Haverty Furniture Companies Inc (HVT.A) 2003 Q2 法說會逐字稿

Good afternoon. Welcome to the Haverty Furniture Company Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the Question and Answer Session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded, Thursday July 31, 2003. I would now like to turn the conference over to Clarence Smith, President and CEO, Haverty Furniture Company. Please go ahead sir.

Thank you. Good morning. We appreciate you joining us for our second quarter conference call.

As we reported in our press release, our earnings per share of $0.10 was below last year, but a slightly better result than we expected at our last sales announcement. We were encouraged by recent trends and we have put in place significant infrastructure changes which we feel will help us to drive a stronger second half.

A great deal has happened in the second quarter. We opened two major new stores in two exciting markets, San Antonio and West Palm Beach. We also completely remodeled two Florida stores with our new look in Treasure Coast, near Jenson Beach and Palm Harbor, north of Clearwater. We are on track for a late Q4 opening of our first [Marilyn] store in [indecipherable] in the Greater Washington DC market. Our plans are to add several additional stores in the DC area market in the next few years to capitalize on our Northern Virginia locations and our distribution capacities.

We are very pleased with our customers’ response to the positioning and our merchandize presentation in all of these important markets. We will be evaluating closely further opportunities to grow market share in South East Florida and San Antonio. We will continue to look for good real estate values in all of our best markets to gain profitable market share. We expect that there will be further opportunities in existing big box retail sites in our markets.

We began our consolidated distribution plan several years ago because of capacity issues to have us better prepared to serve our customer and to begin to reduce our cost while building a platform to significantly grow our business in the years ahead.

As part of this ongoing program, during the first half of 2003 we closed 17 warehouses and converted 34 stores to the full distribution and centralized customer service system. We now serve 52 stores in 7 states, or 45% of the company’s business through our eastern distribution center facility and the two related home delivery centers. We will continue to build our systems and distribution network to improve our service levels, take full advantage of our market position and regional strengths as well as our growing opportunities with imported goods from China.

Our new DC allows us the ability to handle longer lead times and bigger quantities from importing containers worldwide and to do light assembly of furniture to add value and increase margins.

Tom Curran, our VP of Advertising is leading a new consumer survey, which we have initiated, our first comprehensive study in several years. We have engaged Next Level Research, which has assisted us with focus groups annually to take on the project, which will be approximately 1,000 customer surveys and 1,000 general surveys. This should take about three months. We are excited to take on this primary research of our customer and potential customer base. We continue to build Haverty as the important furniture brand in our markets, we feel it is critical to understand our customer and her home furnishing needs.

We have just begun a program with Shop and Check to do consistent secret shopping in all our stores. This is in addition to a recently initiated traffic count system being tested. We want to better measure our sales performance for customer experience and service levels at all our stores and raise the standards of our sales team. We believe these will be powerful management tools to better serve our customers.

Our merchandizing team under Tony Wilkerson has just returned from the High Point Fabric Show in West Coast market with comments on market trends. We expect to see more new introductions in the fall market than usual, with a new emphasis on more color and design. In Upholstery we have just begun to see new products on our floors from China and the color, feel and overall quality has improved significantly.

Domestic Mills have reacted by bringing out sharper new values and patterns. We expect stronger colors in the markets in reds, golds and blues. Top themes we fear are old world, vintage and classic blues. We believe that this will create new excitement on the retail floors by early next year.

We have seen some nice gains in July sales in key classes of merchandize, Upholstery, Bedding and Formal Dining Room all show double-digit increases over July last year. We believe this indicates that our customer is buying not only the basics, but is beginning to take on major room projects in the dining room and key living areas of the home. July should be the second month of positive same store increases breaking ten consecutive months of decreases, tracing back to Q3 of 2002. We are not calling it a trend, but we are very encouraged by the recent enthusiasm and increased sales activity in our stores.

I would now like to turn this over to Dennis Fink, CFO.

