Haverty Furniture Companies Inc (HVT.A) 2002 Q3 法說會逐字稿

Good morning. I'd like to welcome everybody to the Haverty furniture third earnings release call. After the remarks, there will be a question and answer period. If you want to ask a question, press star 1 on your touch-tone phone. If you would like to withdraw your question, press the pound key. Thank you. With us is John Slater, Dennis Fink, and Clarence Smith. You may begin.

Good morning. Sales for the 3rd quarter were as previously announced, $175 million 680,000 versus prior years of $170,645,000. This was an increase of 3%. On a comparable store basis for the quarters, sales increased by .3%. Softer than anticipated sales environment was to see degree offset by outstanding gross margins. Gross profit were 48.18%, up 35 basis points over the prior year's 47.83%.

Credit revenues continued to decline as free interest promotions have become the norm and totally $2.1 million for the quarter versus the prior year's 3.7 billion. Our total SG&A for the quarter rose as a percent to net sales for the prior's year's 32.4% to 45.18%. This was primarily the result of start-up expenses associated with the unprecedented expansion we enjoyed during the quarter. This including costs for the stores in Orlando, Florida, stores in Washington, D.C., one in day in a beach, and a new replacement store in Arlington, Texas.

In addition to the stores, Haverty also had additional expenses with the opening of the Georgia distribution center and a new home delivery center in Virginia. A bright spot on our SG&A was once again advertising which was slightly below 6% of net sales. Interest expense decreased for the quarter from the prior year's 2.1 million to 1.5 million as a result of reduced borrowing and interest rates reaching historical lows. Losses on our accounts receivable rose slightly from 943,000 in 2001 to $1,129,000 for the quarter included. We reduced our reserve for bad debts by $500,000 in the 3rd quarter as we experienced better collections than estimated, particularly for a credit program that began maturing this quarter as well as receivables falling by 18.5 million.

We completed the sale of two vacated warehouses in the 3rd quarter, one in Norfolk, Virginia, one in Atlanta, Georgia, which generated gains of 3.7 million and/or included in other our other income. The other part of other income is primarily the result from better outcomes for vacated lease properties which are first accrued for at least one year from the date of our exiting those properties. The end result for the quarter was net income of 5.9 million versus a prior year's 5.6 million. Our diluted earnings per share were 27 cents versus prior year's 26 cents. Year to date net income stands at 16.4 until vests 12.5 million, last year. Year to date, that is. [ Indiscernible ] An increase of 27.5%. Now just a few comments on the furniture market which has just been completed. There were some interesting trends, cleaner looks, particularly in bedroom and dining room, less carvings and lighter finishes. This was clearly shown in the new collection from Thomasville and our Newton contemporary collection.

Painted wood finishes are also coming on strong: As an example, lane's country living collection, which featured red, blues, and greens to complement red, white, and black linens. Also a freeway hill collection and a new country French collection from Thomasville. More manufacturers are beginning to import fully up holstered sofas in addition to the fabrics. The lower cost in Asia makes these values extremely competitive compared to some domestic products. The values in leather can only be described as incredible. Completely finished products from Asia essentially from China, have seen prices compared to U.S. British products by 25 to 35% lower. We found collections offered by a large number of vendors in the past. This was especially evidence Thomasville, Broyhill, lane, and others.

Manufacturers -- [ Indiscernible ] And attendance was down, however the large dealers were present and those factories with outstanding values had great markets. Average branded products continue to be an important part of the Haverty mix and currently stand at 30% of our totally floor space with a target of 35% by spring. In general, these Haverty branded products yield gross margins that are 200 to 400 basis points greater than our core mix. These outstanding margins are the result of Haverty's being able to strip out marketing costs and provide great value pricing for the private branded product. That concludes my remarks. Would you like to give us comments on operations, Clarence?

