Haverty Furniture Companies Inc (HVT.A) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty Furniture Companies fourth-quarter 2006 earnings release conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, February 21, 2007. I would now like to turn the conference over to Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. This conference 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, other uncertainties detailed from time to time in the Company's reports filed with the SEC. This morning, Clarence Smith will now make his comments. He is our President and CEO. Clarence?

Good morning. Thank you for joining us for our 2006 year-end conference call. Fourth-quarter 2006 profits were down at $0.14 per share versus $0.30 per share last year. We finished the full year 2006 with profits up at $0.70 per share versus 66% (sic -- see press release) for 2005.

Reflecting the difficult housing market, we were disappointed with the 4.2% sales decrease in the fourth quarter, but we were pleased with the improved gross profit margin, which was the highest for any quarter in our history. Our product assortment and our sourcing initiatives are helping us to demonstrate our values and improve our gross margins throughout our line. We are now predominately Havertys branded product with the exception of our bedding program.

We have continued to see overall business conditions soften since September 2006. The toughest challenges are in most of our Florida markets along with the difficult comparisons in the Gulf Coast stores, which were so strong for most of 2006 following Hurricane Katrina.

As we stated in our press release, our February's delivered sales through Monday were down approximately 12% in total, weaker than the low to mid-single digit decreases of the past two months. We expect that the next several months will continue to be difficult.

Even though the general macroeconomic conditions in our regions are challenging, we believe that we can improve our performance relative to overall marketshare. We are gearing the operations end of our business to fit conditions without sacrificing our brand position.

Our new marketing program that we rolled out late last year with the Have It All campaign has been very well-received and we are fully committed to building our brand in all of our markets. However, we are revising and adjusting down some of the advertising spending levels and increasing the promotional aspects of our message.

We are in the final stages of altering and cutting some routes to bring our delivery capacity in line with the current sales pace. Because of our consolidated distribution, we are able to make these adjustments more quickly and we believe that we can dial back up for better business conditions that we expect later in the year. We have already made some cuts to our SG&A costs and Dennis will outline those later, but we are making further reductions to match market conditions.

With the slowdown of business throughout our regions, we have significantly reduced our backlog of undelivered sales and inventories have increased more than we planned. Because of the longer lead-times required for importing from Asia, we were not able to lower the quantity of goods flowing from overseas, particularly in wood case goods.

We have adjusted our incoming order rates to business conditions and we expect that we will bring our inventories to levels that are more balanced by the second quarter of the year. We do not believe that we will have major reductions to our margins to bring inventories in line because we have the most depth in our current bestsellers. We do expect to have margins slightly reduced in the first half due to more promotional activity and the previously planned clearance sales.

For 2006, we have revised our capital expenditures down from $29 million to approximately $16 million primarily by moving some of the stores to full build-to-suit leases. We plan to open five or six stores netting approximately 4% square footage growth. The 2007 new stores averaged 33,000 square feet, slightly smaller than our current average of 35,000.

We will be investing a portion of our CapEx into the further development of havertys.com, which we believe will be an important part of our branding efforts in the future. We expect to have e-commerce capability within the next year. Our integrated distribution network will allow us the ability to operate across channel system capitalizing on the website, catalogs and store visits.

Our industry is in the midst of very difficult times. In many ways, tougher than 2001. The transition to a truly global industry with the bulk of merchandise now coming from Asia and the scramble for retail position by domestic manufacturers has created a glut of capacity both at retail and manufacturing. With the recent housing slowdown throughout the U.S., we know that there will be an acceleration in the fallout of weaker players.

We believe that our strong balance sheet, our strengthening Havertys brand, our focus on understanding and serving our customer and our superior operating and distribution systems, we stand to gain significant marketshare. We are committing to making sure that we position our Company to achieve solid returns in that process. I would now like to turn the call over to Dennis Fink, CFO.

Thank you, Clarence. First, I would like to mention the SG&A expenses for the quarter. In the quarter, we had advertising increasing about $600,000 compared to a year ago or about 6/10 of 1% of sales and this was primarily direct mail increase. We shifted more of our budget towards targeted mail pieces and also catalogs.

Occupancy expense for the fourth quarter compared to a year ago was up about $1 million or 0.8% of sales. We had new locations in -- two in Florida, Sawgrass Mall in Fort Lauderdale and also Port Charlotte, Florida. We had the Stonecrest store in Atlanta and a new store in Florence, Kentucky across the river from Cincinnati. Those four stores plus two others that had opened in very late 2005 contributed to the $1 million increase. Those stores in 2005 were Indianapolis and Columbus, Ohio.