Thank you Clarence. Good morning everyone. As we announce our sales each month, we give color on what is happening in our business. With the release of this first half result, it is worthwhile just to point out the challenges we have endured since the economy started slowing back in late 2000. Going back to the first half of 2001, which was probably the toughest part of this recession, we had comps in the first half of negative 7.6%. Our earnings were $0.32 per share. We had, what we felt, was a bounce-back in the first half of 2000, comps came back and were up 4.9%. Likewise we had increase in earnings per share back to $0.47.

As Clarence mentioned in the last ten months, there has been a slowdown in sales such that the first half of this year we actually had negative comps of 4.5% and again had earnings of $0.32 per share, the same as we had two years ago when the recession first started. This double-dip has been very difficult on us. The second dip has happened as we have expanded our business considerably and gone through the transition and distribution that we have been talking about.

Given those two factors which really started in mid-year last year with related higher fixed costs and the tough sales environment since that time, we think our performance in the first half is understandable and we hope you agree with that. More importantly, we are now in very good shape to handle the higher sales volume that normally occur in our second half which is seasonally the strongest.

Looking at our gross profit margins for the first half of the year and more specifically Q2, we had 47.8% gross profit which was a 40 bps improvement over the prior year Q2 of 47.4%. However, we wanted to point out that that is a decline in margin when you look at the run rate that we have been at in the quarters subsequent to phasing in our average branded products. In fact if you look at the run rate in the last three quarters, we are about 48.7%. So measured on that basis, our margins for Q2 were about 90 bps lower than they had been rather than the 40 bps above Q2 last year.

We felt we should explain that, first of all the impact of the inventory mark downs associated with closing out these 13 warehouses. We also cleared out quite a bit in showrooms in two Florida stores that were completely remodeled during the quarter. Those had a fairly significant impact on the gross profit for Q2. As it turns out a year ago we had quite a bit of close out activity going on as well.

The other impact on gross profit was a 35 bps charge that we had which is an upfront accrual we made for in-house credit programs that have free interest periods for more than 12 months. We ran an 18 month and a 20 month no interest promotion that did have monthly payments, so we had to make the charge to our gross profit in accordance with Accounting [Documents]. That is the first time in a few years that we have run a program that has extended beyond 12 months with free interest internally.

The SG&A costs were up during the quarter, 7.8% over last year’s Q2. As we mentioned in our press release it is attributed primarily to occupancy costs, warehouse and delivery expenses and insurance costs. We opened 7 new stores during the second half of last year, 2 in Q2 of this year and it increased our weighted average retail square footage for the quarter by 7.4% over the same quarter last year.

Our warehouse and delivery costs besides the new square footage we have added, we also had costs associated with transitioning out of these other warehouses. We think the best way for you to look at the quarter in terms of the cost build-up is that we are projecting on an annualized basis to save about $2m a year in fixed costs. We will start realizing that at a rate of about $0.5m a quarter beginning this quarter.

The real story is the additional savings that we should derive as our sales increase and the operational costs of our new distribution facilities are further leveraged.

A little bit more about our in-house financing program and our third party financing program. For the three months of Q2, this year and last year’s percentage finance volume was almost identical at 44.6% of total sales. That breaks down to about 30.9% of total sales was handled in-house and about 13.7% of total sales was financed by a third party program.

The greater the 12 months interest amounted to about 32% of the total volume financed in our in-house programs.

Accounts receivables have declined at the end of the quarter in-house to about $117m and we have an allowance for doubtful accounts of $5.2m reserve for that. The total of the allowance is about 4.5% of our accounts receivable.

We think our portfolio of accounts receivable remains in very good shape because we still have a very credit worthy target customer.

Looking at interest expense for the quarter. It decreased $600,000. That is made up of a 46% decrease in average debt level and also an effective interest rate increase of 81 bps. That occurred because we had reduced the amount of floating rate debt as our total debt was paid down considerably. We are left with more fixed rate debt. The average cost of the total debt at the end of the quarter stood at 6.2% effective rate.

