Haverty Furniture Companies Inc (HVT.A) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Haverty Furniture Company's third 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. (Caller Instructions). As a reminder, this conference is being recorded, Wednesday, October 29, 2003. At this time I'd like to turn the presentation over to Clarence Smith, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning. Our third quarter performance was a pivotal change in what we believe is a sustainable upturn in our business. Our sales during the third quarter of 2003 increased across all major categories of furnishings, with bedding, formal dining rooms and upholstery performing better than the average. Our average sales transaction in price per item both remain modestly higher in the third quarter over the prior year's period.

Gross profit has been improved by the increase in the mix of our Haverty's branded merchandise line, and fewer mark downs and closeout sales. Our private label product generally carries a modestly higher gross margin. Approximately 30% of the items selected for our core merchandize groups were Haverty's branded at the end of 2002, increasing to approximately 35% as of September 30, 2003. Our core furniture and merchandize comprises of approximately 85% of the furniture items, which excludes bedding and accessories that we carry in all our stores.

Additional products that are more regionally focused and items needed to merchandize our larger retails stores supplement the core furniture merchandize assortment.

The Haverty's brand mix is approximately 80% imported, with virtually all case goods and leather items being imported. We will continue to strengthen the Haverty's private label, and have developed our own collection, for more effective store presentations, advertising and brand building. We expect to add a Haverty's branded bedding program in the first quarter of 2004.

Name brand merchandize of well-known US manufacturers such as Broyhill, Laine, Seeley (ph), Certa (ph), La-z-boy and Bernhardt will remain a significant part of our product offerings.

We have developed strong relationships with our suppliers and we believe we receive excellent pricing and superior service from our key vendors. The continued improvements in the quality of products imported from Asia, and the pricing pressure on domestic suppliers will also generate good values for us. We are beginning to see values that we are importing from Mexico, Chili and other parts of South America.

Many retailers have used the decreased cost to support their heavy promotional pricing. Our approach has been to offer products with greater value at our established middle and upper middle price points.

Gross profit as a percent of sales was 49.8% for the quarter ended September 30, 90 bp increase over the 48.2% in the previous year's comparative period.

Our merchandizing focus is to continue to seek values in domestic and imported product offerings and explore how we might better source and flow these goods. Approximately 37% of our core merchandize goods at December 31, 2002 were imported products, and based on recent selections made to implement our current merchandizing plan, this is increasing to approximately 60% as the new products were bought into our showrooms.

At September 30, 2003, only 20% of our selected core case goods were produced domestically. However, most of our core upholstery merchandize continues to be produced domestically, with the exception of stationery leather, which is almost 100% imported. Our merchandizing team has recently returned from the high point furniture market with positive results reported by the manufacturers. Color seems to be the main focus of fabric and leather upholstery. We are seeing strong reds, yellows and blues, which are dominating the new presentations.

The micro-fibers continue to be strong sellers and support the bolder colors and the new patterns. We are seeing more shape and interesting designs in sofa frames, which we think better distinguishes them from the more promotional frames.

We've begun to see cleaner lines and more classic styles in the case goods offerings and softer finishes. The darker finishes in large cases that have dominated the past several markets seem to be abating. Contrasting painted case pieces and colors such as black or red are strong sellers.

Our SG&A costs were negatively impacted as we began in June 2002 to transition to our new distribution system. We completed the Easter distribution center rollout program on June 30, 2003. We now have 52 stores fully integrated, representing approximately 45% of our business. SG&A costs as a percent of net sales was 43.7% for the quarter, a decrease of 150 bp from 2002 third quarter level of 45.2%. All major categories decreased as a percent for the quarter, except for delivery costs.

We are continuing to focus on refinements of our new distribution system, with particular emphasis in reducing transportation costs. Additional savings should be derived as sales increase and the operational costs of our new facilities are further leveraged. The growing amount of product manufactured overseas amplifies the need for excellent supply chain management, given the longer lead times from order placement to arrival, and the ability to receive and warehouse the larger order volumes associated with importing containers.

With the improved business conditions and strong cash flow, we plan to ramp up our capital expenditure for 2004 for new stores, remodeling our better stores, improving our information infrastructure, and continuing to roll out our new distribution systems to our fasted growing region, Florida. We expect that our retail square footage will increase by approximately 4% in 2004. We will provide more details on 2004's CapEx in our 10-Q, which will be filed later this week.

We believe that continued strong housing sales and low interests were a positive factor for the industry. Consumer confidence and further indications of a strengthening economy, are key to an increased spending for big furniture items. We have a great deal of opportunity to grow our business in the regions that we service, and we recognize that our success depends on providing the qualities and the excellent service that Haverty's has been know for, for over 118 years. Our continual focus is to develop exciting stores with fine furniture values, supported by the most efficient IS and distribution systems to back up the most dedicated retail associates in the industry.

