Haverty Furniture Companies Inc (HVT.A) 2003 Q1 法說會逐字稿

My name is , I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Haverty's Furniture first quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise. Media and individual investors will be in a listen-only mode for the duration of the call.

After the speaker's remarks there will be a question-and-answer period. If any institutional and analyst participants would like to participate and ask a question during this time, simply press star-one on your telephone keypad 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's is Mr. Clarence Smith, President and CEO, and Mr. Dennis Fink, Vice-President and CFO.

Thank you sir, you may begin your conference.

Good morning everyone. This is Dennis Fink. I want to thank you for joining the quarterly earnings conference call with Haverty's.

First I'd like to remind everybody that this call is begin recorded and note that we will also plan to furnish a copy of this press conference call and a transcript of it to the SEC on Form 8-K within the next five business days. And I will turn it over to Clarence Smith, our President and CEO.

Thanks Dennis. Good morning.

As announced the first quarter of 2003 was consistent with the sales trend we've experienced in the fourth quarter 2002 with sales slightly positive, but comp store sales down in the mid single digits.

Our SG&A expenses were similar to those we had in the third quarter 2002 do in large part to the opening of new stores and the distribution system in the middle of last year.

We will have the Eastern Distribution Center store rollout program complete by the end of the second quarter with 50 stores fully on the system, representing approximately 45 percent of our business.

During the second quarter we will be vacating five additional stand-alone warehouse operations, with an expected net reduction of 50 related distribution personnel.

The projected annualized savings in rent and operational cost from this phase of consolidating distribution and leveraging our Eastern Distribution Center will be approximately $2 million and will start at that rate for the third quarter 2003.

We've added many exciting enhancements to our customer service capabilities with the automated dispatch and check-in systems and quicker response capabilities to all our markets served by the Eastern D.C. We believe that these enhancements will help us to continue to gain market share in our cities and allow us to more easily and efficiently serve new markets within reach of our distribution centers.

Our focus now is to continue to leverage on the Eastern Distribution Center in Braselton and the Home Delivery Center in Virginia, enhancing our service quality, improving our product flow, and increasing our turnover.

Our first quarter sales showed strength in bedding and upholstery and weakness in bedroom sales, due in some part to lower price-points, soft sales in youth bedroom furniture and some difficulty bringing in a few bestsellers from overseas.

We were pleased to see formal dining rooms show positive sales trends for the first time in well over a year, due to some new values and transitional styles that we've added. Painted finishes and more casual patterns, such as Country French, Casual Metal and Wood Groups and Lighter Finishes are helping to drive the category.

Some of the other merchandise trends we see -- imported leather continues to dominate the value shown in the major upholstered categories, such as sofas, chairs, sectionals, recliners and motion groups. We are bringing in excellent values, both in imported finish leather goods, and in imported cut and sewn hides that are applied to frames domestically. More leather is shown with wood accents on armed panels and sofa bases, and cleaner leather without head trim. Beds with leather panels in headboards and footboards and on side-rails are quite popular.

This quarter, we will begin to promote new upholstery and leather values from China and Italy, which should create excitement, and possibly help gains for the category. These sofas will be at new price-points, but we have focused on providing more look and value with style and better grades of leather usually seen from the higher-end suppliers.

We continue to strive to maintain our value proposition with our customer base in these times of increasing lower-priced imports from Asia. More import suppliers are beginning to offer different types of warehousing options, which help us, to assist with inventory management, both in leather and in wood collections. We're seeing some offering warehousing in China, and some are offering warehousing domestically.

Havertys continues to buy our imported merchandise or RDCs.

Other style trends -- the Cottage Look is quite popular; collections in warm wood finishes, including pieces in age-peeling finishes, and woods in painted accents are strong. Red, white and strong mix of black-accent pieces, primarily on a bed or a case piece, such as a chest or a nightstand, are adding excitement to our floors.

Tropical Themes and Island Collections are expanding. Bedroom and dining room groups with wood accents, woven rattan, hand-painted palm trees and fabrics in tropical designs are popular, especially in our more coastal markets.

