Haverty Furniture Companies Inc (HVT.A) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Havertys Furniture Company's, Inc. third-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, Friday, the 3rd of November, 2006.

I would now like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer for Haverty Furniture. Please go ahead.

Good morning, everyone, and welcome to our third-quarter earnings conference call. This call will include forward-looking statements which are 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 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 our SEC filings.

I would like to introduce Clarence Smith, our CEO and President, and turn the call over to him at this time.

Thanks, Dennis. Good morning. Thank you for joining our third-quarter conference call. The third-quarter results showed good sales and increased gross margins by higher costs involved in generating and serving those sales. We had significantly higher promotional credit costs and higher delivery costs due to fuel prices and other delivery expenses. Last year's third quarter had other income of over $2.6 million, primarily related to selling two stores and a regional warehouse.

As we reported with the September sales release, we saw sales weaken after Labor Day, and they have continued to be at that relative level through October. We believe that this is consistent with what we have seen throughout the industry and reported by others at the October furniture market. After five good months of sales, it seems that we're not immune to that same flu bug.

We continue to have challenges getting same-store sales increases in several of the markets which had strong sales growth in the last two years related to homeowners recovering from hurricanes. These would include many of our Florida markets, which reacted to the multiple storms of 2004 and 2005 and a number of the mid South markets which had strong sales rebuilding, relocating and replacing damaged furnishings after Hurricane Katrina.

This October we did have two fewer delivery days compared to last year, but clearly our business is down from the last several months' performance. Our average sale and our average price per SKU are up. We did write fewer tickets and believe that our overall traffic was down modestly.

As we just reported, we feel that the best indicator of our business is total written orders, which were down about 6% in October versus last year after adjusting for calendar differences. However, we're encouraged about positive comments from consumers about our newest catalog, television spots and newspaper inserts. Scheduled deliveries this week are higher than this time last year, so we have a positive start to the important delivery month of November.

Our aggressive efforts over the past year to bring in timely shipments of product from Asia and our domestic upholstery suppliers has helped us more quickly respond to our customers and reduce our backlog of undelivered orders. We can now react within days to complete orders, where this time last year we had significant problems due to distribution center capacity issues and supply chain problems, both internally and with some of our suppliers. We believe our improvements in supply chain team and systems will give us real advantages over our competition both short-term and long-term.

We're strongly committed to building our own Havertys collections with exclusive designs and better quality. Our new collections are hitting our showroom floors now for our key selling season, and they have been very well-received by our sales associates and our customers. We believe that we have strengthened our product quality, selection and store presentation, further building our Havertys brand in all of our markets.

Our store growth plans for next year to open five stores -- Huntsville, Alabama; a second store in Austin, Texas; and three additional stores. This would be a square footage increase of approximately 4%. Our planned capital expenditures for 2007 are projected to be approximately $28 million, slightly up from 2006's expected figure of $26 million.

Throughout this year and 2007, we are investing a larger portion of our CapEx in systems improvements for supply chain, centralized customer service, upgraded merchandise management systems as well as the hardware and communication network to support our store and service personnel. Additionally, we have just begun a broad project to re-create Havertys.com, providing us multichannel retailing capability. We are in the design stage of this project now, but we expect to roll out functionality in stages over the next year or more. Our customers will be better able to research information about our products on the Web, plan rooms, adjust delivery status and buy online. We're committed to having an e-commerce presence that is fully integrated with our stores and operating systems and one that will give our customers flexibility in buying on the Web or in our stores.

Because we run all of our own stores, controlling the point of sales process all the way through fulfillment with our centralized distribution channels, and have a unified marketing program, we believe a strong Internet presence will be a real competitive advantage over the franchise furniture players. We know that e-commerce and direct marketing are an important part of strengthening our relationship with our customers and further building our Havertys brand.

Our balance sheet is very strong and we are well positioned to capitalize on our financial strength in the regions we serve.

We realize that overall business conditions are more difficult than the middle part of the year, when we experienced strong same-store sales, yet we're optimistic that we're well positioned to gain share due to our excellent product values, better designed merchandise and our dedication to providing the best service to our customers.

There's a theory that although several of our markets have been hit with housing slowdowns and even reduced selling prices, that just means that more people will be hunkering down and plan to make their homes more comfortable and fashionable. We intend to be prepared to serve those customers.

Operator, I would now like to turn the call open to questions.

(OPERATOR INSTRUCTIONS). Todd Schwartzman of Sidoti & Co.

In October you had the disparity in number of delivery days versus last year. Could you maybe walk us through any calendar discrepancies of this or any other kind that we should expect to see in November, December or any time in 2007?

We actually have one less delivery day in both November and December this year. A couple things going on there -- obviously, the calendar we report on, the regular calendar and not a retail calendar. But also we were able to have more throughput in our delivery and distribution system, so we don't feel like we need to have an extra day scheduled. During the busier months, November, December, usually, we deliver typically Tuesday through Saturday. We will add a Monday, sometimes two Mondays. Our plan this year, even before business became a little softer was to make those deliveries without adding an extra day to save money, save over time, et cetera.

