Haverty Furniture Companies Inc (HVT.A) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty Furniture second 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).

As a reminder, this conference is being recorded today, August 3rd, 2007. I would now like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead, Sir.

Thank you and welcome, everyone.

First I would like to give a reminder that these calls 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 reports filed with the SEC.

And I would now like to introduce and turn the call over to our President and CEO, Clarence Smith.

Thank you, Dennis. Good morning. Thank you for joining our second quarter conference call.

Sales were $187 million on an 11.3% decrease, producing a net loss of $1.4 million or $0.06 versus a net profit of $3.6 million or $0.16 in the second quarter last year. In the first half of 2007, sales were $378 million, down 10% with a net loss of $520,000 or $0.02 versus a profit of $8.7 million or $0.38 last year. In the second quarter gross margins were down 64 basis points due primarily to markdowns to move out obsolete inventory. SG&A was reduced by $4.9 million but not enough to offset the lower sales volumes.

The largest percentage decreases in expenses were in selling, warehouse and delivery -- all down in the low double digits. We've reduced our distribution expenses by over 12% through more efficient staffing, better routing and more consistent productivity measurement throughout our distribution network.

As we reported previously, our sales early in the quarter were significantly weaker and our June sales above our breakeven point.

We are encouraged by some of the recent sales improvements, even though we are seeing comparative store sales decreases overall. The second quarter is historically our most difficult quarter and combined with the housing turmoil and macro issues in our regions, we experienced a larger sales falloff than expected. However with the recent written sales sequential improvements we have seen our backlog of unfilled orders increase, which is a good indicator for an improvement in delivered sales in the third quarter, compared to the second quarter performance.

We reduced our inventory levels 13.1% versus June last year to $103 million, demonstrating good control during this difficult downturn in sales. Following the reduction of clearance goods in the quarter we believe that our inventories are in excellent condition and are now focused on balancing the flow of merchandise to fulfill our orders and to deliver anticipated sales in the third and fourth quarters. We believe that our strength and supply chain department and enhanced MIS tools have helped us to provide more reliable delivery schedules while reducing the backup inventory needs.

Our debt-to-cap is 13.4%. Inventory is carried on a conservative LIFO value. We have no goodwill on our books and own 37% of our stores. We are committed to maintaining our sound financial foundation to weather this difficult time and to be in an excellent position to take on new opportunities as they become available in our regions.

We are adjusting the advertising media and promotional mix in several of our markets to fit the current conditions. We have been more promotional with stronger credit offers and specific merchandise promotions in the past few months than earlier in the year. This broader marketing push involves more targeted catalogs and tabloid inserts; increased television and cable presence; aggressive direct mail and newspaper promotion; target e-mails and later this quarter a greatly enhanced website.

We believe that we are gaining traction in our goal to connect better with our customers and to have her feel more comfortable with Havertys and our ability to provide furnishings for the lifestyle she expects and desires. The experience we have developed during the rollout of our Have It All campaign in the first half has been an important part of developing the best way to reach our customers. We are pleased with our message and the professional presentation as we continue to strengthen our brand.

The key part of our plans to reach our customers has been an improved sales training program that we presented to our sales teams in all of our regions. We realize that to connect emotionally with our customers, we have to be dedicated to a system to provide services that she wants versus showing what we want to sell. We are conducting ongoing market research to learn what styles and product values are important to our customers. Our teams have enthusiastically embraced our new sales programs and we are now seeing positive results in those efforts.

The first half of 2007 had some of the toughest challenges that we've faced in our long history. We strongly believe in the customer-focused direction we've pursued of improving our service levels, providing better quality furniture at true values, building the Havertys brand and providing a good return for our investors. We continue to strengthen our core store management and our home office teams which we know are critical to our success. We believe that our position in our markets is on target to accomplish these goals.

Now I would like to turn this over to Dennis Fink.

Thank you, Clarence. I just have a few points to add.

First on our financing and accounts receivable. During the second quarter, we had a larger amount of sales that were financed. 46% of our business was under some sort of finance program as compared to 44% a year ago in the second quarter and 42.5% for the six months last year. So the trend has been for people to use our programs more frequently. Part of that is because we offered more periods of time where there was no down payment required.

The split between the Havertys programs and the third party finance company was about 19% in-house and about 27% sent to the third party finance company. The extended no interest credit offers are very prevalent in the competitive environment we are in and we expect the credit cost for the third and fourth quarter will probably be higher than second quarter and also higher than the third and fourth quarter of last year.

In terms of our receivables portfolio that we carry, there is a continuation of record low, delinquency and problem category percents that we have seen in the last couple of years and we are very pleased with the soundness of our portfolio, and have not seen any deterioration based on the concerns over the debt and the mortgage -- subprime mortgages controversy and problems that have been discussed in the financial community. So we are happy that we seem to have a very sound portfolio.

Interest expense was a credit of $94,000 for the second quarter. That compares to $96,000 expense a year ago. The components this quarter are that we actually did have interest expense on our debt of $1,067,000. However we have an amortization at the discount on accounts receivable that we take up front on in-house programs that are longer than 12 months without interest; and that discount comes back into interest expense was a credit of $1,100,000. There was also about $53,000 of capitalized interest and interest income to net down to the $94,000 credit you see on the financial statements.

Just a couple of points on the cash-flow statement. We did have cash provided by operating activities of $11.3 million. Although we had a small loss, we did have sizable depreciation and also based on the decrease in inventory, working capital requirements were nil. We did see a reduction in accounts payable as we brought the inventory levels down during the quarter so our purchases were lower.

Capital expenditures in the first half were $5.9 million this year, quite a bit lower than the $13.2 million last year as we have more stores that are under lease that we will be opening this year.