Thanks. The tremendous activity that we undertook in the 3rd quarter has set a foundation for our sales growth and market share gains in some of the best markets in the country. We were able to come in line with our budgets and within our regional schedules for opening the most square feet edge in our history. Our distribution of warehouse properties closed within our plans. Moving the Atlanta and eastern regional warehouse took 250 trailers over a period of days to complete the consolidation of those. Our real estate operations and MIS teams performed her and delivering these projects.

The conversions of existing local market warehouses to our new D.C. systems is on plan and we expect to have in place 50 of our 111 stores operating on the D.C. home delivery systems by the end of the 2nd quarter 2003. We have programs and procedures which require further enhancements and we're confident that we'll have one of the best operating fulfillment systems in the industry by mid-2003. During the conversion to our new consolidated D.C.s, we expected a rise in total inventories and we ended up the quarter 5.1 million over both the end of Q2 2002 and the end of the 3rd quarter last year. Last higher levels included inventories for seven new showrooms in Q3, which account for most of the increases.

We expect to see inventories move back down in the 3rd quarter as we're better able to flow and process orders through our new eastern distribution center. We're watching inventory levels closely and feel that we'll be in good shape for the 4th quarter of the best of the year. We're continuing to experience soft sales in October with month to date total delivery sales up 2% and comp sales negative in the low single digits. Incoming orders are tracking similar to deliveries this month. Last year's October counts were relative good at 4.4% so the comparison is tougher than it has been in recent months. November and December comps last year were positive, but only by about 1%.

Our strong start in northern Virginia has been particularly weak most recently due to the tragic shootings and our customer's concerns, we're very encouraged by the news today of a possible breakthrough in the case. Capital expenditures for 2002 are expected to come in at $47 million before backing out proceeds from dispositions. We've adjusted our 2003 cap ex estimates downward to 35 million. That includes new stores in San Antonio, west palm beech and northern Virginia. I believe announced expansion in Texas has been postponed due to improved operations and slower businesses allowing us to continue with our warehouse consolidation program with less investment.

During the quarter, we reduced our debt by $52 million with the largest reduction from a $42 million sale and lease jack transaction. Our accounts receivable were also lower as Jay noted as a result of the outsourcing of our most aggressive credit plan. For the year, we've reduced our debt by 71.6 million. We don't expect to reduce our margins, or extend our credit terms as far as sales during these more difficult times. We believe that this would prove detrimental to our profits and longer term sales growth. We strongly feel that we're in excellent positions in our markets to gain share by providing sharp values and reacting quicker to our customers with better service than our competitors. I'll now turn it over to Dennis for his comments.

Thank you. I only had a few comments on the start expenses. They came in about as expenses. We're looking at about 1.1 million of start-up expenses for the stores that we opened.

We had projected and mentioned in a prior conference that those expenses would be approximately 800,000, so we're a little higher there, and we measured the start-up costs for our Brazil Elton eastern delivery center, and also the home delivery center in Virginia that we opened.

We had looked at -- estimated about 2.2 million and we have measured about $2 million that occurred, so total was expected to be about 3 million and came in at about 3.1 million. We also had looked at the projection of other income from the gain on sale of properties of about $3 million -- excuse me, about 3.8 million and that's about just exactly where it came in. Those sales took place in the quarter we expected and we had about the gain we expected, so we were pleased with that. Then in terms of our guidance, we are not changing our guidance for the 4th quarter.

We've had previously announced and undated our guidance a couple weeks ago, when we announced our sales, and that presently is full quarter expected between 35 and 37 cents a share. Other than that, I think that we'll turn it over for questions right now.

Wes, if you'd go ahead and open it up.

I would like to remind you, if you would like to ask a question, press star 1 on your touch-tone phone. If you are using a speaker phone, pick up your handset before asking your question. Only institutional investors and analysts May ask questions. One moment while we compile the roster. First question, Susan McClarity with UBS Warburg.

Good morning.

Good morning.

Can you give us a sense of what the sales trends have been so far for October?

