Haverty Furniture Companies Inc (HVT.A) 2002 Q4 法說會逐字稿

Good morning. My name is Shane and I will be your conference facilitator today. At this time I would like to welcome everyone to the Havertys Furniture fourth quarter and year-end 2002 earnings release conference call. All lines have been placed on mute to prevent any background noise. Media and individual [inaudible] will be in 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 star one on your telephone key pad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. With us today from Haverty is Mr. Clarence H. Smith, president and CEO and Mr. Dennis Fink, executive VP and CFO. Mr. Smith, you may begin your conference.

Thank you. Good morning. The fourth quarter 2002 results were highlighted by strong gross margins that helped offset the expenses of the significant new investments in our business earlier in the year. We are very pleased with our exclusive Havertys branded goods that have grown to be the top-performing brand on our floor. In the fourth quarter, Havertys brand margins were higher buy 230 basis points over our average margins. This was due primarily to the influx of great import values, the reduced manufacturing marketing cost and exclusive distribution.

For the month of January, 2003, the Haverty brand is 18% ahead of the number two Broyhill followed by Lane, Thomasville and Sealey, Sterns and Foster. Our mix of the best brands in the business led by our own brand gives us the credibility of the strongest presentation on our floors of any retailer in our region.

Recent independent studies in some of our key markets confirm our own reports that show that we are gaining market share throughout our regions. We believe that in these tougher times our merchandising and marketing program which is closely focused to appeal to the educated women, 35 to 54 in the 50,000 to 100,000 income level is well-received in attracting customers from our competition.

Our year-end 2002 study estimates that we have gained an average of 140 basis points of the market share in 2002. We are the number one top of line awareness brands of any furniture brands in most of our markets and in recent surveys from our media partners. Much of the SG&A increases in occupancy, warehouse and administrative expenses were due to the additional infrastructure involved in the roll-out of our consolidated distribution system.

We believe that this year we will begin to see some of the planned efficiencies and cost improvements as we bring more cities on line to new systems and close small warehouses and [inaudible] we expect to have the Brazelton Georgia distribution center approaching these levels by mid 2003. This facility has allowed us to begin direct container shipments more efficiently and began am assembly of imported dining chairs. Over the last 90 days we've been focusing on enhancing operating systems so that we would not have any lapse in our customer service. This time was invaluable to our I. S. and distribution teams.

We are now ready to proceed with the conversion of our first home delivery center directly from the eastern distribution center, which will take approximately two months to completely roll-out. The Peters burg, Virginia, home delivery center will serve Washington, D.C., Richmond, Norfolk, Raleigh, Wilmington and Roanoke. There will be 12 stores served from this facility when the conversion is completed in mid aim and will allow us the flexibility to handle our expansion plans in the greater Washington market.

We feel very comfortable with our distribution strategy and roll how the schedule. However, we will not proceed with any convergence until we are fully satisfied that the systems and as far as have in place to satisfy our customers. In the past weeks annual managers review meeting here in Atlanta, we highlighted our time and focus for the year, brand builders 2003.

We are determined to build on the strength of our reputation and sales of the fine evident brands in our industry. Our directives are to drive our average sales per square foot back up over the 200-dollar per square foot Mark, continue to grow market share, increased gross margins through maximizing the Haverty brand and exclusive distribution and by raising the performance bars of our associates. I'd like now to turn it over to Dennis Fink, CFO

Thank you, Clarence. Starting with income statement, gross margin was up 96 basis points over last year for the fourth quarter and up 50 basis points for the full year. In addition to the reasons Clarence mentioned for the improvements in gross margin we also chose not to focus on price discounting or heavy promotional activity. Summary tailors had emphasized promotions much more during the second half of 2002. We considered spending a big-ticket furniture items has slowed down. SG&A expenses were down due to our store and distribution expansion during 2002.

