Haverty Furniture Companies Inc (HVT.A) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty Furniture Company's first quarter 2007 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 call is being recorded today Thursday, May 3, 2007. I would now like to turn the conference over to Dennis Fink, CFO and Executive VP. Please go ahead, sir.

Thank you and good morning everybody. I'd like to remind everyone this conference call will include forward-looking statements which are subject to risk 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 condition, 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 reports filed with the SEC. At this time I would like to turn the call over to Clarence Smith, our President and CEO.

Good morning. Thank you for joining us on our conference call. The first quarter of 2007 reflects a profit of $831,000 or $0.04 per share compared to $5.1 million or $0.23 last year. Sales were $191 million, down 8.6% from $209 million last year. Gross profit margins are down slightly by 17 basis points to 49.94.

SG&A expenses are $3.4 million lower than last year with the best improvements in advertising down $1.9 million or 27 basis points and reduced warehouse and G&A expenses. Inventories decreased by $5 million or 4% from the end of 2006 and are approximately $10 million lower than the first quarter peak levels demonstrating a better control of our buying processes in this difficult downturn.

As we have reported, sales continue to be very weak in most all regions. The largest comp decreases are in the Florida region which has had very difficult challenges due to housing weaknesses, as well as large insurance and property tax increases in the coastal areas. We have had seven months of slower sales.

We were pleased with our second and third quarter sales last year. Comps were up about 8% for both quarters. Clearly, the residential furniture industry is now in a significant down cycle, and we are feeling the impact. We are reviewing all of our merchandising and marketing plans and refining some of our store presentations. We're excited about several new collections coming in the next two quarters, including expanded special order programs in upholstery, additions to our home office and entertainment centers and several direct imported bedroom and casual dining groups. We expect that we should begin to see sales improvements late this year.

While we will be aggressive in our promotions and offers, we will stay focused on providing higher quality fashionable product with true value for our target customer consistent with our brand and reputation. We do not plan to chase down to the lowest possible quality and price. We continue to gear the operations end of our business to fit conditions. Currently we are looking at all areas of our business for potential adjustments, and while still investing for our future in the latest technologies and direct to customer E-commerce systems.

We've made distribution labor and expense reductions throughout our regions; primarily through attrition we have reduced our distribution headcount by over 110 personnel. In transportation we have further reduced our routes and expect to save approximately $1.5 million for the full year of 2007 compared to last year. In delivery we've reduced our headcount by approximately 100. We are on track to reduce our distribution and delivery expenses by $8 million annualized versus last year.

Our operations team constantly analyzes our consolidated distribution organization to react to current market conditions. Our regional managers are reviewing every store to ensure staffing is at proper levels and adjust where necessary. April sales performance was our weakest month in several years, down 17% in total and 18.1% negative comparative store sales. We are seeing slightly better written orders than delivery sales decreases but do not expect to see significant near-term year-over-year improvements.

As demonstrated by those who report in our industry, this severe weakness is pervasive and well entrenched. Our industry is in the midst of extremely difficult times without a clear ending. With the housing slowdown throughout the U.S. we know there will be an acceleration in the fallout of weaker players. We are dedicated to maintaining our strong balance sheet, improving the Haverty's brand, controlling our costs and inventories and focusing on understanding and serving our customer.

We are committed to investing in the development of superior operating and distribution systems, as well as developing and training our associates. Recent research shows that furniture shoppers are visiting fewer stores before buying. Before buying and making the presentation and store selling process more critical. Shoppers are going at an average of 2.4 stores versus 5 or more stores in the late '90s. We have to connect with these shoppers quicker and stronger.

We've just rolled out our new professionally developed sales training program which is being delivered through our regional sales trainers. We're working to strengthen our display and product standards for every store so the presentation to our customer is the same whether in Dallas or Tampa, and consistent with the presentation on the website or in our catalog.

This year we have committed significant resources on the further development of Havertys.com to better present our product and brand. Our internal research confirmed that 74% of our customers search on the Web before shopping. We have added several hundred thousand new customer names to our list in the past six months and will focus on increasing that important connection to our clientele.

We are committed to having the best fully integrated furniture website driving customers to our stores and delivering in our regions. Because of our distribution network, our operating systems and our own stores we believe we can execute E-commerce better than any of our competitors. We expect you have our enhanced site rolled out by year end 2007 with transactions online sometime early next year.

