Haverty Furniture Companies Inc (HVT.A) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty Furniture Company's Inc. first-quarter 2006 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 today Tuesday, May 2, 2006. I would now like to turn the conference over to Clarence Smith, President and Chief Executive Officer. Please go ahead.

Thank you. Good morning. As we previously reported, the first-quarter sales performance was soft with comparable store sales slightly down and total sales slightly positive. Even though we did have some tough sales challenges in a few states, we believe that our multi region position with stores in many of the strongest markets in the country allows us to have a good balance performance through a variety of different economic conditions. April's delivered sales results were consistent with the last several months but with stronger written orders later in the month. We had an increase in comparable written orders in the combined March/April period of approximately 6%.

We currently have a strong backorder of sales which should provide us a good improvement in May's delivered business compared to a weak 2005 May. The gross margins have shown significant improvement, up 258 basis points for the quarter. While we expect to see continued improvement in gross margins over last year, we don't believe that we will see the increases to be as large as the first quarter results. Some of the gross margin improvements are related to the elimination of part of the middleman costs and the development of our own proprietary Haverty's Collections, which has been well received by our customers by allowing us to gain back some margin. We also have a comparison against several significant warehouse closings last year with related merchandise inventory closeouts which occurred mostly in the first and second quarters of 2005.

The gross margin improvements helped offset the SG&A increases. These were primarily in advertising, outsourced credit costs and local deliveries. In distribution we expect to have better cost comparatives for the remainder of the year due to higher -- excuse me -- tighter expense controls and a significant reduction in our demurrage charges from last year. We have improved or out of stock position and are pleased with our supply chain team and the improved processes in flowing goods both domestically and from Asia. Other income was primarily related to the sale of our Nashville warehouse which produced other income of over $1 million in the first quarter. We do not expect to have further significant sales of properties this year which would produce positive other income. Most of the owned warehouses related to the conversion of our new distribution center over the past three years have been sold.

Our continued focus is to drive positive same-store sales increases to reduce our SG&A expenses and to build the Haverty's brand. We are evaluating all aspects of our merchandising, marketing and the presentation of our brand. Our goal is to strengthen our connection to our customer through stylish product, better quality, strong value, exciting displays and a finely tuned marketing message. We are pleased to begin to show profit improvement which we feel supports our significant investments and our state-of-the-art distribution systems, store presentation and the development of our proprietary Haverty's Collections.

We are excited about our newest store in the Stonecrest Mall area east of Atlanta and expect it to be a good contributor to our home market. We presently expect to open five new stores totaling 153,000 square feet of selling space in 2006. One of these is a replacement store, and we will also close two older underperforming stores. The total growth in retail square footage for 2006 is now planned to be a net of approximately 63,000 feet or 1.5%. We are evaluating a number of opportunities within our regions and believe there will be real estate values available in key several markets within our existing footprint.

We still have many improvements to make but I am particularly pleased with the outstanding work and the dedication of our associates in strengthening our service to our customer and in obtaining this improved profit performance. We have an excellent team and a stronger presence in most all of our markets which we believe positions us for positive performance gains in the months ahead.

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

Good morning everybody. First I need to read this statement. This conference will include forward-looking statements which are a subject to risks and uncertainties. Factors that might cause actual results to differ materially from future results expressed or implied by such forward-looking statements include, but are not limited to the 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 SEC filings.

I would first like to talk about SG&A expenses for the first quarter. They were up in total versus last year by $4.6 million, which is 4.9%. As you know, sales were up only 7/10 of a percent. The components of the increase first of all was advertising expense was up about $1.2 million over last year as we became more promotional starting midway through the quarter in response to slower sales. The outsourced credit expenses were up $1.4 million versus last year, and that is for discounts on the sales that were financed by third-party credit programs. Occupancy expenses were up half $1 million in the first quarter versus last year. Warehouse expenses that are classified in SG&A were down by $900,000. Delivery expenses were up by $1 million, and we had fuel and utilities increases across the board in all of these categories, none greater than in the delivery expense area.

