Haverty Furniture Companies Inc (HVT.A) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Haverty Furniture’s second-quarter 2005 earnings release 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. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Tuesday, August 2, 2005. I would now like to turn the conference over to the President and CEO, Clarence Smith,. Please go ahead, sir.

Thank you. Good morning. Our second quarter profit performance was lower than expectations primarily due to sales weakening in May and June and the higher expenses related to the final conversions to our consolidated distribution. While we expected to have increased distribution costs related to duplicate warehouse and conversion costs, we had larger-than-budgeted increases in distribution due to increased fuel and lower margins due to several significant inventory adjustments and mark-downs related to closing local market warehouses. As previously announced, we believe that all of the additional expenses related to the consolidated distribution program are behind us. Our last local-market warehouse, which we plan to close, shut down in June.

We have taken a number of significant steps to improve our profit performance in the second half, which I’d like to outline. Our main-store focus is returning to the positive same-store sales performances, which we showed in the early part of the year. One key area of focus is on our front-line sales team. We’ve greatly enhanced our reporting tools for our stores measuring performance criteria for all of our manages and sales associates. These online tools include traffic counters and indicators, closing rates, sales coverage at key hours, improved hiring and training programs, and other important productivity measures. With our enhanced and consolidated distribution system, we have freed our managers to focus primarily on serving our customers and managing our sales associates. We believe that we will show continued improvement in the sales productivity in all our regions in the second half of 2005.

July sales strengthened during the month after a weak start for the fourth of July weekend. Our written sales were slightly positive and our order backlog at the end of July is over $8 million higher than last July. We expect that August, with an additional delivery day and our focus on bringing over-sold merchandise will be a solid turnaround month with positive comparative store sales.

As we announced in the press release, we are very pleased to have Steven Langer join our team as Assistant Vice President and Director of Supply Chain. Steven’s considerable expertise in global supply chain has already impacted our operations with a focus on better reaction time to serve our customers. We realize this is a key area of importance for us as we expand to new markets and are sourcing from Asia and other parts of the world.

In merchandising we are continuing to help develop exclusive values both domestically and abroad, which will distinguish us from our competition and build our Haverty’s brand. We are working closely with our strongest suppliers and experienced importers to develop and flow Haverty’s branded product as well as bringing in our direct import product in a controlled manner. We realize that developing product twelve time zones away is difficult. We believe we have the expertise and talent to present the best values in the industry for our customer. A majority of all we sell is Haverty’s branded products. We expect that will continue to grow.

With the continued strength of our Haverty’s collections and the direct exclusive buys from Asia, we’ve begun to see an improvement in our margins. We’re maintaining our great value presentation in our markets due to our strong relationships, the buying power, and exclusive import values through our import services. We’ve seen a strengthening of our average retail selling price per SKU to over 3% up year-to-date, with July’s number up 4.5%. Margins for July were up approximately 50 basis points compared to 2004. We believe that this is a sustainable trend for the second half.

We have begun a program with stronger promotions of some of our best values in key markets with inserts and run-of-the-paper advertising in recent weeks with good results. We will be continuing our strong presence on television and our consistent full-color tabloids supporting this newspaper program.

We recognize the difficulties of operating in the retail furniture business today. We’ve developed an infrastructure and brand, which allows us to serve our customer better than our competition and, we believe, will help us gain market share. There has been a significant fallout of other retailers in our markets and we expect that there will be further failures this year. This will create opportunities, but it does highlight how difficult it is to be successful in our business. We will continue to pursue opportunities with existing big-box retail sites that become available. Of the seven new locations we mentioned in last night’s release, four are second generation retail locations. Acquiring these buildings allows us to open quicker and at lower cost. We believe that our people, our brand, our product quality, and our service levels exceed any of the players in our markets, whether retailer or vertical manufacturer. We expect this position to pay off for our investors. We believe we will produce good returns in the second half of 2005 and full year 2006.

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

Thank you Clarence. Good morning everyone. Our second quarter gross profit margins were flat compared to the second quarter last year and up 12 basis points on a sequential basis over the first quarter. The mark-up on running-line merchandise improved slightly and was offset by margins on the clearance activity in the second quarter as we completed the sale of inventory in our five closed Florida warehouses. Second quarter SG&A expenses increased. It was largely due to higher fixed costs. Demurrage costs for the second quarter were $363,000, which was lower than the 620,000 expense in the first quarter. These costs are incurred when imported containers are not unloaded and returned to the port within the required time-period. We’re working to reduce these charges, but do not expect to eliminate them entirely. Other notable cost increases that have not already been mentioned were in group medical benefits, utilities, and also accounting and professional fees.