So I don't think that the rest of the year, the next two months, will have the calendar issues that we just had in October. Next year there are several months where there's a delivery day difference or a Saturday difference, and I will probably can just get those to you separately.

But we would like to think that in the longer term, obviously those don't make a big difference; it's just when you look at a month at a time, you have to consider that as you are trying to draw a conclusion about the trend. So I hope that answers your question.

You will make that available to us?

Yes; I'll be glad to go over with anybody who wants to which month of the year that is coming up next year. But the next two months have one less delivery day each, but we are not going to point to that as an issue. We think we have plenty of capacity to get the deliveries out in the scheduled dates.

Joel Havard with BB&T.

If we go into the commentary in the release on SG&A, that was the biggest variance in our outlook. The wording confused me a bit. Hopefully, you can elaborate on the labor impact versus the fuel impact. Of course, we're looking at diesel and thinking it's down 20% year over year. What was going on with, I guess, maybe personnel scheduling or hiring or things along that nature? Could you go into that?

First of all, of course, the fuel side of it just subsided in the last few weeks of the quarter, last month of the quarter. But we're looking further into the labor side of it. We have not got the efficiency out of the labor that we were anticipating. Some of the rates that have gone up competitively in some of these bigger markets that we're now in. And I would say that between that and some scheduling issues as to how many days of the week we service some of the smaller markets are probably the two biggest opportunities for us. We're looking at that pretty closely, and we hope to bring that down in the months ahead.

Your drivers are all Company employees, though; right?

All of the drivers that go to the home are. Our over-the-road we contract.

Oh, and it's all contract?

All our over-the-road driving is contract. All of our drivers that -- all of the people who deliver to the homes are our own employees.

To clarify that, when we drive our merchandise from a distribution center to a local delivery center or drops zone is what Clarence was saying; that was what we call over the road.

Those rates -- you're just kind of -- is that kind of a monthly reset? Are those contracts short-term or kind of daily (multiple speakers) --?

We have a contract with Ryder that we adjust and we review and revise the number of trucks going. We have worked on that significantly recently. This did hit us pretty quick. There's no doubt, we were geared up to provide pretty good service for the fourth quarter and still are situated to do that, but we're adjusting where it helps us the most. As Dennis point out, it's probably in the smaller markets. We want to be geared up to have two good delivery months coming up in November and December.

After having clarified that, then, could you weight this delivery side of things versus the shift in credit? As far as the impact on SG&A?

The shift in credit was much more significant, more than twice as significant.

That gives us a sense of it then. Thank you.

Laura Champine with Morgan Keegan.

With demands seeming to trail off and it seems like an industry problem, not a Havertys problem, can you sort of refresh our memory and talk about what macro drivers are likely driving that and what that can tell us as we look into 2007 about whether or not that should be a better or worse year for this industry?

Wow, that's a good question, and certainly, some of that is going to be a guess. I commented about some of the regional issues we have that are affecting us. I think the housing falloff has definitely affected us, certainly in the high-growth markets where we are.

I think that's probably going to level off in a few months. It may be six months, but I would hope that we will have a come back there; we always have. I think we're well positioned, and I also believe that there will be players who will not be able to survive through this, that we will help pick up share from.

So the macro issue is bigger than anything right now, and I think what we're trying to do is just stay well positioned to gain share and remain profitable.

John Baugh with Stifel Nicolaus.

My question was relating to -- I think you commented your written orders were down 6%, adjusting for the calendar issues. Again, if I heard you right, you said that your deliveries this week are up year over year. So if you have like a sudden surge of written orders the last week, or something -- or try to explain that seeming disconnect.

Well, I think some of that is just scheduling of deliveries. We didn't have one day at the end of last month, so it's carried over into this month. But also we did have some good days; the last several days have been up. So they are not always related the same week, but in one month generally you'll deliver about what you write. That's generally what we have been doing. But we were just glad to see up days, both deliveries and written, this week. We certainly -- we started off in the hole significantly in October, having missed a Saturday -- the Saturday was on the front end; it was the first day of the month. So we missed big deliveries and sales, and we were trying to catch up all month and didn't. So to start off positive is what we want to do.

Were the written orders at the time, the pace year over year, any better, say, in the last half of October versus the first half or pretty uniform?

Well, I mentioned they are pretty flat, really. It's pretty consistent; it got a little better, maybe, at the end. But it always gets a little better, usually, at the end of the month. It was pretty consistent.

I think you had a -- I can't remember if it was '08 or '09 in terms of no interest or some kind of credit promotion. Of course, each month as you tick along, you get the shorter window. Have you changed that promotion? Are you doing anything on your promotional calendar with the environment being as tough as it's been?

We did not change the credit promotion and don't have plans right now to do so this year, and those costs will go down in the fourth quarter versus the third quarter.