Susan, we have our delivered sales are up by 2%, but we are looking at negative comps right now. As I mentioned a minute ago, I'd say the low single signatures, in that range, and we think -- it is soft -- sing digits, but it's consistent with what we've been seeing the last couple of months. During the month, we've had -- the first two weeks were up in the neighborhood of actually 1% for the first two weeks and we're up mid-single digit in terms of sales last week, and this week, it's fairly flat in total sales. Clarence had mentioned the Washington, D.C. market and also we have a store in Fredricksberg and Richmond so those stores have been extremely soft this week and we would hope that that comes back with some of the attention -- some of the tension removed there if that plays out like we expect.

and can you give us a little further background on what you --maybe even what you bought there?

We didn't bring in a whole lot of products. We selectively are going to add some collection from broadway you hill that I mentioned, the Yorkshire collection. We have also also added a couple of the import leather products from China to one of our vendors, but in general, we think we have a good -- in general, we think we have a good mix that's competitive. We also felt that the bow Garth collection would be applicable to some of our larger markets as well as the boulevard collection that I mentioned, so in general, we think we have a good mix. We're just fine-tuning, just like Clarence said, we certainly don't need to panic or change our course of collection and discount products or run extended terms or either have a big turnover in product that we have. We feel that from what we hear from the vendors and retailers that we're performing at the head of the pack for the most part, so we're comfortable with our course and obviously we're not happy that our sales are not stronger, but when we get a little break in the economy, things will come back fine.

And one last question, you commented that your interest expense is down considerably. Can you break down the [INAUDIBLE]

I'd like to come back later in the call if I could on that. I'll have that for you.

Thank you.

Next call is with Morgan Keegan.

Good morning. I had a question with regard to the impact of price deflation on your current sales trends and what you expect in terms of deflation, particularly in leather and case goods going forward and how you can offset that with volume increases.

I think it's becoming a concern of the industry, we are enthusiastic about some of the values we've seen. We've done a good job in the bedroom category, which has been up nicely. By providing some of the import values and more product on the floor than the customer is used to seeing for that price point, I think we have in some regards taken that from the higher end, and I think we'll do a little bit of that in upholstery. The leather pricing is incredible, as Jay pointed out. What we're looking for there is to have more value with possibly more cushioning, better looks, that type of thing, but we recognize that we also have to have the competitive pricing there. We're not going to chase the lowest price in the market. We want to offer the best values. I think we can come up with solutions with added value, added looks, which would not severely impact our top line due to that inflation, but we recognize this is a concern and we want to make sure that we have the best pricing on the floor. I don't think there's an easy answer right now.

So can I interpret that to mean that your average price point per categories not necessarily changing, but that you're adding more value, more perceived value at that price point?

It definitely happened in the bedroom and dining room category. We stepped up -- our price point has actually moved up slightly, but we are providing much more look and value than we had in the past. We're hoping it can create some excitement in the category, frankly, stir some additional business that may not have been there earlier. We haven't seen a lot of this in regular up industry. I know that will come, but we're hoping that we can do the same thing that we did in our case goods and bedroom categories as what happened in upholstery tremendous. There's greater opportunity to move the price points up because you can add better cushioning than typically the customer might expect at a certain price point as well as offer higher priced fabrics. I believe that we've in the past merchandised higher end up industry very successfully, and I think we can merchandise it so that they can add price points.

And this is my last question. This is being done in order to hit your current Q4 guidance?

I think that's probably correct. But we also feel that we're going to see a little seasonal pickup and we certainly have not decided that the status we have given you is not achievable.

Thanks.

Next, Buchman company is on the line.

Hello. Good hearing from you and Jay and all of you. A question if I may. You opened a large number of new stores. How long will it take for these stores to get to the so-called company average?

Well, some of the stores are in terrific markets, and I think as far as company average sales per square foot, we'll exceed that out of the shoot. As far as the returns, we look to about 18 months to come up to the company average and I think for the stores we opened, we'll hit that or even sooner. We brought those in at good values and we think that we'll do quite well with those new stores. The newest store we just opened in Dallas-Fort Worth -- Dallas is a huge brand-new store and has come out with terrific numbers, so we're very optimistic about that also.