Most of the new expenses are fixed cost in nature which we will out rum with future increases in sales. We've cut back on the expenses going into the fourth quarter of 2001 and have been pleasantly surprised by the up tick in sales in that time period. That has led to very low SG&A expenses as a percent of sales for the fourth quarter, 2001, as we stretch to handle the volume it helped generate an all time record earnings per share for any quarterback in that quarter. So the comparison was a difficult one.

Interest expense was down 51% for the fourth quarter of this year and 38% for the whole year mostly due to lower debt levels and helped somewhat by lower rates on variable rate debt.

The provision floor doubtful accounts for the fourth quarter, was $737,000 lower than last year. This was due to a $59.7 million reduction in accounts receivable during 2002. The allowance for doubtful accounts on the balance sheet was down to $5.8 million in year end 2002. That equates to a conservative 4.4% of the gross receivables.

This compares to a $6.9 million allowance on the balance sheet one year ago, which was 3.6% of the gross AR. Other income expense for both the fourth quarter and the year were made up primarily in gains on sales in warehouses being replaced by new distribution and home delivery centers. This was partly offset by accruals for expected losses on stores and warehouse closings; most of these will be occurred or have occurred on leased property. The effective income tax rate remained at 371/2% for both 2001 and 2002.

Moving over to the balance sheet, the accounts receivable decreased in 2002 were due to the outsourcing of one of the credit programs to a third party finance company. Total amounts financed by customers under the in-house credit programs declined to 33% of total sales in 2002 from 46% of total sales in 2001.

Amounts financed by customers under the outsource program was 14% of total sales in 2002 and that had just started at the end of 2001. Therefore, the combined total for in-house and third party programs together is 47% of total sales in 2002 and that compares very closely to the amount financed in 2001, total amount was 46% of sales. So there is a 1% increase in customers who use a plan that we either offered or sponsored.

Inventory at year-end 2002 was up $9.7 million. That's 9.3% compared to last year. It's only slightly more than increase in retail square footage for the year which was up 8.2%. So most of the increase in the inventories is explained by additional floor inventories in the showroom. We are pleased that total assets overall decreased 56.1 million during 2002.

This helped asset turnover and return on assets statistics. Total debt was reduced 85 and a half million dollars for the year. Book value was at $10.30 at the end of 2002 and with our stock price closing at $10.93 yesterday and our 68-year string of cash dividend, we are once again worthy of honorable mention at [inaudible] and Dodd type value rankings. We provided cash flow statements for the two years as part of our press release so I don't need to go over those figures at this time.

I will say we are pleased with the strong cash flow in 2002 and we are also pleased we are able to deliver the balance sheet to the extent we were. Capital expenses for 2003 are now expected to approximate $29 million. This is about 10% lower than our previous estimate of $32 million it's mostly due to the timing of the projects. We will update this estimate quarterly as we have in the past.

For retail square footage we've already announced this is but to recap it again, planned increases for 2003, we have four new stores we plan to open, one is a replacement store that's already been open in Jackson, Mississippi. We move to a more prominent, larger showroom in that city. We plan to open in the third quarter or perhaps in even later in the second quarter, stores in Palm Beach, Florida, and our first store in San Antonio, Texas.

We have one showroom that we plan to expand in the third quarter and we also have then another store that's in the Washington, D.C. area, actually in Maryland which will become our 15th state, sometime early in the fourth quarter. There will potentially be one other store closing later in the year an older store in a city where we have multiple stores, potentially. So assuming that take place square footage would be added from 128,000 square feet, that is 3.4% additional square footage. Last year we had added 8.2% as I said. Most of that footage was added in the third quarter last year such that on a waited average basis our square footage increase for 2003 given the timing of our new store openings is expected to be up 6%.

That's a little over 7% in each of the first two quarters, a little over 5% in the third quarter and about a 4% waited average in across in the fourth quarter. So as you are looking at your sales models you may keep in mind that whatever comp store assumption you may have you can add approximately the percentage increase in square footage to that to derive an estimate of total sales increase.