I would point out that our tax provision rate increased in the fourth quarter and what happens is this is a year-to-date rate that we project at the end of each quarter and adjust the change in the rate on the current quarter's provision. So the year-to-date rate of 37.6% was increased to that in the fourth quarter and it had an impact on the provision that you see in the fourth-quarter earnings.

We expect that the 38% number is roughly what the expense provision should be next year for 2007 that is and it is largely influenced by the state tax rates and some of the states have changed their tax laws in regard to [nexis] and the way you compute some of the taxes. So we believe, again, that the 38% is a reasonable expectation going forward as a tax rate.

We are pleased to see that we had reductions in accounts receivable for the year. Our financings in-house were for the quarter about 18.6% sales. The third-party finance company we use financed about 23% of sales. So it is, in total, about 41% of our sales were financed by either ourselves or a third party. That is down from the previous two quarters. The year-to-date rate for 2006 was -- a little over 16% of our total sales were financed in-house and 26% of our sales were financed through a third party. So that is a total of just under 43% of our sales.

The portfolio in-house remains very strong and very clean. In fact, we have had very low bankruptcies during the year. Part of that is the result of the favorable bankruptcy legislation that was passed a year ago and there was a rush for consumers to file right before that became effective in late September of last year. So we had higher levels of bankruptcies last year and those this year have been very modest and we understand we are similar to the experience that most commercial lenders, or should say consumer lender companies.

We are also pleased to say that our aging is in very good shape and our write-offs are also lower this year. So we are very confident that we have a clean portfolio and it is smaller than it was a year ago, as I said.

Otherwise on the balance sheet, we had two leases that are capital leases that were showing up this year as fixed assets on one side and long-term debt on the other. So the payments on long-term debt without incurring any new long-term debt other than for those leases would be explained -- so a little over $5 million in total that we have put on the balance sheet because of the capital leases.

Our deposits are down in the current liability section with the backlog, which is down and that explains also the higher level of short-term debt that we have at year-end than we have had in the prior few years.

Our total debt to total cap ratio is now under 15%. It is around 10% if you take out the cash that is on the balance sheet. So we're not very highly leveraged. We have almost no intangible assets. There is no goodwill on the books, so our $291 million of stockholders' equity is tangible equity and the debt is around $50 million, including those capital leases.

Also, our total assets have been flat for the last several years as sales have gone up, so we have been turning our assets faster. In our book value of our shares is a little under $13, but again it is all tangible net worth.

I would like to point out that we announced in November that we had frozen the benefits under our pension plan and we had enhanced the benefits under our 401(k) plan and whereas that is not expected to save a lot of money immediately, there is much less volatility in the funding required and in the expense that hits the books just based on long-term interest rates and other assumptions, also return on plan assets. So we still have an active pension plan, but it is frozen in terms of benefits accumulating after December 31, 2006.

We are expecting lower capital expenditures for 2007 and 2008 than previously planned, so we believe our cash flow will be in very good shape going forward.

The stores Clarence mentioned we opened and I mentioned in 2006 were a total of 3.8% square footage, four stores, about 149,000 square feet and the total ending square footage was 4.067 million at retail. Clarence mentioned the cuts we are making and we have already started the year 2007 with a budget or plan that advertising expense would be down about $2 million in the first quarter from the first quarter of 2006.

We also had expected that the advertising would be flat for the remaining three quarters of the year. We are on plan for the first quarter and our intention is to take another $3 million out of the budget so that the last three quarters, we would have about a 7% or so decrease in advertising and in the first quarter, that $2 million is about a 13% decrease.

The other expenses that we are looking at to cut -- we'll have to give you an update after the first quarter. The earnings release will come out in about nine or ten weeks and we will tell you then how successful we have been and quantify the amounts a little better. For now, we will say that the typical expenses that vary with sales are in the 15% to 20% range and that we are looking to cut down some so-called fixed costs and gear down to a lower level for the next few quarters. Clarence mentioned in the distribution area was certainly one place and we are looking at all of our expenses and trying to contain them or cut them where possible.

So operator, that is all our comments for now. If you would like to open it up for questions, please do so.

(OPERATOR INSTRUCTIONS). John Baugh, Stifel Nicolaus.

Two questions. One, just the internal philosophical discussion on -- obviously it came out on cutting advertising in a downturn. Is there a thought to, and obviously it hurts earnings, but increase advertising when it gets up? Like some thought on that.

And then the second question would be is gross profit really the best way to look at the profitability of your business? Where I am going with this is we are now in a severe downturn and the whole issues with importing directly and having the product on the water that keeps coming obviously has a hidden cost to it.

I was wondering if that affects your thinking going forward about committing to the import strategy increasingly and how you measure internally the whole profit picture of the import piece of your business?