So in essence what you are saying is despite the fact that most of the furniture manufacturers, including your friends at furniture brands this morning, were saying that experiencing the decline demand, you should be able to do better than industry?

This is Jay. One of the problems that some of the manufacturers are having is that the higher end factories are really getting hit hard by the imports. We've had the opportunity to offset the decline in the higher price products that we carry from the domestic people by offering these great values from the imports at the same or higher price points, so we feel that we've got a little bit of a leg up over what the manufacturers are competing with.

Thanks very much.

Thank you.

Your next question, John Bow with Wachovia security.

Good morning.

Good morning.

I had my hope that we'd caught these guys up here. The question relates to the finances, the receivables program. Can you update us on where you are with the internal program, where the third party program is, and give us some kind of flavor for how these numbers are going to trend?

Sure thing. In the quarter just ended, the receivables originated in our internal programs were just under 56 million, and the amounts that were financed by city financial were 26 million. So those represent approximately 32%, our total sales for -- under understood and just under 15% for the city financial program. That adds up to 46%, and so roughly 54% was -- [ Indiscernible ] And that number includes down payments, of course, so the trend has been for more usage of city financial. And I would imagine that probably will continue as long as -- for the foreseeable future, the emphasis of retail amongst everybody -- [ Indiscernible ] Is on no payments and no interest or deferred interest promotions.

Yes, can you describe the differences between your program and city's?

Yeah. Gee We outsourced a program last August, it's a one year, no interest, the same -- [ Indiscernible ] That means if the balance is paid in full by the end of the one-year period, no interest is due, but if interest -- if it's not paid off, interest is retroactive to the date of delivery. So we ran that program for about three months internally and then got everything in line to outsource that program beginning in -- effectively in mid-December to city financial, so they're running it very similarly to how we ran it, and we've actually seen the first two-month maturities of the interim program. That's part of the reason that we were able to reduce our accounts is that was a brand-new program to us, we didn't know how much more delinquencies we would have on it. We're very pleased that the delinquencies at this point aren't any higher than our normal programs, so we're able with the reduction in accounts receivables, we were able to reduce the reserve down. Our programs internally that we continue to run, the most popular one is 12 months no interest, but it requires 12 equal payments. That turns the money faster, it's not at risk either for us or the consumer, because they're making payments so they don't have this to be careful about or they end up with retroactive interest. So a lot of people like that and pay it off over 12 months and pay it off early if they can.

If I'm reading you right, there is a real change in your collections or your bad debt experience on your internal program, there is not that change, it's the city program where you've had a better experience than what you originally accrued?

That's just about right except it's the program city is now running, we ran it for 3-1/2 months, and that was about -- million we originated into receivables, mostly in the 4th quarter, a little bit in the 3rd quarter last year, so we're anniversarying that. It's come in, like, clockwork, basically, so we did not need the allowance that we had earmarked for that, at least on the first half that's now come due. There is there's a little less than half of it outstanding because a lot of people are paying early. We're pleased that it didn't cautious any complaints or -- to speak of or any higher delinquencies.

Switching gears, any thoughts on new stores?

Yes, I'll go ahead and mention that first. We are looking at four new stores and one closure. In other words, three of the four stores are new. One of those stores is a replacement store. We're also expanding two -- two showrooms where we're expecting to close the attached warehouse with the new distribution programs, so we're expanding the retail space into those. That would be a total of about 163,000 feet, 4.3%.

Were you going to add something?

No, that's it.

Can you update us year to date for the nine months, where are you, do you have a flavor for year-over-year for nine month?

Capital expenditures?

No, averaging expenditures.

Clarence will address that.

I've got it. Last year, John, for total advertising through the quarter, we had spent $31 million. This year, $29.4 million. Year to date. For the quarter, it's about flat, $10.3 million. Do you know what your expectations are for the 4th quarter?

We want to keep it under 6%. That's basically what we've said. We had some price reductions in our paper costs, which was a big help. Dennis?