Looking at our balance sheet and cash flows a little further. There is a summary of the cash flow in the press release. The first half we had cash provided by operating activities of $23m, that included $13.5m from reduction of receivables. Our net accounts receivable were $111.5m after the allowance at the end of June 30. That decreased about 11.6% from the $126m at the beginning of the year.

This decrease has continued for the last six quarters. It is due to collection of internal credit program receivables and the impact of outsourcing one of our programs to a third party.

The cash used in investing activities during the first half of $15m was primarily for $16.5m of capital expenditures. Financing activities included $6.7m of long-term debt repayments and an increase of $8m in our borrowings and other credit facilities.

Our inventories of $116m at June 30 was an increase of $2.7m or 2.4%. $113.3m at the end of the year last year, this increase is due to sales being slower than originally anticipated and to the opening of two additional stores and some other changes, and retail footage as we replaced the store.

The net property and equipment was $151m at June 30. That is an increase of $16.7m from year-end 2002. The increase included $9.4m of properties under a capital lease that was effective on June 30 this year. We expect to purchase these properties within the next 24 months. Previously these properties had been under an operating lease.

We expect capital expenditures for the remainder of 2003 to be approximately $9.5m and a total for the year of 2003 or $26m.

We are adding one new retail store in the second half and the cost of remodeling two stores just completed will be in there. We are purchasing one property currently under a capital lease.

We have our first look at capital expenditures for 2004. Presently we are estimating a $34m capital program next year. We are adding four stores, expanding one store and making investments in distribution and information systems infrastructure. We are also purchasing property that is under capital lease that I was speaking of earlier.

In our long-term debt, our total borrowings at the end of the quarter were $86m. That is an increase of $3.5m from the end of the year. However this did include the $9.4m obligations under the capital lease that we spoke of. It is partly offset by a $5.9m net debt repayment. The cash flow provided us the ability to pay down debt $5.9m and we have added the $9.4m obligation.

We have revolving credit facilities of $80m with six commercial banks. We have had $16.7m outstanding on this at the end of the quarter, together with about $4.5m of letters of credit outstanding. We have an unused capacity on this line of $58.8m.

As I mentioned before the fixed interest part of our total debt is higher. It is actually 74% now. That is again because we have been paying down some of our revolving and rental rate debt as we had positive cash flows.

Although we are not giving specific earnings guidance at this time, I wanted to remind everyone this call includes forward-looking statements which are subject to risk and uncertainties. Factors that might cause actual results to differ materially from future results expected or implied by such forward-looking statements include, but are not limited to, general economic conditions, the consumer spending environment for large ticket items, competition in the retail furniture industry and other uncertainties detailed from time to time in the Company’s Reports filed with SEC.

Operator, if you would please, let us open this up for questions.

Certainly sir. Ladies and gentlemen at this time we will begin the question and answer session. If you have a question please press the star, followed by the one on your push button phone. If you would like to decline from the polling process, press the star, followed by the two. You will hear a three tone prompt acknowledging your selection. The questions will be polled in the order they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for our first question.

Our first question comes from Margaret Whelan. Please go ahead.

Good morning guys.

Good morning Margaret.

I have a lot of questions today actually. First of all, that $2m you gave us in terms of the cost savings is very useful. You said it might be higher than that if we were to take in a better sales rate. Do you have any idea what that would be? Would it be $3m or $4m or on what kind of sales base? I am just trying to model.

We are not going to give specific guidance on that Margaret. The fixed costs are in place and it is really a matter of the throughput. Of course this is the first time that we have had all the stores in the first phase running through the distribution center. We are confident that we are going to increase our efficiencies. It is just difficult for us to project. We are going to try to closely monitor this quarter and give you some better information at the end.

We really have not even seen a full month yet. Internally we will get a better idea of what this might turn in to after we close the books for July, which has been very good as we have talked about.