We are seeing Imported Wood Collections moving to fewer carvings. Large cases, beds with shaped panels, doors and drawers, as well as with serpentine shapes in louvered-panels give more interest without the heavy carvings.

We're doing well with groups that are using interesting woods, such as burled to frame the drawers in woods, and doors -- Traditional Collections in Country European, or Traditional Styles are shown in cleaner lines and more relaxed finishes.

Havertys branded merchandise continues to build with sales doubled the same period last year, and margins 230 basis points higher than the overall average margin.

Broyhill, Lane and Action and Thomasville continue to round out our top suppliers. Lane continues to show good growth as leather, motion and sectionals have gained in importance.

We're continuing to grow in some of the best markets in our regions. In May, we will open a large store in West Palm Beach in a remodeled former big-box retailer, and we'll also open a store in San Antonio. Late this year, we will open our fourth greater Washington D.C. store in a former home place in Bowie, Maryland, which will be our first in that state.

We're excited about moving into these new markets which we anticipate will be some of the best for our customer base. With the Iraq war, Easter holidays, and the taxes behind us, we're optimistic that we will begin to see a return of positive monthly save store comp sales before the end of the year. Some of our largest markets, such as Austin, Dallas, Atlanta, had been hit by significant losses of higher paying jobs which has impacted our account sales. We expect to see this job loss level off and improve in the coming months.

We believe that our positioning in the key markets in the southeast, south-central, and southwestern states is excellent, and we've developed the best infrastructure and service capabilities to satisfy the better quality customer. We dedicated the continuing to improve and tighten up processes to better serve our customer and our investors. We have modified our cap ex plans for the remainder of 2003 to adjust to the current business climate, improve our cash flow and to insure that we're well positioned to take advantage of key opportunities that will become available in our markets. The total 2003 cap ex are now expected to be 25 million, which is $5 million lower than previously planned. I will let Dennis Fink, CFO give you more of the financial details.

Thank you Clarence. First talking about our accounts receivables. At the end of the first quarter, our delinquency percentages were approximately the same as the average gross percentages over the last 3 years. The allowance for doubtful accounts stood at $5.6 million, which was 4.7 percent of the accounts receivable balance of just under $120 million. For Q1, 2003 actual write-offs were the lowest since the second half of 2000. However, new bankruptcy notices that we had received during the quarter, were modestly higher than the level of the last 2 years. We believe that it's the possible bankruptcy reform which is, again, working it's way up the agenda in congress.

That again, given some reasons for to accelerate their filings in Chapter 11, or excuse me, Chapter 7. Moving to inventory, our inventory is up from a year ago, approximately $7 million, excuse me, approximately $9 million, which is 8 percent increase. About half of that increase is attributable to the additional show room inventory from our store expansion. We had added approximately 209,000 square feet last year, so that is around 3 or $5 million worth of inventory. The inventory is up since the year end by $7 million, that's about 6 percent, and most of that increase has to do with, of course, sales being slower than originally anticipated, but also, the fact that we have some duplicate inventories right now until we roll the rest of our distribution centers out, or convert those distribution operations into the new system, and shut down the local warehouses, and we will free up some inventory dollars at that time, and expect to be back in line, really within the next 4 or 5 months. I would also like to point out that in the total amount of change in inventory and receivables that we had a slight decrease with receivables going down 11 million and inventories increasing seven million for the year-end levels. We've had an increase of about 11 million in capital expenditures.

The total debt based on those changes increased about, just under $2 million, 1.7 million.

Our debt-to-total cap was 26.7 percent, almost identical to the level it was at year end.

Another interesting point, our book value is over $10. It's now $10.47 a share.

Also wanted to mention on our credit programs we have outsourced one of those programs beginning the start of 2002 and in the first quarter of 2002 about 11 percent of our sales were outsourced under this third party financing program and for the equivalent period in 2003, approximately 17 percent of our total sales were under this outsourced finance program.

For the full year last year, about 14 percent of our sales were outsourced as we grew in volume during the year and then as I said about 17 percent have been outsourced in the first quarter. The internal programs that we run had about a 28 percent of sales level of new financings during the first quarter. So the combined total is 45 percent, which is slightly less than the 46.5 rate in last year.

