Haverty Furniture Companies Inc (HVT.A) 2002 Q2 法說會逐字稿

Good morning. My name is [Natasha] and I will be your conference facilitator today. At this time, I would like to welcome everyone for the Haverty Furniture second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. Media and individual investors will be on a listen-only mode for the duration of the call. After the speakers' remarks, there will be a question and answer period. If any institutional and analyst participants would like to ask a question during this time, simply press * 1 on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your questions, press the pound key. Thank you. With us today from Haverty are Mr. John Slater, CEO, Mr. Clarence Smith, President and COO, and Mr. Dennis Fink, Executive Vice President and CFO. Mr. Slater, you may begin your conference.

Good morning and thank you for joining Haverty's conference call. Today we will discuss results for the quarter ended June 30, our very exciting store openings, [INAUDIBLE] and merchandising, and our performance and earnings expectations for the third quarter. Sales for the second quarter increased 8.4% to 164.9 million and comparable sales increased by 6.6%. Margins during the quarter reflected a close [as] associated with replacement of retail locations and the closing of local market warehouses. We anticipate margins will remain relatively unchanged for the third quarter as we complete this transition. The temporary reductions in margin were offset by controls and improvements in SG&A expenses. We have been experiencing great value in our advertising as we further consolidate and coordinate our efforts to thus reach our target customers. We are especially pleased with SG&A results given the costs associated with the opening of nine new stores and three distribution centers. Employee recruitment, relocations, and associated timings were ongoing during the second quarter and will continue, but to a lesser extent through the third quarter. Our receivable balance was reduced during the quarter as our customers made early payoffs on their 12 and 18 months. No interest, no payment promotions, which we ran last year as a prelude to outsourcing of one of our credit programs. The receivable reductions enabled us to keep our volumes at a lower level than would have been possible otherwise and moderated interest expense. Additionally, a reduction in receivables and our continued good experience with writeoffs allowed our reserves for bad debts decline by $100,000. Our net income for the quarter was 3.7 million and earnings were $0.17 per share. But that is now history. What is going to happen?

Our operations, real estate, merchandising, and advertising personnel are currently working on the successful completion of the largest store rollout in the history of our company. During the quarter concluded, we opened replacement stores in Pensacola, Florida, and Richmond, Virginia. We opened our Clearwater Florida store on July 12 and a few stores in Orlando are opening in the next few weeks. A third store in Orlando and one in Daytona Beach, Florida will open the following week. Later on [we] will open two stores in Washington D.C. and Fairfax and [Woodridge] Virginia. Our distribution chain surpassed a major hurdle in the closing of the regional warehouse in [INAUDIBLE], North Carolina, loading a 100 tractor-trailers and approximately $3 million of inventory and moving into the new distribution center in [INAUDIBLE] in Georgia. Sales in the third quarter got off to a strong start with exceptional sales over the 4th of July. But it will be fair to say that sales activity is flattened in the last few weeks. We still anticipate a strong month in delivered sales in July and hopefully, the market will show some positive light soon and allow our customers to feel a little more comfortable about spending money. Our new stores are in the heart of our target demography. And we are able to obtain and open them at excellent values. We can't control the market [INAUDIBLE] of depression. So we are going to remain focused on serving our customer, driving sales with strong margins, controlling expenses, and generating earnings. Clarence?