I'd like to now turn this over to Dennis Fink our CFO.

Thank you, Clarence and good morning everybody. First area I will talk about is the financing program to offer to our customers, and also our internal accounts receivable portfolio.

The standard outsourced credit offer that we have available to our customers is a no interest no payments for one year promotion. There is an interest accrual that's waived if the entire balance is paid in full by the of the deferral period. At the beginning of the third quarter this year, we started offering more competitive promotions for larger purchases. And this allows for deferred payments and no interest up until 2005. So the customer under this program can have as much as 18 months to pay for the merchandise, and it's become our most profitable credit offering.

Our credit service charge revenue has continued to subside on our internal programs as customers are continuing to opt to choose the product promotions that have no interest features in them. Our in-house program most popular is 12 months no interest with 12 equal payments. It generates very little credit service charge revenue, but it does help reduce our interest expense and the bad debt expense due to the faster payout relative to other in-house credit promotions.

Amounts financed by our customers under the outsourced credit promotions during the third quarter was about 24% of total net sales. This compares to outsourced credit promotions in last year's third quarter of approximately 14.4% of sales. Our in-house volume decreased in the third quarter this year to 24% of total sales. So the in-house programs and the outsourced programs in total volume for the third quarter were about even. And they together add up to 48% of our total net sales, and that's about 1.6% higher relative to sales than it was in last year's third quarter.

The overall cost of the outsourced credit program in the third quarter increased total SG&A by about 70 bp versus last year. Again that's due to the higher proportion of usage and the more expensive program that we are offering.

Our in-house accounts receivable went down by $6.7m during the quarter, and the overall quality of our portfolio remains in very good shape. Delinquent percents are slightly better than third quarter last year. The write-offs are modestly lower. Incoming bankruptcy rates were flat with last year's third quarter. So overall the allowance is at -- allowance [for doubtful] account that is - is at $4,8m, which is about 4% of the total accounts receivable, and that's similar to a year ago.

Next to talk about, interest expense. We saw a decrease of about $600,000 third quarter versus last year, and that was primarily due to decreased debt level of about 39%. Most of that decrease was in the lower cost floating rate borrowings.

The next thing to cover is our store square footages, which may be tracked. We began the year 2003 with 3,808,000 square feet of retail space. At the end of the third quarter we had 3,877,000 square feet, and by the end of the year we expect to have one more store opening, in a week or so, and we will add a total for the year of 133,600 square feet to give a year end total of 3,722,000 square feet. That's about a 3% increase in square footage for the whole year. Due to the timing of our last years increases and this years store opening schedule, the weighted average square footage will increase more than that, it's going to be about 5.7% versus the weighted average square footage for the whole year last year.

We're not officially giving earnings guidance, as most of you know. We did mention in our press release today the current sales trends which we hope you will find useful. We are going to comment, though, on our SG&A costs. We have started obviously to leverage the fixed costs from last year's expansion, and as we've mentioned the cost of credit is a variable cost that is larger, that we have chosen to use credit more frequently to get bigger tickets, and to help drive total sales to remain competitive with the other retailers of big ticket items in the marketplace. We would tell you that for the fourth quarter we are expecting SG&A costs to decrease from last year's fourth quarter, by about 130 to 150 bp.

That's all our prepared comments at this time. Operator, if you would please open it up for questions.

Thank you, sir. (Caller Instructions). Our first question comes from Margaret Whelan. Please state your company affiliation followed by your question.

Hello?

Hello, Margaret.

Oh, hi guys, sorry, I was on mute. Congratulations, nice quarter. A couple of things. The first thing is, will you talk about the distribution center; you're seeing leverage in the SG&A now. Will you just talk about what the margin potential is for next year? I know you are not providing guidance, but just kind of rough numbers?

Dennis?

Well the distribution center is running very well as you mentioned, Margaret. We are expecting to show leverage in SG&A, as I mentioned abut the fourth quarter, we really have the same situation for the full year. The fixed costs should come down as a percentage, and we do have variable costs of more aggressive credit promotion that will be trending probably in the other direction for the first six months of the year until we get back to comparable level.

The other direction meaning, down?

Well the other direction there would be up. The credit costs versus the first and second quarter next year would likely be higher than the first and second quarter this year. We didn't really see the credit costs jump third quarter.

But in line with the second half of this year?