The other thing finally to wrap up is to talk about our, remind people of our square footage changes expected this year. We have a more modest expansion plan in terms of stores than we had last year, which was a very aggressive and opportunistic expansion. The total square footage to be added net is expected to be about 115,000 square feet. We're opening four stores. One of those was a replacement store and we have a possibility of another store closure at the end of the year, which we haven't announced yet, which takes the footage down to the 115,000-foot level for the year.

As you look at your models however, please remember that because of the expansion taking place, largely in the third quarter last year, that the weighted average square footage per quarter, the increases will still be fairly high throughout the year. And in the first quarter, that was seven-and-a-half percent increase in the average square footage of retail space. In the second quarter, the weighted average increase was 7.5 percent, in the third quarter, 5.5 percent and in the fourth quarter it will be less down to 3.1 percent. So that for the full year the total square footage increase will average 5.8 percent. That's useful as you're working on your models together with the comp store sales assumption that you make, you can, you can have a short cut to expectations for the total sales increases.

We are not giving any further projections about the results this year, we will be happy to talk and answer your questions about other things happening in the business and other trends that are developing.

I want to remind everyone that we do put out 16 financial press releases a year being a retailer with sales release every month and four quarterly earnings releases, all of which have comments on them. So, we would hope that our investors feel well-informed. And we certainly are available, particularly at conference calls like this, to answer additional questions.

Before I ask the operator to poll the people, I'll also mention that our Chairman is with us this morning, Clancy Ridley, and will be available to help us answer any of your questions.

If you would, please, operator?

At this time, I would like to remind everyone, in order to ask a question, please press star, one on your telephone keypad. Questions will be announced by first name. At that time, please state your full name, company name and your question. If you are using a speakerphone, please pick up your handset before asking your question.

As a reminder, ladies and gentlemen, only institutional investors and analysts may ask questions.

One moment while we compile the Q&A roster.

Your first question comes from Margaret.

Good morning. It's actually Susan Maklari for Margaret.

Can you guys talk a little bit about -- in your press release you had a higher discount charge on your outsource credit program. Could you explain that a little, and what effect, if any, it has on decisions for future programs?

Yes, Susan. That is strictly just the higher level of sales under the program, and it carries a discount of a little over five percent. So, as the volume goes up, that expense goes up and it is recorded in the SG&A.

OK.

And I think that the programs work fine for us, especially for extended promotion offers. And in trying to remain competitive, we often look to a third party to provide that financing, since we don't want to grow our portfolio and accept the risk from those larger portfolios in this type of a climate.

OK. And I know you said that you were experiencing some delays with your imports. Is any of that related to SARS, or have you seen any effect from that?

We haven't had any real feel about that yet, Susan. I do anticipate -- with some of our manufacturers not being able to send the U.S. quality control people over there, we may see some issues maybe later this summer. But as far as what we've seen this past quarter, that was certainly not related to SARS. It was just a few specific groups that we were back-ordered on, and it took us a while to get caught up.

So, no, we haven't seen anything yet. Certainly, we're watching it very closely, and don't plan to go to China.

That's probably a good plan now.

And finally, can you just give us a little update on your Havertys brand product?

Well, as I mentioned, it is up significantly from last year. We're continuing to eliminate the lines that aren't brands that are important, and modify them where it makes sense for the Haverty brand program. We feel it's important for us, and it's, obviously, helping us maintain our margins and increase them.

So, it's an important focus for us going forward. We don't want to go too far with it. We think the mix in the 35-percent range -- maybe a little over that -- is about right. And we don't want to go too much higher than that right now.

OK. Thank you.

OK. Thanks, Susan.

Your next question comes from Ulysses.

Hi. Ulysses Yannas from Buckman. How are you?

Good morning, Ulysses.

Is there any way you can give us some idea as to the overall rental cost? The rent that you're paying on your stores.

The rent costs, we're running about 30 million a year in rents.

Ok. The new stores you're moving into Greater Washington area if I recall in the past. I suspect the rents would be higher than your average, wouldn't they?