February sales had started a little stronger than we talked about last week when we announced our January sales. We have seen a tapering off of this somewhat in the second week. We will not be given any specific earnings guidance and. Operator, that concludes my remarks. I will be happy to end taken questions

At this time I would like to remind everyone, in order to ask a question please press star one on your telephone keypad. If you are using a speakerphone had a police pick up your hands set before asking your questions. As a reminder, ladies and gentlemen, only institutional and analysts may ask questions. You pause one moment while we compile the Q&A roster.

Would the ladies and gentlemen from USB Warburg please introduce your and state your question.

Good morning it's substitution Susan Maklari from USB Warburg.

Hello, Susan.

Can you talk a little bit about what you are going to have planned for your president day weekends being that's the large weekends for sales.

We just started that promotion and it's 18 months no interest which is paid out in equal payments over the period. We are doing in, that in-house this particular time and it's just started so we can't tell you how it's going to come off. But it's the strongest chain wide promotion that we put out there and we are optimistic.

Okay. Will that run through Monday?

Yes, it will.

Okay. Can you just give us a little update on your imports program and what you are doing there?

Well, we are importing more and we are working very closely with our vendors who are moving rapidly over there as you know and we are now, Susan, able to handle more imports than we were in the past because of the [inaudible] that we've opened up.

So we are floating direct containers more than we have in the past. We are working with current vendors who we used to buy through their warehouses domestically and where we know the product is good and are good sellers we are starting to buy direct containers from the factories there which we think can lower our cost, at least cost of goods enough to make it worth the difference.

So we are continuing to look at sourcing some direct product. We anticipate that probably, some more of that coming on line by the end of this year or early next year and we will be going there at least, at least ones, maybe twice this year, backs to China.

And finally can you just talk a little bit about style of trends during the quarter.

Well, leather is very strong. It's our number one in dollars and in units in upholstery, leather, leather motion, leather match from a variety of our vendors, and it continues to grow strong.

They are traditional, however, in the fabrics and traditional in the bedroom and case goods is still the driver. We are selling cherry, Queen Anne, the more normal styles, as you'd expect to see from Havertys.

So we are not seeing any major changes in trends as far as our selling right now. It's, it's become pretty bread and but traditional for us with the exception of leather coming on strong.

Okay. Thank you.

Would the lady or gentlemen from Morgan Keagan please introduce yourself and state your question?

Sure. Good morning. This is Laura Champine.

Good morning.

How much of the SG&A expense in the fourth quarter was non-recurring in nature?

Laura, I would say that it's already recurring in nature. There was approximately 1 million and a half dollars worth of what I would call under absorbed fixed cost facilities that were put in place that aren't yet running at full capacity. That's really the two new distribution centers I'm speaking of.

Okay. And another imports question, can you quantify or give me a ballpark by category of what percentage of case goods on your floor are imported and what percentage of upholstered goods are imported?

Well, I can't give you exact numbers there, Laura. I will say that our bedroom is probably up around 50 to 60% right now. Dining room is probably much higher than that. I don't have specific numbers. We are moving our dining room business is particularly strong isn't what we call the dinettes or casual dining area which has grown dramatically and almost all of that is import. So it is definitely moving in that direction. In upholstery, leather is certainly moving to be primarily import, if not all. Some of that is moving to China, as you know, and we also are seeing more come from off shore countries like Vietnam and that type of things. So upholstery, we are starting to see some come from China and we are excited about it, new merchandise that is being brought in from Broyhill, from Thomasville, is hitting our floors this month and we think that's going to have a bigger impact. In the past, it's almost been 100% domestic but that's moving pretty rapidly to the promotional values coming from China.

Is the quality on that sort of that is sent stage fabric upholstery that's being brought in fully finished is it the quality comparable to what you might find in the same price points in the U.S.

It's improving. Certainly the leather quality, the leather, the cut and soon has been coming over from there for a little while now so we are comfortable with that. The domestic, I mean the fabric upholstery has just started to come over. We are seeing it come in, we like the looks, and we are comfortable with it. I think it will continue to improve in quality over the next several months. So our first blush with that is happening this month. So will can he we will know in a few months after that.