We gave guidance in our press release for the second half SG&A expenses, which are expected to be flat versus last year if we can achieve sales increase of 7%. This would correspond to an approximately 3.5% second half comparable store sales increase. Extra second half expenses are expected and built into this guidance for the pre-opening costs of the two new markets we’re entering – Indianapolis, Indiana; and Columbus, Ohio. We begin expensing rents for new stores as soon as we take possession and start making improvements. Second half pre-opening rent expense for these two stores and others opening in the near future will be approximately $850,000. This will be split evenly between the third and fourth quarters.

We’re expecting to have gains on sales of properties of about $3 million in the second half of 2005. It’ll be split approximately $2 million in the third quarter and $1 million in the fourth quarter. These are pre-tax figures and they are recorded in the other income – in that line item. The effective income tax rate was lower for the first half of 2005. We are calculating the entire year to be 36.4% effective tax rate. We have adjusted the first half tax rate and tax expense to that level in the second quarter.

Turning to the balance sheet, we were pleased that our inventories were flat with yearend and approximately $5.5 million below the first quarter levels as we have reduced inventory and reduced warehouse space.

On the receivable portfolio, our customers are continuing a trend to using less credit promotions than they have in the past and more usage of national charge cards. Amounts financed by customers were approximately 39% of total sales for 2005 so far, which is down from 42% last year and 46% for the three years before that. In-house credit promotions were used a little bit more than outsourced credit promotions during the first half. Our debt has been decreased to 62.2 million and our leverage has been reduced to 18.4% debt as a percent of total cap. Capital expenditures this year will run a little below plan. We had predicted 46 million previously. Based on the timing of the new-store openings, that figure appears to be about 40 million now for the total of 2005.

We have purchased some stock on the open market in the last month and will announce and update this every quarter. We’ve only bought about 50,000 shares thus far at approximately $13.20 average.

I want to give everybody a reminder of forward-looking statements that are made as part of this call. Please refer to the disclosures about such statements that we have in our press release and in all of our SEC filings.

Operator, that is the end of our prepared comments. If you would open it up for questions please.

Thank you, sir. (OPERATOR INSTRUCTIONS). The first question comes from Laura Champine.

Good morning. Clarence, when you mentioned that margins were up 50 basis points in July and is expected to continue, is that gross margin?

Yes.

Secondly, your statements about SG&A expense in the back half of the year would imply a better comp than you had last year. Your SG&A expense is flat as a percentage of revenue – is flat or slightly below. That is not the kind of leverage that I had expected from full rollout of this new distribution system. Can you give us some more visibility into why that would be. Could you give us a dollar amount for the year-over-year increase in your distribution-related expenses for Q2.

I would say it’s also not we expected. We are doing everything we can to get this better managed. In the last quarter we have reduced our headcount by 10%. That has reflected—hasn’t shown in the expenses in the second quarter. We expect it to show in this quarter. There was a lot of duplication going on. As far as visibility going forward, it is going to be one of those areas that we have to leverage with sales. I think Dennis has put out a number that it looks like we need to have total sales growth of about 7% to leverage it. We feel that’s about right, frankly. It isn’t as good as we thought. We are working on it. I think we can do a better job than we’ve done. But we have this infrastructure in place to support sales growth. If we don’t get it, it’s going to be – it’s impossible to leverage it almost. We have a system that we feel very comfortable with. We are revising it. We are refining it. We are adjusting it as we speak. But it is not reducing our cost. Some of that is due to the fuel and other costs, which – this is more transportation-dependent than warehouse-dependent. That is the way we designed it initially. So doubling the fuel cost does impact us more than we originally planned.

Can you give us more visibility? I heard the list that Dennis ran through of the SG&A cost increases. But this SG&A percentage is higher than I’ve seen it in your history. Could you give us the dollar amounts attributable to those different items – maybe the dollar amounts for sales expense that were higher; the dollar amounts for distribution expense that were higher on a year-over-year basis? That would be real helpful to me.

Okay. It is higher than it’s ever been. There are some changes too, in our system. Our gross margins are higher than they’ve ever been. We do have some expenses that are in due to the fact that we’re doing more direct importing. We’ve got some costs involved in that. We’re going to be getting the higher gross margins to help offset that. I’ll let Dennis get into some of the detail on it.