Well, actually, Ulysses, the stores we have up there, or ones we acquired, the ones that got us started last year, were the Home Life stores and we got some really good values on those, particularly for the marketplace, and the new stores I mentioned going into Bowie is a Home Place which we got a good, good deal on, so I would say, possibly relative to the overall average, it might be higher but, relative to a marketplace like that, a metro-market, I would say they're good rates.

So, essentially the percentage of rentals to your sales shouldn't be increasing that much? That's what I'm focusing on.

It's increased right now relative to last year because of ...

Yes, of course.

Yes, but -- no expect that to be coming back down as we said in our release with -- as we get rid of some of the local warehouses that are being replaced and as volume picks up to more normal growth levels.

Did I understand correctly that the replacement of the local warehouses, would save you starting in the third quarter around a rate of 2 million dollars per year?

That's right, so about a half a million a quarter.

Half a million a quarter?

Yes.

How about the so-called associate of sales component? Do you see any significant changes as you are moving up north?

I'm sorry Ulysses, I didn't understand that.

What you're paying your associates?

Well, what we're paying them -- our associates are still paid primarily on commission, so that doesn't change as we're going into these new marketplaces. We're able to bring on people and be competitive. I think they're pleased to join us and we've been able to build good sales teams without paying higher rates.

Do I understand you correctly that, about a year after such a store would open, you might get even better quality sales people from other stores in the area?

There is some of that. As people in the marketplace see that we're successful and growing, those who are in other stores that might have done well and were originally reluctant to move, we're able to bring them on, so we're hoping that, that will continue to be the case in these new markets.

So, essentially, if I understand it correctly, instead of you having a problem in terms of qualified help at the stores, as the store moves out in time, the quality improves rather than deteriorates.

I would agree with that.

Thanks a lot.

Thank you, Ulysses.

Your next question comes from Laura.

Hi, this is Laura Champine from Morgan Keegan.

Good morning Laura.

Good morning. Can you -- has there been any improvement in retail traffic trends following the end of combat in Iraq, and can you quantify your consolidated conversion rate, or what the change in conversion rate or any quantification you can do for us in retail traffic would be great.

Well, it's difficult Laura and as you know, the war kind of came into a close about the time of Easter weekend, last weekend, and those times are some of the slowest times for us, so we haven't seen any major trend. We have some markets say that they feel that things are turning. It's too early for us to say that yet. We're not seeing any major change yet.

Now as far as quantifying it, I don't have good numbers to do that. Our, we've talked in the past about our average transaction, which is still around $1,000. We don't have a good enough count yet on our traffic flow and it's something we're going to be working on later this year to get a better read on that.

And is there any change in your conversion rates that's material over the last, let's say, so far in April?

No, no changes really from what we've been seeing.

Thank you.

So again, it's just a little too early to see. There certainly wasn't any storming the doors after it looked like Baghdad fell.

OK, thank you Clarence.

OK, Laura, thank you.

Your next question comes from .

I hope I'm the only on the call.

Morning . We know who you are.

Let's see, the first question is looking at your business price-per-unit basis. Do you look at it that way Clarence? Can you tell us as you've transitioned for example with the Haverty label doubling in the last year? I'm assuming it's on average at lower price point, maybe that's a bad assumption, but can you give us some feel for how you're combating deflation. I know leather's up, so that would be a mix shift that would help you, but can you tell us about that aspect of the business?

Well it's a tough one, and I would say that about a year-and-a-half ago, year ago, we started to see a slowdown in some of the higher brand price points, and that was due to the Asian import influence. And I don't think that we really have a good read on that , to be honest with you. We're seeing some inflow of goods that we feel comfortable with and we get the good price points on, but I don't see, I just don't have a good read on that frankly.

Well you said in your comments that formal dining room was up.

That's just total sales.

That's sales dollars?

Sales, exactly.

But you don't know if that was up eight percent in units and three percent in sales?

We don't really have those numbers accurately enough to give you that. It's just up in percent of sales and sales. So I don't have the units exactly like you'd like me to have them.

OK, in the SG&A line, we have a pretty good look year-over-year with sales being flat. Obviously some of the SG&A increase is due to having six or seven percent new square footage. I'm wondering Dennis if you could break out how much of SG&A is related to that. Then how much of SG&A is related to the D.C. expense? And then I think you mentioned that a half-a-million a quarter should start going away in that line item starting in the third quarter.