Last year in the 4th quarter it was about 10.4 and in that -- that probably would be going up to around 11 million.

Thank you very much

Next, Pam Singleton from Merrill Lynch.

Good morning.

Good morning. I would like to pursue the question of inflation. If you looked at your same store sales performance in Q3 of 0 .3%, is there any way to track whether units increased by more? The reason I'm asking, deflation can turn into a trap for retailers because at the average price point, you got to deliver more product to hit the same sales dollar. I'm wondering what whether the gross profit improvement is enough to offset the increase in delivery cost.

I don't think we've seen the inflation hit that we keep talking about. I don't think it was there in the past quarter.

It's hard to compare the units.

I know, but if leather prices are coming down 25 to 30% ....

But we talked about the merchandising, where we're getting a much better look, and that is what we have really done to this point, but in some of the bread and butter stuff, with the prices coming down, your question is right on target. The first real impact will be from China. Those will hit early next year. Those are bare bones. They're nice looks, but they don't have a lot of the normal things that you'd expect in a better sofa like cushion understand and that type of thing. We have to provide a better look, and what we're looking at is looks that would have been, let's say, $3,000 retail a year or so ago now will have a $2,000 retail it as opposed to chasing that low end. And that price point has been important to us all along in the -- let's say the 1600, 2,000 range all along. We think we can provide better looks. It's not something we know exactly.

Pam, the other thing, for the last two years, most of the leather that we sell has come from either Mexico or someplace in South America, so the comparison between what we've been carrying and what we've seen coming in from China is significant as compared against an American manufacturer.

As you increase the Haverty label on your floors to 35%, is there any difference in the average price per unit of what you're going to be delivering, our do you think you're styling up and maintaining the same price points?

We either maintain the same price points or increase them and we've offered far greater value than we could offer previously at those price points from a domestic manufacturer. And get better margins. So I think it's going to be a real challenge for our industry from the manufacturing and the retailing side. I think so far, we have done a very good job of not chasing the low price advertisers in the marketplace, and we don't intend to do that in the future. Our intention is to continue to the best values at our price points that are out there in the marketplace, and by doing that, I think we can maintain our average price points across the board, and certainly, we're going to have a -- particularly in leather, we're going to need to offer some of these values just like we have -- our foot in the water with the developed payment promotion. Compared to what our competition does, we haven't gotten in two years and three years of people not making payments. We'll have a mix that would allow us to keep -- our average price points at or above where we currently have enjoyed.

Can you tell us if there's been any disruption at all in terms of, you know, your build business versus our delivered business as a result of containers floating off the West Coast?

No.

And do you expect anything in the next quarter?

No. What we have done is to require that all the vendors we buy to carry back up supplies in domestic warehouses for us, so we've seen -- we've had -- Tony told me this morning that we had three or five containers of product that wasn't available in the domestic warehouses and we rerouted to the Mexico other than playing a premium on 48, we still got the product.

Thanks.

Thank you.

I'll also update the previous question about our fixed and variable debt. We've got 72% of our debt is now mixed and 28%s variable. We have just under 100 million, 97 million, so that works out to about 70 million fixed and 27 million variable. The change in the mix for the quarter, mostly the variable rate came down as we reduced our bank lines and did the sale lease back financing. We're ready for the next question.

Next question, Richard Diamond.

good morning. There has been some sense that certain retailers have been advertising their better brands, and they're sold at proprietary lower price store owned brands. Could you provide some color on this issue and how you're going to maintain your brand relationships going forward if this is indeed becoming a common practice in the industry?

This is Clarence. We advertised the -- consumers recognize the furniture brands which are lane, Thomasville, Broyhill, but La-Z-Boy and all the bedding plans, and our bedding room, we only sell branded goods, and those are the major plans of Sealy, certify at that, and Stearns and foster. But generally, they May come in on a Thomasville add or profession, but the brand side by side will it be a better value, will it be a better style? We don't try to move them to our brands. We're up tremendously with Broyhill and lane and Thomasville is about flat with us. So it's driven by what the customer wants. Basically, the house brand that we run is the same product or made by the same manufacturers that we had used they're just branding it for us. We're not trying to move them to our product. It's driven by what the customer wants as much as anything. Jay, do you have comments?