We decided the best way to give visibility about this is to give a prediction. That is what we – as you know, we have not been giving guidance per se. We’ve looked at our expenses and looked at the run-rates and we’ve come up with a number in total SG&A that we think we can hit with a given sales level. I think that it’s going to – since we haven’t done this in the past, we really are not looking towards giving out line-item by line-item expenses. It is largely in distribution that we’ve had the increases. We think we can reduce these costs going forward. We’re not going to count on big efficiency gains until we see them ourselves. The first quarter we’ll have the opportunity is hopefully August and September. July was not a strong month from a delivery standpoint. We’ll be able to tell exactly what we can do when we’re given the whole structure in place and better volume. I’d prefer to hold off on that and stick by the guidance for the fourth quarter.

One last follow-on and then I’ll drop it. So to get to next quarter’s – to what I’m going for – I’d have to see I think, 200 basis points, at least, decline sequentially in SG&A expense. Would all that decline come from the distribution system or are there other factors in that SG&A line that you expect to decline sequentially as a percentage of sales?

It’s all the fixed costs in there. There is occupancy for the stores is a big part of it. Corporate administrative expenses is a big part of it. The distribution is the single biggest item.

Thank you.

Thank you, ma’am. Rex Henderson.

Good morning. I am going to make one more stab at trying to figure out what the SG&A impact of your warehousing and distribution system was. I backed into it in a couple different ways and came to the conclusion that it looks like about $6 million to $6.5 million of incremental fixed costs are in there. Am I crazy?

You’re certainly not crazy, Rex.

Is my guess right?

You are talking about just for the quarter?

Yes.

That is quite a bit higher than it is. We’ve seen – we also had the store expenses from 4% more square footage. That was new stores that are weighing in here.

Right.

We’ve had several categories of expenses that are up.

Interested in the incremental expense related to importing from Asia. Can you quantify that for us in any way.

No. You know there is a substantial increase. It’s the larger order quantities. Demurrage is one of the most visible issues.

Which Dennis mentioned. I think we’re getting a much better handle on that. Hopefully we won’t be talking about that too much going forward. It’s a fact of life in our business. Almost everything we – all wood furniture is coming from Asia. It’s a fact of life. How do we say what it would be if we were doing it domestically? We had a different system to handle that. I don’t know how we’d quantify that.

It also looks like your provision for doubtful accounts – it’s not a big number. But it has edged up slightly. As you get more internal financing, can I expect that to continue to be a little higher than it was last year in third and fourth quarters?

If it is, it won’t be much. I think the run-rate of the second quarter is probably a good figure for the rest of the year.

Alright. Those are my questions for right now. Thank you.

Brian Nelson (ph).

Good morning. I’m sitting in for John Baugh today. I have a couple questions on your new stores. Number one, how many new stores have you opened in the last twelve months?

We are getting a read on that.

In general, how has the performance of these stores tracked versus your expectations in new-store openings prior to that?

We don’t put out comps on new stores related to the others. We’re very pleased with our stores. We have had very few that have disappointed. I think the comps have been good. We don’t give details on that. Our new stores are good for us. We’re in good markets where we’ve been opening. That is our focus. We want to be in the right markets with new stores. They have been working for us.

The store openings – we had two new stores in the fourth quarter last year. We had one in the first quarter this year. We also had one in the third quarter last year – San Antonio. There have been four stores in the last twelve months.

The spread between new stores and comps has narrowed. I believe back in the March-to-May timeframe the spread was running up in the 5%-to-6% range. We’ve seen more recently in the 3%-to-4% range. It looks like, if you are indicating that that 7% sales assumption assumes a 3.5% comp – it looks like you’re assuming that the spread is going to stay more in that 3%-to-4% range. Is that something that we can look at going forward? Do you think there is a chance that spread might get back up into that 5%-to-6% range? Or was that an anomaly for those few months?

I think it was somewhat of an anomaly in that you’ll see the gains more in line with the footage going forward.

Can you provide the square footage growth outlook for the third and fourth quarters?

Yes. The third quarter – we actually have no store activity in the third quarter. In the fourth quarter we’ve got three stores opening, one being expanded. And we have a closure that we announced in the press release – the Austin Airport Boulevard store. One of the new stores, that in Shreveport Louisiana, replaces two smaller, older stores. So we’ve got three closures – three openings, three closures expected in the fourth quarter. The net square footage increase in the last half of the year is just going to be 17,000 square feet. We ended the second quarter at 4,122,000 retail square feet.

One more time for the total square footage?

Total square footage at the end of the second quarter was 4,122,000 – 4-1-2-2. We’re expecting to add only 17,000 square feet in the third and fourth quarters.

When you talk about that 7% sales growth assumption, can you give us an indication about your feeling? Is that a conservative assumption for the second half of the year in light of the hurricanes in the prior year and what you just reported?