Okay. If we look at the gross margin being down sequentially, how much of that was the discounting on products that you might have been carrying out?

I think it was about, as you look at that, 90 bps roughly if you will from the run rate on production, about one third of it was that credit promotion and about two thirds of it was the close out activity.

Okay. Can you give us a feel in terms of the vendors, the manufacturers, either US or from overseas, what kind of manufacturer’s discounts you are getting or incentives at the moment? Has that changed much over the last couple of quarters?

You mean different than what we have been doing Margaret?

No. Just in terms of the suppliers that you are working with, are they getting more or less aggressive in the incentives they are giving you, whether it is co-op advertising or price discounts for volume or scale, anything like that?

I do not think the discounting per se has changed much. I mean it is really getting down to product values and we are seeing a lot of that because as we pointed in several places, the more imports is putting a lot more pressure on existing lines to bring values down. I would say not specific to a line, overall discounts. We are seeing some case-by-case reactions to individual products that are becoming competitive on the market. I do not see anything other than just individual discounts based on competitive necessity.

Okay. Secondly, away from price, but in terms of maybe different terms in the accounting, the payables or just co-op advertising, is there any other stuff that they might [inaudible] that they might be helping you with?

We have not seen any change.

You have not. Okay. Then you said the Upholstery from China, when exactly does that start? Have you been selling it already or are they just coming in?

Probably just within the last month or so. It looks good, the fabrics that are coming are proving – and it is selling.

Right, okay. In terms of the inventory levels, what should be forecasting from here, maybe as a percent of sales Dennis, do you have any idea on that?

Well there again, it is going to more importings, in [trading] that way. There is a natural need for more inventory just because of the cycle time is longer, the response time and the lead-time for the orders. I do not think we are going to see much of a faster turning inventory because of that. We will probably see some small increases in inventory but the fast [occurring] would be strictly based on higher volumes.

The sales level?

Yes. We replaced a lot of these warehouses. Initially the attempt was to see inventory come down, but really we are just able to take on greater importing without seeing inventories go up is what I think is happening.

So net it might be about the same when you get back to a normalized sales cycle?

Yes, I think it is. We are working hard on our supply chain management. Our inventory is flowing different to fewer spots now. We just think we can improve our efficiencies. I just think the nature of importing will probably offset most of that.

Okay, that makes sense. Then just finally on the July sales, I know you do not want to call the bottom view. Over the [inaudible] do you get a sense that it is just the advertising and the promotions that are helping or do you think maybe it might be turning? What are you hearing from some of your peers and your competitors?

Well I am not sure from the competitors, but our people in the field feel that it is a combination of some of our credit offers, the values we have out there. They also say that they see that the customer seems to be coming back. I think it is a combination Margaret. I think we have repositioned ourselves in some key markets which –

Good help, sure, sure. Okay, thanks very much guys.

Thank you Margaret.

Thank you.

Our next question comes from Laura Champine. Please go ahead.

Morning.

Good morning Laura.

Could you talk about your trend and how it might be changing in July in terms of average ticket, transaction count, traffic, conversion rate?

I can tell you a little bit about our average ticket. Obviously the month is not closed out, but it is up. Our average ticket, I mentioned it in several last calls that it is increasing and we are seeing some acceleration in that. It is in the single-digits, but it is improving. We think some of that is due to the fact that our credit promotions are requiring the minimum transaction price and people are reacting to that. I think we are providing some better values.

I also think that as I mentioned in my comments, that people are looking at the whole home now and are willing to take on a little bit bigger transactions. We are pleased with that. The deflation question has not impacted us to any significant degree yet. Our average SKU is going up. I think some of that is just values that we are able to bring to the customer and they are willing to pay a little more for them.

Are you seeing an incremental change in your traffic or conversion rate?

I really do not have good enough numbers on that. I would say our traffic is up. Certainly around the last several weeks and weekends. I also mentioned that we are going to have some more actual information on traffic counts. Right now, it is kind of just what the managers are telling us. We are going to actual store counts and we will have better data for you.