Thank you, [Jay]. We had a solid performance about our stores and support teams in the second quarter. Sales were good in all regions and we are on schedule with our stores and [DC] rollout program. We began regional shipments out of the new [EDC] on July 15, began home delivery shipments on July 28, and plan to move and convert our Atlanta warehouse in late September. We have seen our stronger sales increases in motion sofas and reclining chairs as customers move to more comfort in functions in their homes. Fabric selections also reflect the move to soft [INAUDIBLE] and solids to support a [INAUDIBLE] of the soft as well as [INAUDIBLE]. Color and bold accents are now strong sellers adding interest and excitement in our showroom. Stationary upholstery and leather remain strong as the customer prioritizes the living areas of the house. These increases in motion and upholstery plus increases in the sales of entertainment, [INAUDIBLE], home office desks and storage units support the trend that more people are spending more time at home in entertaining, relaxing, and working in the house. Another strong category is bedding, second only to recliners. Formal [bounding] has produced the smallest increases this year, but sales in casual [bounding] were very high. [Paint] finishes and more casual offerings that are imported have been best sellers. In Taste goods, we are seeing more lighter finishes and intricate [INAUDIBLE] which are values as imports from China. Imports continue to dominate the bedroom category in all styles. Large taste pieces are still important with leather and wood combination beds, shape fronts, and [INAUDIBLE] and tastes showing strength. We continue to see great values in cut and [sell] fabric from Asia in leather and fabric. Due to the import values, we are seeing no price increases and expect none this year.

Our merchandising team plans a trip to China to visit factories in the fall to strengthen our relationship with our [INAUDIBLE]. Year to date, 53% of our furniture sales are in the living room category, 33% in the bedroom category, and 14% in the dining room. We believe that we are gaining share from some of the upper price point retailers as the customers recognizes the value we are able to offer due to our mix of main brands and import products. Haverty's brand now reached 30% of our core product mix and remains a key growth area of our business. We see a slight increase in this percentage going forward, but we are close to having about the planned mix of Haverty's brand on our floors. It continues to provide our customers excellent values exclusive to us and higher-than-average margins. We remain focused on growing profitable market share in the stronger markets in our region. I will now turn it over to Dennis Fink, CFO.

Thank you, Clarence. I just have few brief comments today and we will open it up for questions in just a moment. The balance sheet of Haverty remains very strong. We have shown a nice debt reduction over the last year. As we recorded in our press release, it is about $32.8 million reduction in debt from a year ago, and for the six months' first half, we had reduced debt about $20 million. Lot of that has been because of accounts receivable coming down. Accounts receivable for the six months is down about $30 million, but it is actually about level with a year ago. You might recall a year ago, we had offered some other free-interest programs that tied up money a little longer wanting to match competition and those programs were first run internally and then we outsourced one of those programs so that we still got some of those receivables, quite a bit of them on the books that were for the longer period and those are now being reduced as [Jay] said earlier then, in some cases called for. So, we have seen the money freed up there and back to last year's level which was again before we had started these extra-longer dating programs. So, we are pleased with that, that figure has come back down and has enabled us to reduce debt as normal cash flow from operations has come through and had been used for that purpose to pay on debt rather than support any big asset increases. One asset increase we do have, however, is the capital expenditure based on the expansion program we have and for the quarter, the capital expenditures were $14.8 million. Total capital expenditure now for the six months are about $19 million and as we have talked about previously and still are expecting capital expenditures [more than] $50 million for the year in the low-to-mid-50 million range with a lot of that coming obviously this quarter. Also, for purposes of cash flow statements, we had depreciation and amortization for the second quarter of 3.9 million and that makes it 7.8 million for the six months. So again, cash flow was positive approximately 20 million for the six-month period and it was basically flat for the third quarter. The big decreases came are [tax-claim] positive. That decrease has been in the first quarter.

Just looking at the makeup of our debt, we did have low average rates. About half of our debt is variable rate and that is running just under 4% right now and about half of our debt is fixed rate, which remains around 7%. So our average cost of funds are about 5.3% on the total 148 million now outstanding. I wanted to mention one of the things about the earnings model for the third quarter. We had given some new guidance. The first time, we had given guidance on the third quarter of $0.28-$0.29 a share and we had talked about sales assumptions, 3% comps, and 7% total sales increase in the third quarter. Also within these figures, we have a significant amount of startup expenses for the 16 stores and also for the two distribution centers. Of all those, the distribution expenditures are heavier and involve more under-absorbed costs as we steadily progress to bring them fully operational with all the functions that we intend to put in there such that we are expecting a little over $3 million in startup expenses in the third quarter and perhaps 1.5 million in the fourth quarter. Off saying this and we feel directly related to this, is the sale of some warehouses that we are edging and moving into and including startup expenses on the new warehouses. So we have already sold, and [Ted] announced we have [INAUDIBLE] from the third quarter pretax of approximately 3.8 million and we had originally thought that it would be about 3 million in the third quarter and about 800,000 in the fourth quarter and so we are now going to have both of those going to [essentially] two warehouses that we have sold, will show up in the third quarter since we have now closed those transactions. That will show in the other income line item, enforce the startup expenses, almost all in the SG&A line item.