We plan to open a total of seven stores and close three for 2007. This net of four stores will increase square footage by approximately 3.5%, lower than previously planned. Two leased stores previously planned for 2007 may roll over into 2008. We are closely evaluating each of our stores for profitability and positioning in all their markets.

We are keenly disappointed with our sales and profit performance. We know we must do a better job of responding to our customers in the marketplace, particularly in these tough conditions. Unfortunately, these difficult times will cause borderline retailers to fall out. We believe we stand to gain market share. However, we will be cautious in analyzing all opportunities to assure they fit our investment return criteria.

Now I would like to turn the call back over to Dennis Fink.

Thank you, Clarence. First a couple points on the P&L. Our financed sales were 39.1% of total sales for the first quarter this year. That is a 1.5% decrease compared to last year's first quarter. A little more than half of our volume was through a third-party finance company of that finance volume, and that is less of the total that was through the third party finance company last year.

So our discount expense in the SG&A was lower by $1.2 million or 49 basis points. This reduction is due also in part to the types of promotion we offered to the third party and lower usage of those programs. They generally were not as aggressive as those being offered last year at the same time.

Our occupancy costs increased $1.3 million or 150 basis points of sales in the first quarter as compared to the prior year's period. The majority of the increase is due to the five new stores that have been opened since that time last year.

Our interest expense net of interest income for the first quarter was actually a credit of $59,000. This is occurring because the amortization of upfront discount on our in-house finance sales that when we use free interest were greater than a twelve-month period. The actual interest expense on debt was $914,000 for the quarter. That is roughly comparable to the interest expense on debt a year ago first quarter.

Our income tax rate was 38.6% for the first quarter this year. It was lower last year's first quarter at 37.8 per cent. The increase in the 2007 rate is due in part to the change in the tax law in Texas, that is unfavorable to retailers and added taxes gross profit rather than pretax earnings.

On our balance sheet I will mention that our receivables continue to be very strong and performed very well in terms of collectibility, and we are real proud of the quality of the portfolio we have and are not concerned with any particular issues about the high risk of credit and the sub prime markets. We feel our credit strength is quite strong at most of our customers.

Looking at the cash flow statement, the one thing I wanted to point out was the changes in operating assets and liabilities that are up $13.9 million, and it shows on the press release. There was a $5 million reduction in inventory that Clarence had mentioned, and there is about a $20 million decrease in accounts payable and accrued expenses. The accounts payable part is because we slowed down purchases quite a bit in the last six weeks of the quarter, as Clarence said, we had had a higher inventory than year end inventory midway through the quarter. So we had been able to slow down our purchases and obviously when that happens, payables come down.

As we maintain a more normal flow of purchases, it would be likely that payables would come back up and also that our cash flow would not be impacted negatively by this item. Our capital expenditures for 2007 are being revised downward. We now expect approximately $13 million in total CapEx for 2007 and somewhere in the neighborhood of $15 million or so next year. We have a lot of stores being opened this year. It is probably more stores than we would like for a tough year as it is but we have curtailed some of the expansion next year and have reserved capital with a low level of total CapEx, which ran quite a bit higher for several of the past years than it is expected to be for the next two.

Operator, I would like at this time to open it up for questions from the audience.

(OPERATOR INSTRUCTIONS) David Berman, Berman Capital.

I was wondering if you could embellish on the competitive environment. You speak a lot about it and how you believe other businesses might go out of business, and I was wondering what you were seeing. If you are seeing companies that were acting in a desperate state or was maybe hurting your business even further and how you would expect that to change.

I think that what we are seeing mostly is the smaller operators not being able to compete, and they are contacting us, they are contacting others, and some of them will be just going away. This industry has historically been a network of mom-and-pop dealers, and a lot of those people won't be able to stay in this kind of environment. And we expect that to accelerate, that fallout to accelerate.

Marc Heilweil, Spectrum Advisory Services.

I was wondering if you have some metrics you can share with us with regard to the selling of Haverty's store brand pieces as opposed to the name brand, and how you measure the effectiveness of the Haverty's name. In other words, if you had devoted square footage to Henredon for the same product would you be getting -- how do you measure how much in sales you are losing or gaining?