That's probably a fair assumption. We will certainly attempt to come out in that range. So it's really up to us as managers to leverage that cost as much as possible. And I do think you're going to see most of the leverage next year in the second half, which is seasonally much stronger than the first half. So we think that's where the most improvement will be, we've found.

How are you're stores positioned now, are they all up to speed, and are you planning to open many new stores in '04?

We've said 4%. We have a Board meeting tomorrow and we're going to be presenting the Board with our plan, and we want to meet with them before that's rolled out or put out to the public. But we are looking at about 4%, Margaret.

In terms of the square feet?

Yes.

Okay, and then --

We are going to, as I mentioned, we are going to ramp up the plan to roll out our distribution. You know that's been on hold for a year or so until we felt comfortable with the plans here and with the operating systems of the EEC. That's going well. And so we want to move that particularly into Florida and we will aggressively do that next year. But that will be a part of the CapEx's plan.

And then what about the one in Texas, is that up yet?

We still have -- it's the same facility. We were going to expand it. We're thinking we may not have to expand it, and the growth in Texas has not been as dramatic as it has been in Florida. And so we have so much pressure on our facilities in Florida, plus the economics make more sense, we're going to move on Florida before we do anything in expanding the Dallas facility.

Okay. And then that's a good lead into my last question which is, as you are accelerating the amount or percent of the Haverty's private label product, what sort of terms on the inventory are you getting from your new suppliers, being the Asian manufacturer? Are you taking ownership from the order from Hong Kong, or --

Well we're still not importer of record. We're dealing primarily with agents, and we are trying to that better as you saw. Inventory is clearly down even though we are importing a little bit more. It's a real fight to control it and have the right product in stock. We're getting better at it, more sophisticated in our flow and our inventory management. But I think that it's not a major problem. We watch it. We do believe, though, that we're going to need a little bit more storage than we originally planned in some of these facilities. It is a fact that containers are more profitable in terms, so we're doing a pretty good job, and I don't think it's a problem based on what we've seen so far.

In terms of the actual terms on working cap these guys are giving you, though, is it much different? Are you getting anything different from the agent versus the agent manufactures directly, or versus the US manufacturers?

Not anything much different. It's a pretty standard requirements for most of our supplies and they are complying with it.

Okay, so you have your own standard. Some of the smaller retailers we talk to say that it's harder for -- it's easier for them to use the import agents because they are being more lenient in terms of holding the inventory for them than the US companies.

I think there is some merit to that.

Okay, guys, great quarter. Thank you.

Thank you.

Thank you, ma'am. Our next question comes from Laura Champine. Please state your company affiliation followed by your question.

Actually this is Anand Krishnan (ph) for Laura Champine from Morgan Keegan actually. Laura is on the road. Good morning.

Good morning.

You know that in the press release that real estate gains accounted for majority of other income. Can you provide some additional color on that item, and what can we expect going forward on that line?

Sure, there's roughly -- mostly its two properties. There was a warehouse that was sold, a local market warehouse, and also a favorable lease that the landlord bought us out of. Those were the two items of primary significance in this year's quarter. And last year as we said we had the two larger warehouses, one of which we had a very tidy gain on. It was one of our larger warehouses in the east that we vacated to occupy the big distribution center.

Going forward in the fourth quarter there is very little expected. Next year, depending on the timing of the rollout and the timing of some sales, we do have some potential for other income. It probably will not be as significant as last year's figures, but it might be somewhere in the range between this year's third quarter and last year's third quarter, spread out throughout the whole year. It's very difficult to predict exactly when the properties for sale will be sold. And part of it is depending on when we vacate and put something on the market.

Okay. And my next question is, in the prepared remarks you mentioned that Haverty's branded product represents approximately 35% of your core product line. The question is, what percentage of total sales was accounted by Haverty's brand?

If you look at our total sales in the high twenties. Somewhere between 25% and 27%. And that might be something that we need to look at more closely or get more information about. We have based it primarily prior to this based on square footage, so the change is based on what our core merchandise is versus our total. So it's somewhere in the high twenties right now.

And that would be as a percentage of total furniture sales, if you look all sales, it comes down a little bit, perhaps in the low twenties, and our intention is to put that information in our 10-Q, so we will have that in a day or two.

Okay, that sounds great. And also in terms of the inventory turns that you were witnessing in your Haverty's, how does that compare relative to your other brands? The other brand that you carry.

I would think it's -- actually I don't have those figures right here, but I would think turned better because it's some of our better selling products. So it would be in line or better.

Okay, thanks a lot.

Thank you, sir. Our next question comes from Pat Swartman. Please state your company affiliation followed by your question.

Sidoti & Co. Good morning. I'm curious about the replacement of the relatively modest business of losing Thomasville, the void that that will create. Do you have a sense of how much of that will be replaced by the Haverty brand versus all others?