Haverty does not show an operating income per se in our statements. A lot of the analysts and investors will come up with a co-operating income, but since we do have in effect a finance company embedded within our retail operations, the word operating income isn't typically used in that situation. We are just looking at pretax income and then earnings before interest and taxes or EBIT. So EBIT is in my view fairly reflective of all of the activity. We were selling some stores and again, we were having really huge startup expenses, reasonable considering all that we are doing, but large nonetheless that are offsetting mostly in the third quarter and then in the fourth quarter there will be a little higher relatively net startup expenses, since we don't have any gains from the sales of our warehouses. So, we are not getting down to this time in the fourth quarter feeling that we only are seeing the macro picture of what's going on. We think whatever is out there in so far as the economy goes is that we are streaming well positioned, we are really in the best markets with excellent locations. We are very much [improving] suppliers, our customers, [INAUDIBLE] and like to shop. They have got new homes with rooms to furnish and we are very confident that we are going to get their business. In spite of delays they may have in purchases with concerns about the economy or the stock market, we are there and we will [believe] prevail and be the strongest retailer in the markets. So, we are very confident and will also have the knowledge that the financing that we have and the track record we have and the solid balance sheet allows us to be patient and serve our customer and not to do anything that would unwind all the progress that we made and really gain the positioning for our brand and for our profitability. So with that Operator, I would like to turn it over to you to ask for questions.

Thank you. At this time, I would like to remind everyone in order to ask a question, please press *1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before asking your question. As a reminder, ladies and gentlemen, all institutional investors and analysts may ask questions. One moment while we compile the q-and-a roster.

The first question comes from the line of [Susan McCaurie] of UBS Warburg.

[SUSAN MCCAURIE]: Hi, can you comment a little bit on what the sales pattern was like through the quarter? I know that you said that the end of July kind of was low. But what were you seeing through the quarter and even through the July 4th holiday?

[DENNIS L. FINK]: There was kind of an up and down pattern in May and June and actually continued through July. First half of May was strong relative to the prior year in terms of incoming orders, written orders at the store level, which is usually what is being viewed from the front window. The second half of May although that is a big time that retailers got a lot of business written. It was only modestly [half] of last year. Then June started out very strong and the second half of June was weaker on the written order basis. We had delivered very well in May and got our backlogs down somewhat and we saw in June that deliveries were softer, only comps were up under 1% whereas comps in April and May on under-delivered basis have been up about 10%. So we saw a falloff on our deliveries. But we did have a little higher backlog at the end of June. In July, we are seeing the same pattern, erratic sort of pattern, week-to-week, or first half, second half of the month, and we saw strong businesses. We announced in the first half of July actually through the 10th is when we made our sales press release.

Since that time, it has been flat and actually the last week has been off modestly, the week after, our earnings release was up modestly. So we have seen it flattened out again. The good news is deliveries are going strong as Clarence has said and we feel that we will have nice increase in sales and comps in mid-single digits perhaps for the month of July.

[SUSAN MCCAURIE]: Okay, and can you comment a little on what kind of discounting you are getting from your manufacturers and has that changed much?

No, this is [Jay] Slater. Prices from the vendors have been stable and we have not resorted to discounting to drive our businesses. We have continued to emphasize value of quality and service and Dennis alluded to that in his comments that we have not done anything to unwind the reputation and the position that we have built for ourselves by avoiding what other retailers and our particular industry seem to thrive on. Susan, as far as some of the manufacturers are having some promotion specials particularly this summer, I don't know if that is what you are referring to, but some of our vendors want specific pieces and the groups are helping promote the products. Nothing [INAUDIBLE].