I don’t know if I’d use the word conservative. It was more developed based on the SG&A cost estimates. We’re not trying to give a guidance of 7%, 3.5% for the second half of the year. We did have, obviously, a tough July from a delivery standpoint. That would evolve, I think, pretty good numbers for August and September. I guess you could call it reasonably good performance in the fourth quarter as well.

Last question. You mentioned that you are developing a slightly more promotional strategy for the second half of the year. Should we take that to mean that there will be slightly higher SG&A costs as a result of this? That you are not going to be promoting on price point, but it is going to be more extended terms?

No. We are not going to change our credit promotions. I think it is more a merchandising and advertising focus on pushing our best-sellers, on making sure we have those in stock and can deliver them as opposed to trying to make statements about quality or something like that. We’re continuing to build our brand. I think we want to make sure that the customers recognize what kind of values we have out there, what our best-sellers are, and that we’re pushing those. It’s a slant as opposed to additional credit promotions or lower margins. We think that we’ll increase margins on that.

Okay, great. That is all my questions for now.

Charles Grom.

This is Paul Trussle (ph) filling in for Charles. Just another question on the SG&A. I want to know what the sensitivity is. For example, if sales – or comps were flat as opposed to up 3.5%, what then would be your expectation for SG&A as a percent of sales?

I’ll tell you that we are looking at three components. There are fixed in there; there are discretionary costs; and there are variable costs – as we look at. There are other ways to look at it – semi-variable and that sort of thing. If you break it into those three components, the pure variable cost is running around 17% of sales level. The discretionary cost is largely advertising. We set that based on our expected sales or desired sales level and then spend that. If we had a shortfall in sales, that would probably be spent. You can look at a shortfall or an extra sales gain as being a – having a 17% impact on the SG&A line item just from volume. We have to test this presumption out, as I was answering Laura’s question earlier, because it is really involved in the efficiency of our operations. We know we have increased the fixed costs. We haven’t really tested the new structure running hard. This is somewhat of a presumption. We’re sharing it with you because I understand you’re trying to get some sense of what the extra volume or shortfall could mean in the way of the cost changes.

Thank you, that is helpful though. On gross profit, obviously you have a few initiatives going with increased buying power, with increased imports. With the private label already more than 50%, you have that one at your back already. Are we nearing peak levels of gross profit?

We haven’t reached those levels. We are just now beginning our direct import program. We are just now getting that product. It is exclusive. We are getting higher margins on Haverty’s branded product than the brands we used to promote. We’re just starting to see some of those effects. We don’t know what the upside is. We think that there is more ground to gain. We are taking some of the risks in this importing. We expect to get margins to cover that. I don’t know the upside.

Is there a maximum percent of sales that you are comfortable with in terms of the branded product as a percent of sales?

We haven’t set any top-line or top level to that. We haven’t set any cap. Once we have passed 50%, we’re not giving any other information about that. There are certain brands that are important for us. As long as those are important for our customers and us, we will promote them. But our development is building the Haverty’s product line going forward.

Then just a question on demand. Are there any particular areas of weakness geographically?

We haven’t given out that kind of detail. We have mentioned in the past that certainly for the last nine months or so, Florida has been the strongest and it still is. We haven’t given any other detail for regions. I’d say it’s pretty balanced, other than Florida.

Can you speak to what you’ve seen competitively in terms of what kind of promotions your competitors are doing.

Credit is still a big deal in our industry – credit promotions. It’s not as important for our customer. We are competitive, but we don’t play that up. We’re trying to play up the value proposition and the quality of what we sell. I would say that in general in our marketplace there is a whole lot of competition at the entry price point. That perhaps has brought the perception of the value of furniture down in some of our marketplaces because of the heavy low price-point promotions. That is really what I’d say we’re seeing – is very heavy promotion on the lower end, heavy credit promotion. That is across most markets.

Thank you.

Ted Crawford. (ph)

I want to ask about the – on the demand side. It seems like the external factors affecting your consumer haven’t meaningfully changed from four or five months ago. Could you offer your thoughts on the recent weakness in sales?

I don’t have a good answer, to be honest. I don’t know why. I will say that the delivered part of what we just put out for July – we had some problems having the right merchandise in stock at the right time. That is why our backlog has built up and why we believe that August is going to be good. We had some execution issues. I did mention that the fourth of July weekend was weak. Last year in comparison, it was a prefect calendar. This year it wasn’t. I don’t like to blame the calendar. We started the month off weak compared to the previous year. It gained momentum as the month went on. We finished pretty strong. We couldn’t get our deliveries out in time to finish the month the way we like to do that. There are some execution issues. I also think there is some cloud over the customer a little bit. Some of that is related to everything else you see in the marketplace –fuel cost, all the other issues. I do believe, and we mentioned it, automobile promotion does cut into the discretionary that we usually have part of. That probably impacted us a little bit over the past six weeks or so. Some of it – this is speculation. I don’t have a good answer to that other than what we read in the press.

