chief Executive Officer

Thanks, Mike.

Operator

[Operator instructions] Our next question comes from Todd Lechtenberger from Amalfi Investments. Please go ahead. Your line is open.

Todd Lechtenberger -- Amalfi Investment -- Analyst

Hi, guys.

Greg Trepp -- President and Chief Executive Officer

Good morning.

Todd Lechtenberger -- Amalfi Investment -- Analyst

I just want to kind of follow-up since Al is there. Have you guys thought, the board and the company collectively, but it seems like there's a lot of opportunity on the brand side, a lot of growth potential and you talked about emerging markets and talked about e-commerce, about just selling the kitchen collection side of the business and focusing where your strengths are in the broader street -- scheme of things? Growth is going to be on the brand side. And even if you -- right now, if you just sold the company, if there was a buyer, if you just gave it away, I mean, operating cash flow would increase by 20%. So has there been any thought around that? I know you're trying to rightsize that business, but it just seems like a lot of work for a very little the incremental potential income and the ROI, the ROC or however you want to think about it will be a lot higher with that cash flow and those resources being utilized to the brand side.

Al Rankin -- Chairman

With all respect, I think you've got the equation upside down. We have to manage the kitchen collection business. There is no buyer. It's a very, very difficult and troubled industry.

The whole mall environment is difficult. The key is lowering rental rates to make the stores more profitable and adequately profitable. And in the meantime, as Greg has pointed out previously, we're managing down the liability exposure in the business, which is particularly related to leases that are extend out for more than one year, and also the inventory levels represent some exposure. So we believe that the most prudent way to manage the business is to manage the capital down on a consistent basis and to enhance our flexibility by entering into no leases longer than a year.

And as Greg has indicated to you, we will not sign up a lease, unless we think the store is adequately profitable, and that equation will work itself out over time. It's one we have to manage in a prudent way. There's no way to walk away from it.

Todd Lechtenberger -- Amalfi Investment -- Analyst

OK. Fair enough. And is there any kind of forward -- for the third quarter and the fourth quarter about what you guys see in terms of the number of stores in kitchen collections that will be shut down? Is it too early to look at those?

Al Rankin -- Chairman

Well, let me just reiterate that -- what Greg said, which is that the discussions with the landlords are going on as we speak. We are being very prudent about how we handle the ultimate decision on which stores to continue to sign up. We'll assess that. But let me say, in addition, just to put it in perspective, that the Hamilton Beach Brands board meets separately with the kitchen collection business and with the Hamilton Beach Brands business.

And in that way, the board is very closely involved with the efforts to deal with the difficult mall store environment, particularly in housewares category but also in many others, and is paying a great deal of attention to the overall program to sign up only stores that can make an adequate profit as we look forward and to bring down the central headquarters overhead expense at the same time. So it's -- it is certainly too early to say how all those negotiations are going to come out. But Greg has given you pretty clear guidance as to what we think a landing point might be. If things deteriorate further, that would change those numbers.

If more footsteps to the malls occur and there's a leveling out of the declines, that, again, would lead to a change in the number of stores. So all of those are sort of work in process at those time -- this time. And as we develop clearer perspectives, we'll include them in the future earnings releases.

Todd Lechtenberger -- Amalfi Investment -- Analyst

OK. Thank you very much. Appreciate it.

Al Rankin -- Chairman

Thank you.

Operator

Our next question comes from Michael Fisherman, Zuckerman Investment. Please go ahead. Your line is open.

Michael Fisherman -- Zuckerman Investment -- Analyst

Sorry. It's just a follow-up on kitchen collection. I know what your strategy is on winding it down over time. But clearly, the negative free cash flow is hurting the stock.

I just wanted to get your thoughts on, Greg your compensation, your long-term compensation not being tied to kitchen collection and just seeing if that -- do you think that's fair for shareholders.

Al Rankin -- Chairman

Well, let me just interrupt and say that's not an accurate assumption on your part. Greg's compensation is very much tied and -- to -- and so is mine. And in fact, anyone who is in the long-term incentive plan and receiving stock in the company is tied to it because the management is required to hold those shares for a significant number of years. And to the extent that the results in kitchen collection can be improved or the losses avoided, presumably, the value of the stock will increase.

So there is a very direct involvement in kitchen collection that affects the compensation worked out over the long term in terms of the way that our compensation system works. We feel that's extremely important because the whole concept behind granting restricted shares, which are entirely owned by the executive but which cannot be sold for a certain number of years, is designed to ensure that the executives' long-term interests are aligned with the shareholders in having maximum long-term value. So I think that everybody's very much tied to kitchen collection. And the important thing is if we're winding down the number of stores to an appropriate level, whatever that may turn out to be in an orderly way and managing the business in a way that the board concurs is the most reasonable way for us to manage it.

Michael Fisherman -- Zuckerman Investment -- Analyst

Hold on a second, Al, because if I look at the -- I hear what you're saying about the stock going up or down. But the truth is the performance criteria for Greg's long-term comp is brands [Inaudible] and HBB operating profit. There's no performance criteria for kitchen collection, and that's what I'm asking about. Why? And that any...

Al Rankin -- Chairman

And that's the answer I gave you, and I'm going to leave it at that. We've outlined this in great detail, as you know, and we've answered your question individually for you at prior times. And I think it's quite fully outlined in the proxy. And the perspective of the board concurred in by the management is just what we've outlined.

I'm going to leave it at that.

Michael Fisherman -- Zuckerman Investment -- Analyst

OK. Thank you.

Operator

[Operator instructions] I don't show any further questions in the queue at this time. I'll turn the call back over to Greg Trepp for closing remarks.

Greg Trepp -- President and Chief Executive Officer

Thank you. I'd like to leave you with a few key takeaways. We're pleased with the progress we're making, ensuring that our inventory, debt and cash flow are returning to historical levels. Based on our plans for new product introductions and customer commitments for the holiday selling season, we expect the back half as a strong enough to deliver a 2019 that will keep us on our path toward our long-term goals.

In the second quarter, we returned capital to shareholders in two important ways: our dividend increased by 6%, demonstrating our confidence in our 2019 outlook, our cash flow generation and financial position; and we have repurchased shares, as Michelle reported. We are excited about our prospects for advancing our strategic initiatives in our Hamilton Beach Brands segment. And at kitchen collection, we expect to make further progress with our strategy to improve its financial performance. And really, a key point, as always, is our company takes a long-term view, and we're committed to building long-term shareholder value.

So with that, I'll conclude our call today. Thank you for joining us.

Operator

Thank you very much, ladies and gentlemen. The recording for this program will be available as of 12:30 p.m. eastern time. Please dial (800) 585-8367 or (416) 621-4642 and use the passcode 7837809 to access the recording.

[Operator signoff]

Duration: 48 minutes

Call participants:

Lou Ann Nabhan -- Head of Investor Relations

Greg Trepp -- President and Chief Executive Officer

Michelle Mosier -- Vice President, Chief Financial Officer, and Treasurer

Michael Fisherman -- Zuckerman Investment -- Analyst

Scott Tidey -- Senior Vice President, North America Sales and Marketing

Al Rankin -- Chairman

Todd Lechtenberger -- Amalfi Investment -- Analyst

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