[SUSAN MCCAURIE]: So, you are getting some help from them and so at the end of the ...

That is for the whole line. In some cases, there are not just exclusive to us, but yes, I think, is some of the sales that we saw from [INAUDIBLE] come out with promotions to drive business and we take advantage of that.

[SUSAN MCCAURIE]: Okay, and one last question. Can you just talk a little bit about in terms of Haverty's brand? How much are you importing of that, where are you getting it from?

It is about 60% and most of that has been in the cases. The import companies are suppliers that we have used such as Presidential, [Woodlands, Snottix, Lawrence] and most of that or lot of it is coming from China, so they are branding it and making it exclusive to us in our markets for us, but these are suppliers we have used in the past.

[SUSAN MCCAURIE]: Okay, thank you very much.

Thank you.

Your next question comes from the line of [Sally Rollick] of [LakeMason].

[SALLY ROLLICK]: Good morning, everybody. Congratulation on a very good quarter. A few questions, Dennis could you talk a little bit about how you expect interest expense to look in the second half and it came in for low, what I expected to see in there, second quarter just wondering if that will continue in the second half?

[DENNIS L. FINK]: Yes, Sally, I believe that we will be probably lower than, certainly lower than last year and perhaps lower that we are projecting. I think around the $2 million level, perhaps 2.1 million for the fourth quarter. That would be without any impact from any other sort of financing that we might do like the sale leaseback that we have talked about, but just on a steady state basis, that is what the interest expense we would like to run. Funding the sales leaseback, we tend to reduce debt, we definitely will reduce debt and reduce interest further, but it would add something to SG&A. I think for now we are just talking in terms of a steady state for comparison purposes going and now that has actually happened.

[SALLY ROLLICK]: Okay, and also the expansion related expenses in the second quarter, can you quantify those at all and I assume they were all in the SG&A line?

[DENNIS L. FINK]: Yes, all but one, one amount of about $100,000 was in other expense and that was per decision for store closing costs which we are required to take in advance. The startup expenses are expensed as occurred but closing expenses are taken basically as I said on leased premises, and lease [hold improvements] and that sort of thing, we approve and anticipate a loss that we would have in subleasing, we are buying out of the lease. It shows about $100,000 of that. We had talked in terms of about a $1.5 million of startup expenses overall in the second quarter which is a combination of people on site in the new facilities especially in the distribution area where we had to do some training and relocate some people from some other cities and then each of the stores has got expenses that are in the pre-opening categories. So, it amounted to round $1.5 million.

[SALLY ROLLICK]: And Dennis, does that 1.5 million, does that include the 100,000 or that's the 1.5 million is what was in SG&A?

[DENNIS L. FINK]: It is a good question, yes, a1.5 million is what is in SG&A. There is another 100 on the other [INAUDIBLE].

[SALLY ROLLICK]: Okay, so the SG&A in other words, on a capital basis, the SG&A performance is actually even better than you showed in your numbers?

[DENNIS L. FINK]: That is correct, yes.

[SALLY ROLLICK]: On that score, you highlighted advertising expenses one category where you particularly saw improvement, could you talk a little bit more about that, will that continue going forward to the same degree, can you quantify it all, how much of that helped, that alone helped the expense ratio and are there any other factors that were helping the expense ratio?

[JOHN E. SLATER]: Well, Sally, on the quarter, I think it was 84 basis point reduction in advertising and we are seeing some improvement particularly as we move to these tabloids which are being the primary driver of our ads plus the supplemental television. So we are moving away from the [ROP] and we see that trend continuing. I don't know if we will see much reduction from the percentage that we have this quarter going forward from current advertising. [INAUDIBLE] is targeting around 5.5% but I don't think we will hit there this year. We are just primarily seeing reductions due to the fact that we are consolidating it, making it more directed and targeted, eliminating the fringe advertising and the cost of the paper production.