And overall our sales were not as strong as expected, as we've said, so our staffing levels were geared a little higher than were necessary again particularly in the delivery area. The other category in SG&A is our general expense category, and it was up $1.4 million. Two new stores in new cities were the biggest factor in that increase. There are two items that are charged out differently than this year. The first is the credit programs themselves. When we run these programs in-house we have a discount on accounts receivable that is charged to gross profit for any free interest promotions that are longer than 12 months. And this year we chose to outsource those programs as I mentioned and additional cost was $1.4 million in SG&A. We did have a positive impact on gross profit of $450,000 because we had less of these credit promotions that were run in-house. So that $450,000 was 22 basis points of the increase that Clarence mentioned earlier.

The other positive to gross profit that was caused by an item that previously had been reported in SG&A was the portion of warehouse expenses that have to do with handling the goods that are on the way to the customer and the stores. This handling expense included in cost of sales was $800,000 less than a year ago, and that also helped gross profit by 38 basis points this year. So there were two other items -- those two items explain some of the increase in SG&A as compared to a year ago.

The interest expense net of interest income for the first quarter was a credit of $34,000. This occurs because we have amortization of upfront discounts on the sales financed in-house, and the no interest programs or the amortization on these programs was more than the interest expense on our debt, so we had a small credit. The tax rate effective for the first quarter is a little higher this year at 37.8%, and that is due to state income taxes.

Moving to the balance sheet, the inventory increased $4.4 million versus the first quarter last year, and it was up $12.8 million since year end. The warehouse inventory at year end had been less than needed for acceptable in stock position given the transition to more imported merchandise with the longer lead-times. But during the first quarter we expanded our main distribution center in North Georgia by a much-needed 300,000 square feet so most of the increase in inventory was according to plan that was filling up a portion of that warehouse, the additional warehouse space.

In the accounts receivable and credit promotion area our customers responded to the more aggressive credit promos we ran during the first quarter, and the total amounts financed by customers were up to 40.6% of total sales, which was up about 8/10 of a percent from the same period last year. However, the outsourced credit promotions that I mentioned were used for a much larger portion of the total. It was about 64% of the total of sales under credit promotions, and last year the outsourced portion had only been 43%. This contributed to a reduction of total accounts receivable by $11.6 million during the first quarter and $13.8 million compared to a year ago balance.

The collection experience and delinquency trends continue to be favorable as evidenced by the low provision for doubtful accounts this year. The balance sheet leverage current debt is currently $52.7 million. That is up $4 million since year end but its $5 million below the total debt we had a year ago. Total debt at the end of March is 15.6% of total cap, capitalization. Just a reminder our policy is to not give earnings guidances so we aren't able to answer some of your specific questions on these calls about future sales, gross margins and expenses.

And operator, at this time we would like to open it up for questions.

(OPERATOR INSTRUCTIONS) Susan Maklari, UBS.

Good morning. Can you talk a little bit about has there been any change in the incremental margin that you get on your private-label product versus branded product?

Yes, it was little better in the first quarter, Susan.

Okay, can you quantify that for us at all?

In the first quarter it was in the 4 to 500 basis point differential.

Okay, and what percentage was your Haverty's private-label on the percentage of sales, do you know that?

Yes, it is running between 60% and 65% now.

So as you approach your targeted level for the end of the year should we expect to see some incremental improvement in your gross margin flowing through from that?

Susan, as I mentioned in the comments, we have a significant increase this quarter and we really don't expect to see that kind of increase going forward. There were a number of issues that Dennis pointed out that made up that. We do expect to see improvement. I don't know if we can get a lot higher. We're not sure about. We've got a lot of things that are going on. We want to make sure that we're driving our comp store sales. So we may have to get a promotion with different times. But we recognize that we have to maintain a higher margins and get credit for what we are doing and the sourcing. So I would say that as we get more towards the goal of 80% Haverty's branded bids, we have the potential to get higher margins, yes.

So we could see some expansion flowing through there?

It's what we would like to see, but we are not giving estimates on that.