John, first question on the advertising, I have always had a philosophy you shoot while the ducks are flying and I don't know if you can buy business in Florida back to where it was. I don't think you can and so we are adjusting to what we believe that conditions will be. Our advertising, we think, is very good and appropriate for us. We are going to have less pure brand advertising and a little more promotional within that mix. So I think that is the right thing to do and I don't think that you can buy business when people don't want to buy. So we are going to adjust market by market for what we think is appropriate and we are in the midst of that now.

As far as the import question, some of what happened as far as our inventories jumping up here was we had very good business in the middle of last year, all the way up to Labor Day and so we were buying to those rates and we made a decision not to back off dramatically. In retrospect, was not exactly the right decision and I think we have more goods than we need right now, but we are handling it and I think we have a more sophisticated system in place now for projecting that peak demand and supply and I think that we will be better at it.

So we are also working with our vendors, oversea suppliers to warehouse in Asia, which we think will help us flow that at a lower cost and be able to react better to sales. So we are not going to walk away from something that I think the industry is moving to and that is importing. There is a cost there and we have to make sure we make the margins on the front end or we can't recoup that. So I think we are going to get better at it and it is something we have to live with.

Laura Champine, Morgan Keegan.

Dennis, I think you mentioned that CapEx will be lower than expected, but can you give us your CapEx budget for 2007 and maybe a preliminary look at '08?

Sure. Right now, the expectation is that it would be about $16 million for '07 and for the projects we have identified for 2008, we are about $12 million.

Okay. And have you given what square footage growth that would support what you're looking for '07, '08?

'07, it was about 4% and in '08, there is probably four or five stores in there, most of them leased. But I couldn't give you a square footage yet because a few of those would be replacements.

Rex Henderson, Raymond James & Associates.

A couple of questions again on the ad spend. Have you figured out -- how do you measure the effect of most of your brand advertising and how that is affecting your position in the marketplace and what have you learned from that so far?

Well, it is early. We did some preliminary brand research following the campaign, which just really started late last year, very late fourth quarter last year and we did see an uptick in the brand recognition. It is really too early to know completely. So we have independent research that we look at on a quarterly basis to see the effect of that, but what I measure is our sales and sales are tough right now. So we are adjusting to what the reality of the market is.

So I think we invested very heavily on the front end in building that brand message and that is why I mentioned a minute ago that we are going to tweak that back to be a combination of a little more promotional combined with that brand advertising.

Okay. And also on Presidents' Day weekend, can you comment at all about what foot traffic was like on Presidents' Day weekend and order trends? You did note in the press release that delivered sales so far in February were pretty bad. I'm just wondering about the order trend and Presidents' Day weekend.

We gave you that number because we think that is a good indicator.

That helps. Finally on capital spending, you have cut back your plan here. What kind of projects did you postpone or cancel when you cut your CapEx?

Really what we did, Rex, is we worked with these landlords to take on more of the capital expense, more of the upfitting and put it into the lease. So it is an adjustment of the lease arrangements on those projects. We didn't change any projects.

So you've moved from capital spending and you will pay for it in the rent expense eventually?

That's pretty accurate.

Susan Maklari, UBS.

You mentioned that you plan to open about five or six new stores this year. Can you give us information on maybe location of those stores? Were there any changes to that given the kind of change in the demand environment?

No, there really aren't changes in that particular plan. These have been moving along. The three that we had announced -- we are going to open Austin, our second store in south Austin, next month. Huntsville, Alabama is a new store that we are renovating an existing building, which will open up in the second quarter and then we announced that we took over a lease from Mastercraft in Rockville, Maryland, which will open up in the fourth quarter. We are in the process of renovating that building.

There are four other stores that we have not announced. They are all in our existing markets. And we think they are in terrific locations that are positioning us for growth, so we haven't announced those yet and we will as we get closer.

Okay. And then can you just give us some sense of -- are you seeing a lot more opportunities in terms of real estate given maybe some of the bankruptcies that we are seeing out there? Is there any area that seems to have a lot more or a lot less going on?

I don't think any particular area. We are hearing a lot of different opportunities and we are evaluating them. This is our plan right now. But we, in the past, have been opportunistic as we were with the Homelife leases in 2002 when we took over eight or nine of those stores and we are looking at different opportunities, but we are cautious. We want to make sure they are exactly right for us before we tackle them in an environment like this.

Mike Marburg, Ramsey.

Just on the comment on variable costs, I was under the impression that your variable costs were on the order of 30% to 40%. Is that referring to something different?

I think you are talking about a contribution margin, theoretical contribution margin, so it would be gross profit less the variable costs.

So the variable costs on the SG&A line are only 15% to 20%?

Yes. And I am mentioning that not as an absolute; obviously it is a range. But just the idea that sort of an automatic or expected reduction in costs just with the different sales volumes in a short-term time horizon, that is what we work with to help you think in terms of different outcomes at different levels of sales.