Great, thanks a lot.

Thanks.

Our next question comes from John Bow(ph). Please go ahead.

Good morning.

Good morning John.

A couple of things and maybe I will throw this one out first so if you need to look it up Dennis. Could you give us a feel for square footage year-over-year percent change for the next say four quarters?

While you may be looking at that, is all of the gross margin decline that you referenced 90 bps just comparing the last three quarters, is all that explained by close outs in the credit promotion or is it even greater than the 90 bps or less and there is something else going on?

No, I think it is related primarily to the close outs and then also as Dennis mentioned the credit. When we close this many warehouses, that is a pretty big event. Granted, there are not a lot of large inventories in these individual markets, but taken accumulatively and the fact that we want to move those out, I think that hit us a little bit in this quarter. It was a big issue for us, but I think it is behind us.

Now the credit I assume will go on or do you have no plans to do a greater than 12 month credit plan in the next year?

No, I think it will go on.

Okay.

In this particular quarter, the third quarter, we are outsourcing the program and we are running right now in our stores, it is a no payment – no interest until 2005. That particular one impacts SG&A and the discount rate will be a little higher than it was in prior quarters because of the extra time. The fourth quarter, we have not really decided yet, but it will be one or the other, either some kind of a credit promotion in-house beyond 12 months or outside for at least the key holiday selling period, the month around Thanksgiving.

We are seeing that, in response actually to somebody else’s question, still we think the consumer will come out and buy, but they do need to have a feeling that there is some sort of reason. The sales promotions, the credit promotions and the way we are running them around the holiday periods are tending to bring them out and we are getting them to loosen up and buy.

Your footage question, the weighted average footage expected for Q3 is an increase of 5.6%. We anniversary the store openings from last year, August was when we opened 8 stores last year. Then in Q4, it is going to be 2.5% increase in weighted average footage. I actually do not have the exact numbers for 2004, but it should be in that same range. It will become a smaller number, 2% to 3% for most of the year in 2004.

Okay great. The other expense number jumped from a credit it looks like to the expense. Can you walk me through that?

There is not a whole lot in there. We have adjusted some of the impairment values that we have had. We had several properties that we closed out and we have accrued those in advance. The fixed cost that would be ongoing or the [inaudible] as we buy out a lease. There were some adjustments to that that are in there for the quarter. There is nothing of otherwise any great significant in there.

Okay. Where would you model that going forward? Break-even or --?

John, there really should not be anything that comes up until we start selling some other properties. I think that we will probably have a modest gain, a very modest gain on one property sometime in the second half and then next year there will be more gains on properties that we are getting out of if we better the next round as planned of this distribution roll out. It is in our Florida markets, we would have some gains. I will probably give you a little guidance on that later this year.

Okay. Just to be clear, the close outs from the 13 warehouse closures, does that complete that inventory? Is that all done? Is the expense in the transitions largely done from closing out those?

I would say largely done.

Largely done. Okay. So we can start accruing these savings as you said $2m a year going forward. Comment on, if you would, on the order versus the shipment trend in July?

I can give you just a little color on that. We had a strong start and a weak middle, call it 10 days, and then a very strong finish, which we are obviously still finishing it today. We have a very good reception to a private customer mailing that we had and the offset of the credit offer that I was talking about. Deliveries have been strong all month –

So that comment of strong, weak, strong was related to deliveries or was it orders?

It is orders in the store, I am sorry John. Yes, the order activity, store activity was as I said pretty much all through the month because we had a very good initial 4th July sale. We had a good backlog starting the month. We have been able to push that through pretty steadily. The deliveries are usually a little more steady than order trends and that is the case this month.

I am still confused – have orders tracked in line better or worse than deliveries for July to date?

A little better.

Right. Just on this Upholstery thing. What price point are you going after? Relate this to the deflation issue and the price per unit, are you sourcing this fabric and taking a frame and a fabric here that was a higher price point and offering it at a lower price point? Or have you got some kind of look or color or something that jazzes up the value and yet you hold the same or maybe even higher price point?