Okay. Thank you.

Budd Bugatch, Raymond James and Associates.

Good morning Clarence. Good morning Dennis, good morning Clarence if you're there as well. A couple of questions. Just make sure I understand the gross margin, the 258 basis points, about 84 basis points out that were called out to 24 basis points from the half-million inventory plus 60 basis points of other -- is that right, Dennis, that you gave us this morning? Did I get that right? So 174 basis points from essentially margin improvement of the goods that were sold?

Yes, you got it exactly right.

Okay, and the sustainability of that with the additional, do you want to make any comments on that?

We think there are a lot of moving parts, and I don't know if that is sustainable. I really don't believe that we can continue to see the increase as we would love to see that close to 50% margin, but there are too many unknowns out there to know if that is really sustainable.

Okay, and then on the SG&A I think Dennis very well quantified it, thank you very much for that 4.6 million year-over-year delta of about -- my guess about six or seven different items including the G&A. Some of those have got to be persistent as well. And it looks to me like almost all of them are persistent except maybe with the outsourced credit, because that is a choice you made, I guess quarter by quarter, is that right? And that has an offset to -- another part of the geography of the income statement?

Yes, the other choice of course is advertising, discretionary.

Yes, but you're trying to drive sales and it looks like the sales environment is still a little challenging I guess to say the least. I would expect you'd want to continue to drive sales. You wouldn't take your foot off the accelerator when business is tough, and it is tough right now it looks like. Is that fair?

Fair enough, yes, but it is still a choice that you make each month for each quarter.

That's right. You have discretion over the number.

Yes. Correct.

Understood. And the last question, the tax, the 37.8 that is a sustainable tax rate that we ought to use if we are modeling the company going forward?

Yes, I think that that is a good rate for now.

I appreciate it. Thank you very much.

Douglas Pratt, Mesa Capital Management.

Thanks very much. Two questions. One, could you walk me through it; are there three items that hit gross margin this quarter? You referred to a half-million dollar favorable inventory adjustment, so there would be that. The 400 some thousand -- $450,000 adjustment and then one for $800,000?

Yes, those last two are correct on the first one -- the last two are really not adjustments. They are just these items are coming in a different -- are showing up in a different place than they would have historically. And in the case of the credit promo, it is actually unfortunate, but when we run the promotions in house, the cost goes against gross profit. And we outsource it goes against SG&A, so it was merely to point out that the increase in SG&A and the increase in gross margin were both impacted by the classification differential. So not to say they were onetime, it is just as you look at trends or year-to-year; and we choose whether to run the promotions inside or outside. But typically the more aggressive the promotion the more likely it is we will put that program to the third party.

So those are the items to get you to the 84 basis point boost in gross margin?

That's correct. That does explain that much of it. That's correct.

The second question, what was the provision for doubtful accounts during the quarter and what was your reserve at quarter end?

The reserve -- excuse me one second here -- the reserve was $2 million at the end of the quarter, and the provision was actually only 30 some thousand dollars. It is a reflection of the low delinquency levels, improving collection trends. So we did not make a very big provision for doubtful accounts in the quarter.

And that compares to about $200,000 I believe than last year?

Exactly.

I will get back in queue. Thank you.

Laura Champine, Morgan Keegan.

Good morning. We originally were looking for 6% square footage growth this year, and that went down to 3 and then 2.3 and now 1.5% net square footage growth. Is that a purposeful ramp down in square footage or what is driving that?

Its been a long time since we said 6, Laura, but a couple of these projects look like they're going to fall into next year. We have a couple of stores that we thought would make it this year that look like probably will move into next year. And we have a couple closings that previously we had not planned. And those I just announced. So no, that is not, we don't want to keep sliding on that. Our goal is to get up to the 4%, or so. We just want to make sure these are the right stores in the right markets, and we have gone on a program of closing our weaker stores to be more productive. And I think that its the right move. We're looking at a lot of different opportunities. It just looks like some of them are falling into next year when we thought they would be making it this year.

So the --.