Well we're working with several different suppliers. We mentioned Bernhardt. We are looking at other upper end manufacturers also where we might use their brands. But we will probably do most of it with sourcing through some of the better manufacturers. We're branding our own collections. We've had success doing that in the past year or so, and we will just continue to do it. But the phase out of Thomasville, we continue to sell it the way we do now through the rest of the year, and we will continue to have the time to close it out through the first half of next year. So there's not a lot of pressure on us to move the product out fast. And we think that we have, particularly coming from market, some very strong opportunities to bring great values in the better end merchandizing on our floors. And it will be primarily branded Haverty's, but we will do some Bernhardt and use some of the other higher end manufacturers which we will announce later.

Okay, thanks.

Thank you, sir. (Caller Instructions). Ur next question comes from Reed Anderson. Please state your company affiliation followed by your question.

Piper Jaffray. Congratulations on a great quarter. A quick question for Clarence. You commented on your rolling out a Haverty's private label in the bedding category. I'm just curious, the margin differential on that, would that be roughly comparable to the margin pick you get in the core furniture categories on the private label?

I would expect that. We haven't finalized it. We have a couple of vendors who are bidding on it, and we haven't completely worked through that. But we would expect the margins to be better than what we currently have on the other brands. And I would say it would be comparable to our experiences in the cases.

And the other question I has was just your prepared comments talking about 35% of the core now is in Haverty's brand and in private label. Would you care to venture a guess what that might be in a year from now, or by the end of next year?

I don't think we want to guess yet. We're going to let that find its own level. We still strongly believe in brands, and we will have a strong mix of that. I don't think we're ready to guess on that, Reed, I think we'll just let it evolve closer to what the acceptance of the market is.

That's fine. I just thought it would be worth asking. And then comps, you commented again near term, your October comps kind of 7% level or above. Again has that been very broad based as you've seen the last several months as well?

It's been stronger in some regions than others I would say. I mentioned Florida and Florida seems very strong for us. Some of the regions were a little softer, but I would say that's a pretty good mix across regions. Some of the individual markets are not as strong, but that's pretty good across most regions.

Thank you very much.

Okay, thank you, Reed.

Thank you, sir. (Caller Instructions). The next question is a follow up question from Margaret Whelan. Please go ahead with your question.

As you look at the Haverty's private label, will you tell us what percent of it is imported versus made in the US, if you have it, or just a rough number?

We do have it, Margaret, let me just do those notes.

While you're looking for that, has the retail competitive environment changed much for you in your core market over the last couple of years?

I would say at the promotional end it has. There have been a lot of promotional players who have come in with very strong credit promotions, 3 years, no interest, and low price points. It's been primarily at the lower end, and I think where we've probably been our share has been on the better end, maybe at the higher end. So there have been a lot of players. There's actually been one who has been very aggressive in price points and credit, and others that have been pushing credit pretty strong. So mostly in the lower end.

I think we've got our numbers here. I mentioned in our comments, it's approximately 80% imported, with virtually all case goods and leather being imported.

And 20% of the upholstery?

Yes.

And then in terms of who you are getting that from, can you just give us an idea of what percent is the agent, I think you said primarily, and then direct from Asia manufacturers, and then rest from the US manufacturers?

Actually, Margaret, Tony has just walked in here.

That's nice. Hi, Tony.

Tony, did you hear that question?

No I didn't.

Tony Wilkerson, our SVP Marketing will answer your question.

Well I'm just wondering if you look at the private label product, could you give us a rough idea of what percent is imported directly, what percent is imported through an agent, and then thirdly what percent is made for you by the US manufacturers?

Well we're importing [77%] of that total product. We have about 20% of that is through what we would call a close directed agent [indiscernible] situation, a percent of that would be manufacturers.

The other 80%?

Right.

But are you importing any of it directly from Asian manufacturers?

We are through agents. And when I say agents I'm talking about a third party.

Okay, so the 20% for agents is coming direct from the Asian factories and then the other 80 is coming --

It would not be a US manufacturers. It would not be a manufacturer, they're an agency only.

Yes, I understand. And then the other 80% is coming through US manufacturers to third party. Got it. Alright, that's it. Thanks very much, guys.

Thank you, Margaret.

Thank you, ma'am. (Caller Instructions). Management, at this time we have no further questions. Please continue with any further statement.

We appreciate your joining us on this call and your support. Thank you.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. If you would like to listen to a replay of the conference please dial 1-800-405-2236. You will asked to enter access code of 556444. We'd like to than you for your participation on today's presentation. At this time we will conclude and you may now disconnect. Thank you.