Thanks very much.

Thanks, Laura.

Would the lady or gentlemen from Piper Jaffrey please introduce your and state your questions.

Yes, Reed Anderson at Piper. Thank you. Couple a questions first your Clarence could you comment you've done a great job of driving the average transaction size higher despite comes being soft. I'm just curious if that is fairly consistent across most of the categories or if there are certain cat gears that are really effecting that more favorably?

Well, the number we've been giving out I think it's a little over $1,000, 1080 or something like that, has been pretty consistent. However, we don't really measure it cross categories. It's really transaction size and delivery size; delivery amount. So I would have to say that I haven't, with haven't seen any decrease in an individual category with the possibility exception of dining room. But as I mentioned earlier, our business there is moving more to the casual dining. So I haven't seen a trend that would change our number on that.

Okay. Then, Dennis, on the gross margin, obviously it's certainly not being impacted by comes. I'm just curious what you think is a reasonable expectation for '03 and just on the annual basis what you might still seeing, see an improvement for that.

I think there's some additional improvement we can expect in '03. Obviously the market is competitive, business is soft. But we possibly could see 30 basis points for the whole year versus, '03 versus '02. We might see more than that. We do have some inventories to close out as we convert some of these cities to the central distribution. But I don't expect that that's going to have a major impact at this point. And the other trend should overcome those. I would say without the slow environment that we would expect more than I mentioned in the way of gross profit increases.

All right. Thank you.

Would the lady or gentlemen from Buckman, Buckman and Reid please introduce yourself and state your questions.

Yes, this is Ulysses Yannas with Buckman, Buckman and Reid. Hi.

Hello.

I noticed other severe leveraging of your balance sheet, this usually means something. What does it mean? What are you getting ready to do.

We are not getting ready to do anything extraordinary involving that, Ulysses.

We, as you know, we began outsourcing the most risk yesterday of our credit promotion to Citi Financial which is a big driver of bringing down our receivables. And that was important and as far as the sale-leaseback, that's long-term money and we felt it was an appropriate time to do it and move that off of our balance sheet. So we don't have any significant plans involved with that deleveraging. Dennis, you want to comment.

I would just add, Ulysses, that we are perceived by some investors as being more highly leveraged than retailers are expected to be and, of course, part of that is because we have our receivables on the balance sheet and we thought that some deleveraging would be more appropriate for that audience. We were comfortable with it as it was but with the one credit promotion that we needed to be more competitive we really didn't want to increase the portfolio risk that much. So we were keeping with the times, we decided to deleverage sum with that as really the primary vehicle.

But 25% is very low for a retailer, isn't it?

Well, I think, I think it's lower than some, it's certainly in line with some retailers are very, have very little debt. They have some leases that are operating leases that don't show up as debt but are fixed obligations certainly. We had targeted 30% as being a reasonable number and we are within that and hope to maintain some amount of debt because that helps return on equity. But this sort of range is more comfortable for, I think, all concerned parties.

Something about [inaudible] if I may ask a second question, I am noticing that existing home sales keep on increasing in record amounts so the [inaudible] is increasing. Usually it's very favorable for your industry. Against that your sales haven't kept track of that is the automobile really hurting you?

I think the automobile promotions last year, some of them did hurt us and maybe mid year third quarter. I think that seems to be played out and winding down as far as that, how that's going to impact us. We think that there is a lot of pent up demand, Ulysses, and there are a lot of big houses in our markets that don't have furniture in them. And we think that it does bode well for us. Our demographics are very strong with the boomers and we believe that there is going to be some, some come back here when the economy turns around when this what are gets behind us. So I think if anything about our position, we are stronger than we've ever been and better to be able to take advantage of that turnaround when it does happen.

Thanks.

Thank you, Ulysses.

Would the ladies from Ferris Baker Watts please introduce yourself and state your question?