Yes. I'd like to comment that our business is up pretty substantially with furniture brands this year, especially with boy hill which is our number one vendor. Number three is Lane/Action, and we're up tremendously with them. Number 4 is Thomasville we have no plans to bring people in on name brand products which Haverty ends brands, but from unaided recognition surveys, the happy brand in most market places has better name recognition than any of the national brands.

What do you think this means for the industry? Not specifically talking about heaves going forward to the extent that -- Haverty that there's more substitution of individual retail are brands against the national brands, is there some sense that, that advertising support will decline or generally would -- I'd like your color from an industry perspective.

You mean national advertising?

Yes.

Well, national advertising is primarily driven by the brands we just mentioned, and I don't see them backing off on it. We advertise in our markets more than they do, so in our -- I don't know of any other retailers doing the same kind of thing we are in the furniture industry. I don't know of any other retailer that is trying to develop their own brand the same way we are while promoting the best brands in the industry. So I think it's been successful for both us and our partners. I don't see any major differences.

Thank you.

Next question, Justin power with Lord Abbott.

Good morning. Just a couple of follow-up questions. You talked about trying to bring better value at similar price points. A couple of guys commented last week that a lot of the stuff you see in the far eat is labor-intensive, yet you also mentioned that a lot of cleaner line stuff seems to be what is moving. I wondered, are the consumers buying stuff that's more conducive to be made here as opposed to a lot of the more labor intensive select then that's going to China, the more curved product that people May not be as interested in.

First off, what I said was a lot of the new introductions were cleaner products, not the fact that the heavily carved are still dominating our floor in terms of sales, but both the particular groups that I mentioned were both imported. The Thomasville came from Vietnam and the other from Asia. Asia you can make great values and beautiful suits as well as everything heavily carved. So I think we'll be able to have values from Asia that is clean which means those ...That their product, their domestic product, wouldn't be impacted because all that Asia could make was big, heavy carved product, we saw very nice product that was not they have letter carved and wasn't made domestically.

If it is clean and coming from Asia, how do you bring that in at similar price points? Is it better quality wood?

There is size, detail even in queen furniture, some of the drawer construction that is really interesting that we saw from China, some of the breast drawer construction that I've seen domestically or otherwise. The Chinese have ratcheted up the learning curve on finishes. You'll see a lot of hand work done on even queen furniture in the form of furnishings and inlaids. I don't think they identified where all the product was made. There's a lot of opportunity, better mirrors, there are a lot of things you can do whether the product comes from Asia or where to keep your price points up. It's just going to take a very strong merchandising effort and a dedication on the part of the retailer not to get trapped and who is going to be the lowest price game in town. I think you've seen a comparable thing with the domestic automobile people trying to compete solely on price and yet in their -- getting their clock cleaned by the garment and the Japanese who are making a nice product with a lot more quality there.

The second question, you mentioned the dock situation not being a big deal and backup inventory in the U.S. Is that also the case for people providing Haverty product?

If it's a Haverty product and it's from the far east, they're required to have backup product for us.

We knew we had a build-up in this transition to our distribution centers and we brought in a little more imported product, more containers than we would have. We also recognized the possibility of a strike, so we're heavier in imports in stock right now and we feel good about that. The only way it really impacted us was on some new product which we had to postpone and move to new books.

Finally, given your $35 million cap ex next year, can you then rate free cash or is that not likely?

It's absolutely likely. We should have a moderate reduction in receivables and we expect to be more profitable than this year.

Thanks.

At this time, there are no further questions. Do you have any closing remarks?

I'd like to thanks everybody for being in on this call today and let you know that we are thrilled about the future. I think there's a lot of opportunity, whether we see inflation from Asia or what, and I think Haverty -- the group to stay the course that we know is profitable and going to build the company for the long-term and I thank you.