[SALLY ROLLICK]: Clarence, so the 84 basis points, that sort of improvement could continue in the second half, is that correct? Not necessarily [INAUDIBLE] should continue to see year-over-year some meaningful improvement in that category?

[CLARENCE H. SMITH]: I think we can see some improvement, not that significant though, I think it would be smaller than the 84 basis points. A lot of that came from the paper reduction because we are doing so much in that category, so much in tabloids. And that will continue to be that much lower.

[SALLY ROLLICK]: Okay, and then one final question for Dennis. Do you have the quarter end square footage number?

[DENNIS L. FINK]: Yes, in the second quarter it is [3.570] million square feet of retail.

[SALLY ROLLICK]: Great, thank you.

[DENNIS L. FINK]: Thank you.

Your next question comes from the line of [Jon Bock] of Wachovia Securities.

[JON BOCK]: While I'm an analyst too. All right. Good quarter. Really a lot of questions have been asked, but I guess the one thing I wanted to try to get a feel for what Clarence [was saying]. I think you mentioned you cleared out some inventory somewhere; I'm just trying to get a sense of what the gross margin performance was exclusive over that unusual activity?

While [INAUDIBLE] if I can quantify exactly. We had some significant reductions close out primarily in cities where we had to relocate stores and in closing warehouses. Those would be Richmond, Pensacola, and Atlanta and [Valis]. And we are preparing particularly in Atlanta to move and consolidate this warehouses. Dennis, do you have a feel for that?

I couldn't quote exactly [Jon] because it gets mixed in across our cities and it is not all special event sales and I would say certainly more than 10 basis point reduction year-to-year, we had a much more impact than that here, perhaps 30 or 40 points, I would say, 0.5 point even.

[JON BOCK]: So, you are still seeing progress on that line and is that the influence still at the mix of private label?

I think the private label has helped us significantly, that margin is best, as well as [INAUDIBLE].

[JON BOCK]: Super. A followup on the advertising issue. I don't know how you can look at it if you are changing mediums you are using, but in terms of creating the same number of impressions or however, you measuring it depending on the medium, are you basically saying you are just getting the same number of impressions, but for less money?

I think that is correct. I think we are targeting our customer better, we were doing a little bit more [INAUDIBLE] before and we are much more targeted going to our best retailers with these mailers dropping them in the right areas as opposed to the entire market. We are getting more specific and scientific about getting that message out. We do a lot of research on this as to have to work what the customers want, we just completed some focus groups and have learnt that they like these full color tabloids, we are going to direct them to those customers and not give them other messages that don't seem to be [INAUDIBLE] as well.

[JON BOCK]: And I am just curious if you are seeing your latest week's orders drop, seems like if you watch [INAUDIBLE] that the world is coming to an end. Is there any attempt on your part to put in place some prices plan or are you just pretty much steady as you go and you feel good about where you are heading or is there a plan to reduce advertising and go on forward, and if we see comps slipping, or kind of expense somewhere?

[Jon], this is [Jay]. I think it is steady as we go. We have been through some rough waters before, we have stayed the course and it has paid of for us. We did not see a dramatic drop in sales even though the stock market has done some wild gyrations. We think we don't want to [INAUDIBLE] as I said earlier and I think the third quarter is going to be okay. We are just a little reticent about looking out beyond the third quarter. If the stock market continued to drop as it has done the last four or five days, God knows what is going to happen, but hopefully, we are coming near the end of that ride.

[JON BOCK]: Okay, and lastly any interest in buying [much] stock at some point in time? Is that being discussed?

[DENNIS L. FINK]: It was completely out of the question a few weeks ago, so but with the precipitous drop, I would say we wouldn't rule it out, it is not likely because we have had such a large capital spending program going on. We had bought a lot of stock back, we think that is a good strategy, but just with the expansion this year, it is not a year that you can look ahead of time and say, will be a likely year to buy much stock, but this is not out of question, this is just not likely.

