Hook on Phonics didn't work for Hadley

So as parents you worry about making sure your kids learn things on time, and secretly hope they learn things ahead of time. We are now on the path to start teaching Hadley to read. I really haven't done a lot of research on this topic yet, but we are trying to begin with her nightly reading. We bought a bunch of the Level 1 reading books and as we read we pick out words for her to spell and then we repeat what the word is.
So..now after that explination..
Tonight Jason was reading a Biscuit book. In one part Biscuit is written on his dog house. This is what transpired:

Jason: Spell this word.
Hadley: B-I-S-C-U-I-T
J: And what does that spell?
H: Dog House!

So, we still have some work to do. At least she is able to spell the word, even if she doesn't know what she is spelling!