And, Operator, that is all the comments I have. If we'd like to open it back up for questions now, please go ahead.

(OPERATOR INSTRUCTIONS) Laura Champine with Morgan Keegan.

Dennis, this one I think is for you. Your [PT&Es] on your books right now at about $217 million, but my guess is that given as long as you have owned some of those fixed assets it might be understated, relative to market value. Can you guesstimate what your PT&E would be worth in the markets today?

Laura, I'm not going to try to come up with that number. It certainly would be higher from all that we know. There are several stores that we have had gains on when we relocate. We don't have a reason to keep appraisals up-to-date on those. But certainly we do feel they are, in today's market, worth more.

Dennis, could you give me any kind of an order of magnitude because that's really all the analysis I can do at this point, too, is probably worth more. But if you know anything that can help me qualify that if not quantify it?

I tell you it's pretty sensitive to the markets and just from month-to-month as we've gotten appraisals before something can change our market or in the financing as much as in real estate. So I'm really not able to get you a ballpark number on it. We have had sales of properties that run $1 million or so profit for us and some that have been higher than that. There also are stores that we sell that we are just glad to get our costs back out of them. Most of those would be in the markets that have deteriorated a lot.

So we also certainly have leases that are at favorable rates. And it's -- I know it's kind of a backstop number but I just can't get you really in the ballpark on it. Sorry.

Rex Henderson with Raymond James.

A couple questions. First of all, traffic. Can you give -- I know that you don't -- well are you at the point now where you have year-over-year traffic data? And even if you don't, do you have any sense of how traffic is trending?

I think traffic is down as the sales are down. It's better than it was earlier in the year and -- .

Yes, that's what I'm thinking about is, sequentially, have you seen any moderation in the rate of decline in traffic?

Yes. I think late in the quarter we did and I think July was probably in the range of what we saw in the sales. Now we are still in the process of refining how we measure this. We put in a system that, frankly, wasn't working like we wanted and we are now rolling out another one. So I don't have chainwide data as good as it should be, but we are seeing an improvement in traffic, but not to the levels that we had hoped they would be.

And I heard you comment that in your press release that orders are down in the neighborhood of 3% versus sales down 8% in the month and kind of wondering -- and you mentioned that you have a bigger backlog. When are we going to start to see some of that additional orders flowing into delivered sales? How long do you think that will take to kind of get there?

I think you'll see some of it this quarter. The situation was last year we described it as a tailwind because we had a very large backlog just based on the flow of the inventory --

I remember.

And we had reduced that in the neighborhood of $10 million, for instance, in the second quarter last year. This year, it went up a little bit and we don't expect to see our backlogs grow that much. We expect the throughput to happen. So I think third quarter will probably be closer in terms of written business and delivered business this year.

Okay. That's what I was wondering. When would delivered sales start to match the written order pace (multiple speakers)

Yes I think this (multiple speakers) now for this quarter we ought to see the numbers be closer.

And finally on inventory, you did a nice job of keeping inventory levels down. On the flip side of that, any potential for out of stock? I mean, are you confident that you have the best-selling items and that you are flowing the right merchandise?

Well I will say that we are probably a little low right now. We have had some disruptions as you know, in the industry, with some fabric problems which we think we can get corrected. We are a little lower than we would like to be and in some of our bestsellers we are at a higher point of being oversold in some of our bestsellers than we would like to be.

We see that hopefully corrected by the end of this month and into September, but we do have some out-of-stock issues because we got a little lower and because we do have some supplier issues.

Do you feel like you lost any sales because of that?

I'm sure we did. I don't think it would be a significant number. You know, if somebody wants a sofa and we don't have it in stock, they may go somewhere else. So it's not a position we want to be in, but it -- we hope to be able to correct that in the next several weeks.

Todd Schwartzman with Sidoti & Co.

I realize you may not look at Florida, your Florida stores as a single market per se. But on the whole did you see any or did you see sequential improvement in July comps versus the second quarter in the Florida stores as well?

No, we didn't. Florida is not better.

And from where you sit when do you envision you might see the comps in Florida to turn positive?

That, Todd, I don't know. We are hoping that later this year that it will look better than it has just because we had real rough comps late last year. South Florida is very difficult, and I don't know when that is going to improve. I think we are seeing some improvement in other parts of the state. Central Florida is a little better and the Panhandle parts of it are better. But we have had some tough challenges there.

So it's hard to say when Florida is going to be what we are used to seeing in Florida. That could be a good while. It has been a real challenge.

And from a product category perspective, either in Q2 or in July, were there any categories that were positive?

None that were positive. Some that were close to positive. Upholstery is probably one of our better classes right now and I would say formal dining rooms is our weakest.

And upholstery, does that really speak to the value proposition of the imports or is there something else?

Well I think it probably does reflect that and I think we are doing a good job in our upholstery selection, but I also think that it's the front of the house type of thing. It's not as postponable as a bedroom or dining room is. It's something that people get credit for quicker. It is a fashion item. We understand it's a fashion item and we are presenting that to the customer. So I think it's just not as postponable.

Curious about your website plans. Could you outline your plan for the enhancements to the site?

We will be rolling that out in two phases. In about a month will be Phase I and then that will be an improved site which we are excited about. Phase II would be either very late this year or early next year and that would be when we would be selling over the Internet. So it's an important direction for us and we put a lot of resources behind this.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions. Please continue.

Thank you so much for joining the call. We look forward to talking to you on next quarter's call. Thank you.

Ladies and gentlemen, this concludes the Haverty Furniture second quarter 2007 earnings conference call. Thank you for using AT&T Teleconferencing. You may now disconnect. Have a pleasant day.