[JON BOCK]: Okay, great, thanks. Good luck.

[DENNIS L. FINK]: Thank you.

Your next question comes from [Bud Bauch] of [Raymond]

[BRIAN GORDON]: This is actually [Brian Gordon] sitting in for Bud this morning. As you said in the press release and before, your comp store sales increased 6.6 for the quarter, but if we stand back three months ago, what were you looking for to deliver comps in the second quarter?

[DENNIS L. FINK]: I have to check that, but if my memory serves me right, probably 8-9%. We originally had talked about a range of $0.16-$0.18 in earnings for the second quarter and it was based on higher sales with higher SG&A was the expectation, so we came in with lower sales and lower SG&A and still got to the mid point of that range. After the first month, we had lowered the expectation from 16 days bringing this down to 16, and in fact, we are clearly going into the quarter after five strong months and the pulse of business certainly seem to be a lot better, the momentum was growing and things did kind of even out in March, April and May and then did get a little softer. So we have [coned] it down and I think that is appropriate, but have been able to make up for a lot of that in other controlled fashion.

[BRIAN GORDON]: Okay, and then the forward guidance, you talked about 3% delivered, would it be safe to assume that is what you are expecting for orders as well?

[DENNIS L. FINK]: Our comps basis [INAUDIBLE] over the longer run and so, I would say yes, I mean in the second half of the year, the comps normally would drive everything for retailer and they are very important obviously. We have also got these new stores that we are opening. We are counting on good volume from and so I think for this period of time, the total number is even more important to us and I would say, yes. If you look at the quarter at six months, you would be comforted by the fact that the two numbers come close to each other and it is really kind of a nuisance for everybody to track the ebb and flow where the reductions in the backlog etc and the changes in the calendar, but generally yes, in the fourth quarter, it is fair to say that the delivered sales are ahead of the yearend.

[CLARENCE H. SMITH]: That is right, we do push, if people want to get furniture in their homes, they buy more at fall and they like to get it in ahead of the Christmas holidays, so there usually is a reduction in the backlog in the last month of the year. That is correct.

[BRIAN GORDON]: Okay, that is all of my questions. Thank you.

[CLARENCE H. SMITH]: Thank you, Brian.

The next question comes from the line of [Sally Rollick] of [LakeMason].

[SALLY ROLLICK]: Hi, I just have a couple of followups. First on the gross margins. Will you complete the clearance activity related to replacing stores and closing [DCs] in the third quarter, so that the underlying improvement that you have been seeing in gross margins may be reflected in fourth quarter numbers?

[CLARENCE H. SMITH]: Sally, I think it is going to be showing up in both, the third and fourth, so we are going to see margins that would be a little lower than last year and I think most, I have seen models which have that in already, but yes, not unlikely quarter, we just finished margins in that range.

[SALLY ROLLICK]: Okay, all right. Also, can you talk to us a little bit about the ad promotion in the competitive environment at retail right now, have there been any changes, any flare-ups in any markets, anything of note going on?

[CLARENCE H. SMITH]: I don't think anything is unusual, Sally. The independents I think are struggling. I think we are gaining some share from them, but credit promotion is still big, a lot of people run in 18 months. We are choosing not to do that. So, I haven't seen any big changes, [Jay], you got any comments on that?

[INAUDIBLE], people whose business is apparently is a little difficult or go into [INAUDIBLE] and don't pay for promotions and we don't see any [necessity] for that, we are comfortable with the business as compared to what our competitors are doing.

[SALLY ROLLICK]: Okay, great thank you.

Thank you.

At this time, there are no further questions. [Over to you], if you have any closing remarks.

No, we would like to thank everyone for attending the conference today. We think the numbers pretty well speak for themselves in the second quarter and we are anticipating the rest of the year to be fine, the third quarter we have already [got] ahead of that, the fourth quarter is a little far out for us to look, but unless we have some dramatic change that takes place this negative from what we know now, I think the year is going to be a good one for Haverty. Thank you.

Thank you for participating in today's conference. You may now disconnect.