I think we have been able to do more of the latter there. I think an example are some of the groups that were brought in that Furniture Brands has put together for us. They were sold at significantly higher price points and now are sold in over $1,000 price points, but they are such values that the customer is reacting very well to them. I think we are able to bring more value to the fore and in some ways step up customers who might not normally buy at that price point. The facts are our stats demonstrate that. How long that will stay? I am not sure, but we are going to work very hard to continue to increase the average SKU as well as the transaction price. That is the trend this year.

Right. Just lastly, a comment on leather?

Leather is great value. We are again starting to bring that directly from China. We are going for the better look. We are not trying to chase the lowest price point, but there are some great values and the customers are reacting very well to it. We are excited about our leather program.

Would that be again, back to the deflation and price per unit, so you are trying to hold the leather price point? You are not dropping it?

We are offering leather at lower prices than we have ever offered below $1,000 for instance. We are still selling around that price point, $1,000, $1,100, our hot point is frankly I think the $1,299 price point. We are just offering a lot more sofa at that price than we were a year ago. I think that is what the customer wants, our customers that is. They want the better leathers, the better looks and not necessarily the cheapest leather sofa.

Thank you. Good luck.

Thank you John.

Our next question comes from Joe Havard. Please go ahead with your question.

Thanks. Good morning guys.

Morning Joe.

Dennis the two components that you mentioned, the $16.7m, did that include – what was it you said, was it $4.5m of LOCs or is that separate?

That is separate.

It is separate. That is also a floating rate in nature?

Actually there is a fee for that, because it is not outstanding debt, it is just usage of the line.

Oh, okay.

Yes.

Okay. We finished Q2 at $16.7m on the revolver, has it tweaked up since?

We are actually in pretty good shape. It has come down a little.

Down a little?

Yep.

The other terms are all on regular amortization. Obviously what I am getting at here is should we look at interest expense coming down a little bit from where it was in Q2 over the whole second half or will you all need to boost it back up with maybe some increased purchases if these volumes trends keep going the right way for you?

Really I think that will take care of itself because of the pre-payables going up. It would be capital expenditures and what we do with our credit programs. If we outsource more of the aggressive credit promos, we will see positive cash flow in the second half. If we choose to keep some of that in-house, we still would see positive and probably a lower figure, quite a lower figure. The real discretionary or part we are choosing is the treatment of the finance programs.

Okay. That is probably a good segment there, on the provision for capital accounts we keep maintaining a too conservative amount there. Do you all think the maybe 0.4 and just a little bit more is okay or should we maybe keep that where we are? Or are we being too conservative? It looks like you guys have done a real good job on the quality side?

Well it is our customers. We are appealing to the right people. We are just smart enough to not sell to some of the ones that have run up debt considerably. It is going to go with the volume again the more volume we do and house we have to provide for, future bad debts. We are pleased that with the receivables coming down that the denominator for purposes of delinquencies and everything that we have come out pretty well. I do not see a spike of any type coming in the consumer side with our customers. It is not an easy one to really call, it is just we do not expect it. Maybe you can take that and come up with some appropriate numbers for your model.

I will sure try. All right, thank you guys, good luck.

Thank you.

Ladies and gentlemen if there are additional questions please press the star, followed by the one at this time. As a reminder if you are using speaker equipment, you will need to lift the handset before pressing the numbers. Mr Smith, Mr Fink, there are no further questions at this time. Are there any closing comments you would like to make?

I really appreciate you joining us for the call. We very much appreciate your interest in Haverty's. Thank you very much.

Ladies and gentlemen this concludes the Haverty Furniture Company Second Quarter Conference Call. If you would like to listen to a replay of today’s conference call please dial 800 405 2236. Once again, that is 800 405 2236 and enter the pin code of 546 523. You may now disconnect. Thank you for using ACT Teleconferencing.