And then obviously you don't typically comment on your competitors per se, but with Rooms to Go and Ashley, are you seeing more competition from them with new store openings in and around your key markets or is that not any different than it was nine months ago?

Well, Rooms to Go took over several different operators in our region. A year or so ago, they took over Rhodes and Kirschman's later in the year. So that was in many of our market but -- and I think Ashley has been very aggressive in most parts of the country. I would say they are the most aggressive players, particularly at the promotional end, in the industry or you could probably say the most aggressive in the industry anyway, but they are at the promotional end. We position ourselves above them and we want to continue to be positioned above them.

Todd Schwartzman, Sidoti & Company.

Could you talk about how the bedding category performed in the fourth quarter and what percentage of the mix bedding represented for both the quarter and the full year?

We are not giving out exact percentages there. Bedding has been around 10% and it maintains that. It has been a good category for us. We make good margins there. Our average ticket is up. I would say that the fourth quarter was not as good as the rest of the year, but neither was anything else.

Does it tend to drive traffic more so than other categories or is that something that you'd prefer not to share with us?

Well, I think it is a traffic category. We advertise it probably individually more than most other categories and there is co-op in it and there is brand recognition. We use other brands instead of our own in bedding, so it is a very important category and when it is 10% of our business, it is important.

Rex Henderson, Raymond James and Associates.

Thanks for taking a second question from me or third or fourth. On inventories, part of your inventory build was because you felt felled underinventoried a year ago at this time and you obviously now are a little bit overinventoried. Can you kind of parse out for me how much of that is excess inventory and what your kind of target inventory level is in terms of either days sales or terms or some other metric?

We have a target and we have not reached it. We have a target of warehouse turn of about 12 times. We have not reached that and that is our internal goal and we are incenting several of our departments to get to that level. It is going to be a challenge with the import model. We know we are high. I mentioned earlier that we purposefully projected in our best sellers, so we think we can bring this thing down pretty rapidly. We do have some excess inventory that we are going to have to move out and we are aggressively looking at that, but I don't know if I can give you an exact number. Dennis, do you want to --?

No, I think if our inventory was $5 million to $10 million lower right now, we would be happy. There is a certain base stock that you need for the breadth of the line and so higher sales are always going to get you more turns. But that is somewhere on that order of magnitude, which -- 5% or so maybe.

I will say that and I kind of referred to it with the size of our stores, we are looking at smaller stores as opposed to the -- several years ago, we had 40,000 to 45,000 square foot stores. We are looking at smaller ones now, more in the 35,000 to 30,000 square foot range. We think that fits us better and we think we can support it and flow the goods better and then complement that with more special order and ultimately the website capabilities to add on the business that way.

Will that change in floorplan -- floor size, materially affect the percentage of your inventory that is on the floors for display and the amount in the warehouse? Will there be a meaningful shift there?

I think what we are trying to do is work our whole system to supporting the 30,000 to 35,000 square foot store.

(OPERATOR INSTRUCTIONS). Stephanie Haggerty, Register & Akers.

I have heard you talking about doing more promotional advertising. Being here in Atlanta, obviously your name is pretty well known to all of us, but when I look at what is going on promotionally, there are always these huge sales obviously by Rooms to Go and Ashley and so forth. But when you all have a sale, there is not really much of a percentage off for the consumer. I am wondering if in your thinking about being more promotional you have factored anything in terms of -- I know your low everyday pricing, but if you've thought at all about having something a little more aggressive to move off some of this inventory.

A lot of our advertising and promotions, Stephanie, has been on adding to the ticket larger ticket opportunities that they can get a lower price when you add let's say a love seat or a chair to a sofa type of thing and I think we will continue with that. We have gone with this pricing integrity for a number of years. We don't mark it up to mark it down and to the point of Rooms to Go and Ashley, we are not going to chase the four or five years no interest plan. That is frankly not --.

I hope not.

Yes, it is not our customer and we don't think it is the right thing to do. We are in the game with sometimes 18 months or even up to two years at times for no interest, but we are not going to chase the other low-end players that way. When I say promotional, it is really more item and price, more added value for a bigger ticket as opposed to just brand advertising. It is really a reflection of the mix and we don't see going to -- we are not going to be a discount house.

No, I wasn't suggesting that. I just wondered what promotional implied and I appreciate your expanding on that. Thank you.

At this time, we have no further questions.

Well, thank you very much for joining us on the call. We appreciate your interest in Havertys.

Thank you. Ladies and gentlemen, this concludes the Haverty Furniture Companies fourth-quarter 2006 earnings release conference. Thank you for your participation. You may now disconnect.