In the first quarter it seemed like you were outperforming the competition, at least on a comp sales level.

Yes.

The industry certainly has gotten weaker. Do you still feel like you are outperforming or more in line?

I would have to say in July we did not outperform. I would say that that was a poor month. We expect to recover from it.

On the buyback, I missed what you said about that. I don’t recall you buying back shares in the recent past.

It’s been awhile since we have.

What is your authorization? What are your plans?

We’re authorized to buy up to two million shares. That is an authorization that was increased, I think it was about four or five years ago. We haven’t been active. We had a very small block that we bought about a year and a half ago. It’s a potential opportunity for us. If those conditions are such we will be an opportunistic buyer. We also have plans to expand so we want to be careful with our capital.

(OPERATOR INSTRUCTIONS). Susan Maklari (ph).

Good morning. You had talked about streamlining the distribution system that you’ve put in place. I know when Laura asked about this, you said there were a lot of duplications that were in there. Can you give us some specifics or some examples of areas that you can cut or changes you can make?

You mean from this point on?

Yes.

Because of the impact of fuel and what it costs us to get to certain outlying markets, we are looking at particularly in some markets where we already have a distribution possibility – for instance, an attached warehouse that is outlying – we are looking at the possibility of having local-market cross-stops in some of those areas where right now we’re serving them long distance with DeManibles (ph). In some cases, that could save us significantly on the fuel and distribution costs back and forth. There are a few that stand out. This is a top priority for us right now. We’ll be adjusting it to fit that. I would say that is probably the key area as far as just pure operationally that we would be changing. The other is just being more efficient in our people and how we’re handling the merchandise. These facilities are running – most of them are running 24 hours a day in three shifts. It’s very dependent on getting the kind of growth we expect to get or had hoped to get to leverage it. We are adjusting the ways I’ve just mentioned and others, which make sense.

In the SG&A assumptions for the second half of the year, have you forecasted any kind of impact from this at all?

I would say no, we have not.

So if anything, it could be a potential benefit if the volumes come and stay (multiple speakers).

We sure expect it, if we are doing things right, to do that. We have been pretty conservative in this estimate that was given out.

Okay. Thank you.

Michael Cox.

Good morning. Thanks for taking my question. Could you provide a little additional color surrounding the promotional activity or any advertising changes you might make in the back half of the year to drive home that value proposition that you talked about and combat some of the competition at the lower price points.

It’s primarily major market focused where we do more newspaper advertising. It’s highlighting the key price points that are important to us and we think are important to our customers. We also are doing a little more promotion of clearance-type items, which we have not done very much of. It’s going to be in our major markets, the Dallas, Atlanta, Tampa, Nashville kind of markets where we can get quicker impact and drive home that message. It’s a slant. It’s not a major move. We think that we probably have not gotten credit for some of the value that we present to the customer. We want to make sure that we do. We also will be doing a little more direct mail to our best customers. I think we expect that to pay off too.

One other question on the capital expenditure side. You gave a bit of guidance for ’05. I assume you haven’t made any plans for ’06 yet. As we look at a steady run-rate for CapEx going forward, I am trying to get a sense for the free cash flow for the business. How much of this 40 million is tied to some of the changes you are making on the distribution-center side. Or said differently, what would be the CapEx for a new store and for maintenance of your existing store base?

The figures depend on how many stores are leased versus purchased or built from scratch. The numbers can range – we typically wouldn’t open a store without at least $1 million of improvements. The most expensive stores with land in a choice location could be a little over $6 million. There is a wide range. The mix between leasing and owning determines a lot of the volume number.

In distribution we have had this year a significant amount – I think it was about $14 million of our expenditures were distribution-related. That is much larger than normal. That was one facility in Florida as well as trucking equipment.

Was there a third part of your question? I’m sorry.

No. That covered it. I appreciate it. Thanks.

Thank you, sir. Gentlemen, at this time there are no more questions. Please go ahead.

Thank you very much for being on our call. We appreciate your support.

Thank you very much ladies and gentlemen. This concludes the Haverty Furniture second quarter 2005 earnings release conference call. If you would like to listen to a replay of today’s conference, please dial 1-800/405-2236 with a reservation number of 11036048. Once again, if you would like to listen to a replay of today’s conference, please dial 1-800/405-2236 with a reservation number of 11036048 followed by the pound sign. You may now disconnect. Thank you for using ACT Teleconferencing.