Scott Helleneck with Ferris Baker Watts. A couple questions here, can you comment on the home life stores, maybe what you're been calling better, I'm particularly interested in the store up in DC as you move up north a little bit outside of your, I guess major territory?

The Home Life acquisitions were primarily in Florida and Virginia, and both areas were doing well. The ones that are doing the best are once in Washington, Northern Virginia. We are very pleased with our entry into that market. It's been, as Dennis pointed out we have a new store that will come on line in Buttie late this year and we plan to have at least one to two more next year.

One that we are trying to build in Dulles, so that is a major new growth area for us. What the home life stores has allowed us to do is to get into the market at a good price. Those stores are already profitable even with the fact that we only have two in Northern Virginia, we have one in Fredericksburg which joined that group which allows us to leverage on some of the advertising. But we need to get more stores there to be able to be able to capitalize on the media, which is very expensive up. There so the once in Florida is doing well. We are very pleased with that type of acquisition. It was very fortuitous for us.

And the private labeling program at year end, do you have a percentage of the total mix that that was or some estimate of that?

Yes.

And where you see that headed in '03?

Well, with this it will grow because we are moving more of the program that is not branded with these brands we've mentioned to that, to that Haverty figure. Last year we were not number one, Broyhill was. The figure I quoted to you was our current trend because it is changing very dramatically. Primarily because it's consolidating a lot of the other vendors into our, into the Haverty brand. The percentages is in the high 20s, I think is about right.

As far as SG&A was there any increased advertising in maybe toward the end of the quarter just because, given the softness in the economy and the consumer?

No, we stayed with our program. We are very pleased with our advertising mix. We were pleased that we were able to actually reduce our costs and maintain and grow our share. So we are, we had no additional advertising program or expenses that was not planned in the fourth quarter.

Okay. Thanks a lot.

Okay, thanks, Scott.

Would the lady or Joe from Skyline asset management please introduce yourself and then is that state your question.

Hi, can the lady or gentleman with Skyline Asset Management.

Hi. It' Bill Feedler with Skyline Asset Mangement.

A couple income statement related questions here, probably for Dennis, if you could help me out. First of all, could you characterize a bit for me the infrastructure ramp up associated with the new distribution configuration, how much that ramp was in '02 and, let's assume that we do see some positive same store sales in '03, we did see quite substantial leveraging on the SG, would you expect to see quite substantial leveraging on the SG&A line as a result of those expenses falling off or at least the sales figures moving up to leverage those fixed costs you referred to?

And my second question relates to the non-operating income line where you had quite substantial gains from the sales of the warehouses? How will that line item look in '03? What do you expect there? Thank you.

Sure thing. I think the easiest way to answer your question on SG&A is just give you an idea that the variable costs per incremental dollar of sale is around 15% of net sales and the rest of SG&A is relatively fixed so that you are leveraging that considerably as sales go up.

Whether or not they are on a comp basis just sales from stores already open as of this point in time, be it a comp store or be it a store that was built the last or acquired in the last year. And if those, if those do get a rise, the leverage is as I said pretty substantial with a 15% variable cost line.

In terms of the other income expense, you did correctly point out that that is mostly gain on sale of properties and we have a couple of properties that we might sell in 2003. If we did we would probably generate gains of around 1 million and a half dollars and those are both warehouses that we are vacating after we below out the distribution plan further.

There's also some fixed cost of leased warehouses that we will be vacating. We don't have a good estimate of that at this moment. But that would be the prime may marry area of the fixed cost that we could pair down modestly for 2003. But pretty much what you see in the fourth quarter of 2002 is, is a run rate and part of that, the reason is there are some expenses going up as everybody knows.

All kinds of insurance has gone up dramatically, property insurance, liability insurance and also health insurance coverage. So those are going up and some of these expenses that we are obviously trying to pair as business is slow, we are pretty much just offsetting increases of those other costs. So that covers the point. Is there any other follow up on that Bill Feedler.

No, that's helpful. Thanks.

Okay.

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

No, I don't. Thank you very much for your attention and interest in Havertys. Thank you.

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