This is consistent with what we put in the K at the end of the year.

Okay I thought that said 2.3% square footage growth and this is --

That is correct; it said 2.3, we are at 1.56. It may get up to 2, but it is going to be in that range. The numbers are the same. The stores -- one of the stores swapped out which is a smaller store. So the numbers are the same. It is just one of the stores came in smaller and the larger store fell into next year.

Also from the K it mentioned 5 new stores for -- I'm sorry 6 new stores I think for 2007. Is that a net new store number for 2007? And would that -- I'm getting to about 7% square footage growth for next year for 2007. Is that accurate?

I would not expect that to be next year, no. We will have some closings next year; several of the new stores will be relocations as they are this year. So it will probably be a net of close to 4. We haven't put out the official on 2007. It is a moving target.

But you're thinking more of 4% growth than 7% growth?

I would, yes. 7% is -- I mean we may hit that in a year, but that would be with an unusual acquisition or set of stores that come online.

Thank you.

Joel Havard, BB&T Capital Markets.

Congratulations, everybody. Dennis, more for you, what do you see the working capital commitment looking like kind of into Q2, Q3? And is there any -- I was looking through my footnotes here trying to find any change really in the cost of interest. Could you elaborate on those points?

We pay interest on a floating-rate driven by LIBOR, so.

This is all off that $80 million revolver, right?

That's correct, and we are paying down some fixed debt that is about 7.5%. And just as scheduled, which I think there is $13 million scheduled for this year. And then if we incur additional debt on the revolver, it is at LIBOR plus the margin. So right now that is a positive to pay off long-term debt and incur short-term debt. In terms of the level, the two items that influence that the most are really accounts receivable and inventory. And receivables have been trending down. The likelihood is we will move a little back more to in-house financing at some point during the year. So I would not expect receivables to continue to decline. They may level off.

And then in the case of inventory, the quantity on hand is not likely to change, but we are buying more direct and some of that is funded early. So we could own some more inventory in transit. And that would be the single biggest thing is inventory in transit from Asia that would increase our working capital. I don't think its going to be substantial this year, but over time it might be.

All right. If I can get away with calling that my primary in my follow-up, Clarence, being geared more toward you assuming that inventories are kind of where you want them, has there been a noticeable change in the composition? One of the big conversations at High Point last week had to do with the risks and difficulties versus the cost advantages of the upholstery side of imports. Could you give your thoughts there, please?

We're working with some of our suppliers to move back as much as possible some of the values domestically. And one particularly we're working back with Lane who has always been a major supplier for us to provide more Haverty's branded goods, which they are working -- cut and sew and providing us out of Tupelo, which is a lot easier to flow than it is either from Mexico or from China. So there are advantages to dealing with domestic suppliers, and we would like to do that if the values are there. And I think several are coming to the party, and we want to certainly encourage that.

However, we are seeing and we did see at this market some extremely good values from China with a lot of more ornate combinations and premium construction which is going to be difficult to duplicate here. So we are working on more special order programs here, and those are supplied domestically, and we expect that to be a growth area for us in upholstery. But we are importing upholstery and will do so. It is probably going to be in the better goods. And we will just have a mix. And we're able to handle a mix. So I like our program.

All right, good, thanks for the insight. Good luck.

John Baugh, Stifel Nicolaus.

This is Brian Nelson sitting in for John. Just a few quick questions. On the provision for doubtful accounts do you expect that number to be around this level going forward, or do you think we will probably revert back to what we've seen historically?

Its such a small number its kind of hard for me to call. I don't expect it being dumping significantly from here, but if it doubles it would be $60,000.

I understand. And looking at the 8% increase in April and March, do you have any additional detail there in April versus March? Do you think there was any impact from where Easter fell last year versus this year?

That is really the reason we chose to talk about the two months together, and we had -- it really helps us to have a later Easter, I think in general. Because it is kind of the signal its a spring season and people are more thinking about outdoors than furnishing the indoors. But if you try to adjust for the Easter, April was a little stronger increase than March.