We look at it. I don't feel credit is as big a driver as it has been in the past. We have got a very aggressive, strong calendar for November, promotional calendar. We feel good about it. We're doing some slight adjustments as in moving up start dates and stuff of promotions, but we're not doing anything dramatically different and don't see that credit being a bigger issue than it has been.

(OPERATOR INSTRUCTIONS). Rex Henderson is next, with Raymond James & Associates.

I wanted to make sure about the promotional and credit cadence in October versus prior months. Was there any change in the promo offers in October versus the more successful months through the summer?

It was very similar. We had a no down payment feature for part of the month, and we also had that for part of the third quarter. So I would say it was very similar -- the same interest till January 2009, but it's with monthly payments. That's the same thing we ran all third quarter, without change.

The store opening pace -- you gave a little bit of guidance about future store openings for 2007. I just wonder if you could talk about that longer-term, going out beyond this year and next into the future, and tell me about what your thoughts are about the growth rate of the chain, longer term, now?

Well, we have a lot of projects underway, and some will fall over into '08, and some of our CapEx that we're spending is going to '08. We're certainly reviewing all of those programs; we want to make sure we are growing in the better markets, ones that return quicker for us. But I also think there are going to be opportunities for us. This kind of environment generally creates those kind of opportunities. We want to be prepared to take advantage of them when they come, like we were able to do in 2002 with the Homelife stores. So we want to keep our powder dry and not overcommit.

We've got about a 4% plan for next year. I think it's pretty safe to say it's probably going to be about 4% in '08. But we want to be open to opportunities.

There was a time you were talking about trying to achieve a 6% square footage growth rate at kind of a cadence over a long term.

We could probably pull that off this coming year, but we don't think that's appropriate right now.

Over the last couple of years I've had a bit of a theory, personal theory, and wonder if you could comment on this. That is that this growth of furniture sales didn't match the magnitude of the housing boom in 2004-2005, which led me to believe that people were stretching to get into houses and then not furnishing them as they had in the past. I just wondered if you have seen any indications that that is the case and whether it might be a benefit to you going forward.

That's the old pent-up demand theory?

Yes.

I don't think there's much to it. I think that there was a lot of deflation in this industry, and I think that people did take on more debt for their house, and maybe they are going back and re-working on it some now. But as far as a big pent-up demand, I don't think it's there.

David Berman with Berman Capital.

I was just wondering if you could comment on the competitive environment and to what extent, perhaps, the stores like IKEA are hurting you even though they are in a different market; they are still taking part of the pie. And what do you see going on competitively in different markets that you might get a sense of, if anything has changed there or if you think it's just purely the economy.

I think the economy is the big issue. Certainly, we do have competition. The competition on the promotional end is very intense, and you mentioned IKEA and they are in several of our markets including Atlanta and now Dallas and in D.C.

What kind of impact do you find in those markets when they are open?

Well, they take share. It's usually on the lower end. We don't feel like we, head on, compete with them, but they certainly take share out of the market. We're in the same parking lot as they are in D.C. and do well in that store and they have expanded it.

They are a different player than us, and we're trying to separate ourselves from them. We are purposely choosing to be near them in a new store we're working on because of the traffic they generate. I think that we will be complementary to them. So we certainly don't try to avoid them, but we don't try to merchandise towards them, either.

You guys have been around for, what, over 100 years? Given your experience, what do you think -- how long do you think this slowdown may be sustained? What do you think?

Well, as I told Laura earlier, we really don't know. This has come on pretty fast. We do think it's related to the housing slowdown in some of the particularly hot markets we're in, and that will take a little while to settle out. But generally it recovers fairly quickly, so a matter of months. But how many, I can't tell you.

Do you have a sense as to why, with you guys, it came up so quick, so fast in the last month or so, whereas with others like Ethan Allen it started hitting them two or three months ago? There were quite a few others where it started hitting them (indiscernible), a while back.

If you look at the markets we're in, we are in generally faster growth, better markets. We're not nationwide. Sales did soften after Labor Day, and that has been now a good while. So that hasn't really changed. We're in some hotter markets than the entire nation, and so I think probably that's related to it. I think we're doing a better job than some of these players, too. So I can't equate how much that affected, though.

It's interesting because the timing was so different. But good luck, and thank you very much.

[Tom Lightcap] with Value Holdings.

Just checking to see if you are still forecasting $30 million for CapEx this year.

We think that is going to be a little lower, probably in the $26 million range.

Yes; I said that in my comments, about $26 million.

Can you break down how much of that is for IT and how much of that would be for new stores?

I can give you a sense of that. It's probably about $3 million for the IT side. The new stores is about $13 million. We have got renovations and expansions of stores -- it was about $2.5 million we're expecting. We also have what we call -- they are infrastructure, but they are really more repair, updating-related, and that's about a little over $3 million.

Finally, in the distribution area, we have approximately $3 million, $3.2 million -- excuse me, $4 million expected. So that adds up to about your $26 million, I hope, if I quoted it correctly.

Gentlemen, there are no further questions at this time. Please continue with any closing comments.

Thank you very much for joining us on our call. We appreciate your interest in Havertys.