Everything is measured by sales per square foot, Mark, but we are primarily Haverty's branded now. We probably upwards 90% of all of our furniture is already branded for us. We have made that move over the last seven years, and we used to sell Thomasville and Broyhill. And we've moved to our own brand and developing and sourcing our own brand. So I would say we don't have a comparative except in a few cases. In furniture it is our own brand. We do sell, in bedding we sell other peoples brand, the main ones and do a good job there but I would say we've done better with our own brand than we have with others.

That's really my question, I realize you've moved over to it, but do you have any way of measuring how effective that has been just in terms of sales? I realize there may be profit margin differences and other advantages to having your own store brand. But initially I would imagine there was some resistance.

Yes, I would say that's true. Initially there was some resistance, and we were concerned, and it moved faster than we expected it to because it was doing so well. And there again it is several years ago. So some brands are very important. We've just chosen to build our own.

But in other words if you just had to take a guess in this kind of environment would the branded be gaining market share over those of you who sell the private label? Is there any way that that --

I don't have metrics to measure that. I would doubt that they are gaining over us what I would have to say. And most of the brands that are advertising heavily are retail brands now. There are very few furniture brands that are advertising very significantly. So I doubt that they are gaining on us or other retail brands.

Could you also share with us the way in which you charge those stores which you own when you are evaluating profitability compared to those which are leased?

That is an interesting question, and we charge them a cost of capital that is as if the store is leased for those that we own to get them on an apples-to-apples basis. And we pick a typically a competitive cap rate and just apply that to the total cost of the structure. We also look though at the return on investment, just an EBITDA type of calculation, so that we do have the different view of what it financially turns out to be if the economics of owning versus leasing a store. And we look at it for the Corporation as a whole on that basis. But for the operators there is a cost of capital charged to them.

Laura Champine, Morgan Keegan.

Good morning. This is Danna Getske in for Laura Champine. You talk or allude to perhaps opportunistic acquisitions out there in the current environment, and I was just wondering if you would be comfortable taking on leverage to finance any acquisitions. And if you have any sort of target in mind in terms of debt to cap that you would be comfortable assuming.

I think our debt to cap now is about 16%. We've had a target of not going over about 30, and I think that is what our Board is comfortable with. As far as store acquisitions these are really real estate transactions. I don't see any significant, large chains or anything like that. We would be looking at several stores, one or two in a marketplace or possibly more in a big market. But just real estate transactions really not taking on another operator and consolidating them into us. It is similar to what we've done over the last several years. I just think there are going to be more opportunities.

(OPERATOR INSTRUCTIONS) David Berman, Berman Capital.

I was wondering if you could talk about the difference between your (inaudible) business and your delivered business. I understand that last year this time I think your (inaudible) business was quite strong which helped you in the summer with your delivered business. And I was wondering how that went, what that mean for your business right now and what we should expect for the summer.

It is a good point. The backlog that we had, which is just undelivered sales, we'd write a sale in the store and have to arrange for a delivery for 95% or so of the total business. There is not a lot of take-with. So typically you got to match with the customer's schedule and there is a couple weeks to get the delivery in their homes. And we had a situation for about a year and a half where we had a higher than normal backlog. It was about a week further out, partly due to getting accustomed to flowing container full of goods from overseas, and partly just with our own warehouse limitations.

And we really kind of conquered that about exactly a year ago. And took the backlog down this undelivered sales about $15 million in a 5-month period from May through September. So what that meant was that our delivered sales, reported sales got a boost from bringing this backlog down over those five months. And that is part of the reason our comp store sales were pretty strong last year in the second and third quarter. Clarence mentioned 8% each quarter. So it just is a good thing to do. It is a good service position to be in. But it makes the comparisons that much more challenging this year. So it is a --.

Does that mean that come those quarters that business should be that much more difficult for those quarters?

Yes, the comparability, because we just caught up on our deliveries in the second, third quarter last year and there is nothing there to catch up on now. We are delivering -- we would like there to be less than, less lag, but there is just kind of a systemic amount built-in with the customers wanting to be home and so many people have both adults living in the home working and they are on the move on lot. So it takes a while to arrange the right day. And yes, so it is definitely a challenge. We will talk about written sales in the month ahead, and they are likely to -- it is likely that the delivered sales will be weaker than the written sales are because of that reason for another four or five months.

Thank you very much. Appreciate it.

Gentlemen, I am showing there are no further questions. I will turn it back to you.

We appreciate your joining us for the call. We thank you very much for your interest and support of Haverty's. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.