Okay. And last thing you mentioned some weakness in a few states. Can you give any additional detail on that where you are seeing weakness?

I think in the last conference call I mentioned that we have a real challenge with our comp sales in Florida, and that is primarily because it was so strong and hot last year as a comeback to the hurricanes in 2004. So there is some comeback that is making it difficult for comps in several coastal markets in Florida. And Florida as I mentioned also is almost 25% of our business. So that is one area that certainly has been, it will be a difficult challenge to get positive comps out of for the rest of this year.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Douglas Pratt.

Thank you. Could you walk me through also the -- I didn't really follow the interest item. There was some sort of a credit that offset interest expense and what was interest expense in the quarter? Thank you.

The interest expense, the net was $34,000, and --

That was a credit?

Yes, that is the net credit. We have interest expense on the debt, and then it is offset by a credit that again on this in-house accounts receivable, on the front end of the credit promotions that are no interest for longer than 12 months we set up a discount that we charge to gross profit, and then that is amortized as a credit into interest expense over the collection period of that receivable. So in effect, what this the accounting of this does it just catches the cost of running these promotions on the front end, and then as it turns around you already expensed something that offsets the interest cost you're going to incur carrying the receivable. So the two of those net together, and we have a small credit.

And what was the cash interest expense or I should say the GAAP interest expense for the quarter?

Actually I am going to need to come back to you with that net number; I don't have that in front of me I'm sorry. I can provide that, I believe we will have that in the 10-Q as well if I don't get back to you.

Okay, how about the amount of the credit then? I can always back into it.

If I had either one of those I would be happy to give that to you but I just don't have that handy right now. We provided that in the annual, and as I said, we will have that in the Q or we will get back to you with those numbers.

Okay but maybe I should just look in terms of interest expense being whatever the reduction in outstanding was that interest rate hasn't changed?

That's correct.

So, was it 900,000 last year so it is something just a little bit below that, okay, thank you.

Yes, I will just quote the number out of the 10-K or the annual report for 2005 for the full year, the interest expense on debt was $4.1 million. The amortization of the discount was $2.3 million, and then we had some other interest income of $370,000. The net was $1.4 million, in the case of 2005 for the full year, that was an expense of $1.4 million.

Okay. Thank you.

Budd Bugatch.

Hi, Dennis. Could you give me the nature of the half-million dollar inventory credit, what caused that? Was it a reserve that had been over reserved over a period of time and you just looked at it more carefully?

Well, it was brought about by a change in the estimate of realization from inventory, which is subject to markdowns. So we did a pretty thorough analysis of it and found that adjustment on that was necessary.

Do you do that periodically and this was one of those or how does it -- do we think about it as an operating number or a non operating number?

I would not quarrel with calling it non-operating. It is not going to recur, and the idea would be that this relates -- this adjustment relates to a longer period of time. So I think if you chose -- whichever way you chose I think there is an argument for either side of that.

I've done that with myself this morning as I was looking at the (multiple speakers) .

Again I would not quarrel with taking it out. It is certainly not something we would expect to recur. It would be more gradual.

And the real estate gain as well, do we take both of those items and should be back out both of those items or just leave both of them in and go from there? That's kind of what I'm arguing with myself on both of those items.

Clarence is rooting to keep them both in.

That's fine. (inaudible) You have to compare against that next year so you might want to think about that again.

We had to compare against all the sales of warehouses from last year this year.

I understand. That's right, so you set yourself up for next year's comparison. All right, I mean that is kind of. It is a diminimus point but I am just trying to make sure I understand how the best way to do it from your view.

We have had those stains on warehouse sales over the last three or four years and like Clarence said also the expenses, so we've tended to view those as kind of normal operating.

That was my druthers. That is what did first (inaudible) so I think we will probably just keep them in.

Okay. Very good.

Management I am showing there are no further questions. I will turn the conference back to you for any closing comments you may have.

No closing comments. Thank you very much for joining us on the call.

Thank you. Ladies and gentlemen this concludes today's conference call. Once again thank you for your participation, and at this time you may disconnect.