Sure, the new stores are adding about $3 million to the quarterly SG&A costs and the distribution centers, it looks like they're adding about $2 million. So that's five million of the seven that we're looking for, and the other parts of that are the, we talked about the insurance coverages of all kinds, the more volume going to the third party outside party that's financing our credit program, and then there was also sale lease-back transaction we did in the third quarter last year. And with variable rates as low as they are, sale lease-back is like a fixed-rate transaction. So, the rents on that are up a half-million dollars or so, relative to the depreciation and interest costs. So, it had a -- all of the costs now for those 11 stores for the SG&A line.

That's kind of the run-down of it. A lot of these costs are, like we say, relatively fixed in nature, and I've included there the occupancy expense and the administrative expense of those facilities. So ...

So, we wouldn't expect -- if we had another 175-million revenue quarter, and it was in the third or fourth quarter -- and hopefully we don't have that -- but you wouldn't expect, other than the closing of the D.C. -- you'd only expect about a half a million to dissipate, is that right?

Off the top of my head, I'd say that, but I will also tell you that if we get in -- you know, the first quarter is usually a fair quarter, the second quarter is the weakest of the year. And if we're in the third and fourth quarter and only experiencing that sort of level of sales, I'd feel like we'd be cutting back on expenses.

You would. OK.

So, you know, if you didn't cut back on expenses, then I'd say yes, that's correct; your assumption.

Has there been any change in ad spending as a percent of revenue?

Let's see. I don't think there has. It's just about flat as a percent of sales.

And has there been any change in promotions; free interest promotions, what have you?

We haven't had any changes. Significantly, we did go an 18-month promotion, which is free interest. And we will repeat that some time this quarter. But nothing dramatically changed there. Our advertising, John, is right in the mid-five percent range right now, and that's where it's been in the last several quarters.

And the last question: any markets where you're seeing business so poor -- any changes in competitive dynamics? Anybody hurting? Anybody panicking? Any GOBs? Anything like that?

I don't think we've seen anything dramatically there. I don't think any new competitors are really impacting us too significantly. As I understand, this is pretty consistent across most of the retailers that we've talked to. I don't know if you're hearing the same thing, but not really. I can't say there's anything new out there on the horizon.

Yeah. Hopefully, most of the trees have fallen. Good luck.

OK. Thanks, John.

Your next question comes from Richard.

Hi. Yes, good morning.

Just a quick thought; could you provide us some color on your marketing strategy for Memorial Day and Mother's Day, you know, given sort of the weakness we're seeing in the economy?

We have a pretty good program for Memorial Day that we're excited about. We wouldn't give the details of that now. That'll be out in a few weeks. So, we think it'll be a very strong event for us. And Mother's Day is usually not that important to us. Memorial Day is very important to us. So, we will have a big promotion and be aggressive in all of our markets.

Thank you very much.

Thank you.

Your next question comes from Bruce.

Good morning. This is Bruce Kennedy from T. Rowe Price.

Good morning, Bruce.

How are you all?

Good.

Good. I wanted to ask if you all are seeing anything different in terms of the terms of your -- in terms of the terms of the concessions which you exact from manufacturers? Are you seeing anything different there, or have you all given the problems that all of the manufacturers are having? Have you been able to exact any more favorable payment terms or anything?

One of the things that we work on, and I mentioned it briefly in my comments, is that we are working with our suppliers who are importing to back us up domestically or at least warehouses in China, so that we get better service and better flow of product, and that's really been our focus. The pricing is changing as you well know with the import impact and we haven't tried to get anything better than the best pricing and best service from our vendors, so nothing's new that we're really pushing there.

Have there been any payments in the payment terms for the manufacturers not wanting to reduce the price but maybe doing other things to make ...

We , our warehouse, or our local courts, so sometimes we're about to get a landed pricing that we know what it's going to be, and that might be considered a term concession, but that would probably be the stroke of where we're going.

OK, well thank you all very much.

Thank you.

Again, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad.

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

Thank you very much operator and thank you for listening and your interest in Haverty's. We appreciate your signing on.

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