Haverty Furniture Companies Inc (HVT.A) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Haverty Furniture Companies, Incorporated, third-quarter 2007 earnings release conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today, Friday, November 2, 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 good morning, everybody. During this conference, we will make forward-looking statements which are subject to risks and uncertainties and assumptions that are difficult to predict. Actual results may differ materially from those expressed in such statements, which speak only as of the date they are made and which we undertake no obligation to publicly update or revise.

Factors that could cause Haverty's actual results to differ materially from the expected results are disclosed in the Company's reports filed with the SEC. We caution you to give consideration to those possibilities.

Our President and CEO Clarence Smith will now give us an update on Havertys.

Good morning. Thank you for joining us on our conference call. The third-quarter results continue to reflect the difficult sales conditions that the furniture industry has experienced since last year. We produced a slight profit for the quarter and for the nine months, but we were disappointed with our earnings.

We are continuing to adjust to the macro conditions in our regions by reducing expenses, modifying our delivery schedules to conditions, and refining our marketing to better reach our customer.

The top priority this year is to maintain our strong balance sheet and to improve our cash flow to better weather the industry downturn. We will be better positioned to gain market share now, and to react to opportunities when the markets for home furnishings improve.

During the quarter, we reduced our bank revolver borrowings from $12.6 million to zero; paid down $8.3 million in long-term debt; bought back 5.2 million of common stock; and increased our cash position by $5.7 million.

We are pleased with the new merchandise that has arrived in our stores recently, and several collections have quickly moved into our top sellers. Many other exclusive groups are planned to arrive in the coming weeks and in the first quarter of 2008, which we expect to stimulate sales.

We recently held our annual leadership conference here in Atlanta, where we kicked off our new havertys.com website and reemphasized our Company focus to our team.

Our priorities are, number one, to intensify the focus on our customer in everything we do. Two, to renew our mission to strengthen our Havertys brand. And three, to give our customers every possible means to interact with Havertys on her terms.

An increasingly important way to interact with our customers are our new and greatly improved havertys.com. Our top development goal for this year was to build the finest website in the home furnishings industry. With a true multidepartment team effort from MIS, marketing, merchandising, and operations departments, I believe we have brought havertys.com to that standard of highest quality.

Our site features more than 6,000 images with 400 fabric swatches and full details on everything Havertys sells. We also made sure that our operating website is fully integrated with our systems when we go live with selling over the Web. The backbone of the operating systems were designed and envisioned from day one to operate seamlessly with our current programs.

Unusual to furniture retailing, we are actively encouraging our customers to give us feedback and share reactions by rating our products and writing reviews. To date, we have over 8,000 reviews listed on our site. We believe that it is important to ask our customers' participation in our site so that other shoppers can consider the real-life opinions of unbiased actual purchasers. Additionally, it allows us to more quickly respond to any product issues and add to top rated collections.

The second phase of havertys.com will allow for online sales transactions, the latest room planner, and other significant additions to assist our customers in meeting their home furnishings needs. We expect to have this fully operating by first quarter next year.

The main focus of havertys.com is to drive customers to our stores with more knowledge about us and our merchandise, with a pre-inclination to buy.

Another key part of our plan to reach our customers has been our improved sales training program and the new modules that our HR training team have presented to our regions. We realize the difference in winning the loyalty of our customers is enthusiastic, well-trained sales associates at the point of contact. We have invested more energy and resources in product knowledge and training throughout our Company than at any time in our long history.

This past week, we cut the ribbon on our new location in Rockville, Maryland, part of our six-store Washington D.C. market. This location is an important addition to our largest potential market, which now allows us to better reach and serve customers and to leverage our advertising and fixed costs.

We also recently opened a relocated store in Wilmington, North Carolina. Next week, we will be relocating to a new store in Trussville, Alabama, a fast-growing suburban market outside Birmingham.

Even though we had a drop of 1.6% in total delivered sales in October, it was an increase over September sales and a smaller decrease versus the prior year than the past several months. Much of that improvement came from filling orders and bringing down our unfilled order backlog. We are receiving strong shipments of sold goods in November, which should keep our backlog closer to expected levels.

Our incoming written business is still very difficult. We continue to have significant challenges in some of our regions related to the housing weaknesses, and there is no visibility as to when that will turn positive.

While we are disappointed with the profit and sales performance for this year, we do believe that we have in place the right store presentation, product value, and service to grow our business profitably.

I now would like to turn this back over to Dennis Fink.

Thank you, Clarence. Our gross profit margin for the third quarter was in line with the full year of 2006. It was 68 basis points better than last year's third quarter. Last year's quarter had included a higher level of clearance activity which had impacted margins negatively.

Sales commission expense for the third quarter was down $1.2 million, and $3.9 million down for the first nine months of 2007 compared to the same periods in 2006. To help stimulate sales during the third quarter we promoted longer-term, no-interest financing for our customers and required less down payments. The discount fees for credit programs offered through a third-party finance company increased $1.5 million compared to the prior year, and $0.5 million for the nine months compared to the prior year.

I'm going to restate that. The $0.5 million was actually a decrease. The third quarter was an increase of $1.5 million.

Credit program costs are expected to continue to be higher for the remainder of 2007 relative to last year, due to greater anticipated usage. That usage was up in the third quarter. 50.8% of sales were financed. That compares to a year ago's third quarter where 44.4% of sales were financed in total. The split between Havertys' in-house program and the third-party programs was about one-quarter Havertys and three-quarters the outside finance company.

Occupancy costs increased $600,000 in the third quarter as compared to the prior-year period, and $2.8 million for the nine months compared to the same period last year. The majority of the increase is due to the six new retail locations opened or soon to open since September 30, 2006.

Delivery expenses were down as expected in the third quarter as compared to the prior year period. In response to the lower sales levels we adjusted our routes in many of our markets, reducing total headcount and related delivery expenses. These decreases were partly offset by the cost generated due to the operations of new stores.

We have adjusted our advertising spending in 2007, decreasing our costs by $1.4 million and $3.7 million in the quarter and nine months periods compared to the prior year.

We're carefully evaluating each geographic market area we serve separately for 2008. We're seeking the most efficient way to reach target customers, considering the economic prospects for that locale and the relative cost-benefit of the different media in that area.

Our administrative costs were down $1.7 million in the third quarter and $3.9 million for the first nine months of 2007 versus the 2006 periods. The decrease is due in large part to reduction in compensation expense partly offset by overall increased insurance costs. We have just found out the property and casualty insurance costs will be coming down for 2008.

Our allowance for doubtful accounts as a percentage of receivables is slightly higher in the third quarter of 2007. It is up $200,000 from the prior year and year-end 2006. Actually, it is up $100,000 from year-end 2006, excuse me. This is due to a modest increase in the delinquency and problem category percentages that we experienced in the third quarter.

Interest expense is a credit for Havertys. We have interest expense on debt, but it's offset by amortization of discount on internal generated no-interest accounts receivable that is outstanding longer than a year. Then we have also got interest income. The components in the third-quarter interest expense was $755,000 debit or expense, and the amortization of the discount was $1,179,000, and interest income and capitalized interest was $147,000. So the net number was $571,000.

In terms of our store expansion and capital expenditures, we are adding approximately 2.8% retail square footage during this year. We're opening a net of three stores. That is comprised of six openings less three closings. Planned expenditures for 2007 are $15.5 million.

We do expect a lower capital expenditure figure for 2008, and we will advise you of that on our next conference call. Operator, that is all of our comments for now. We're ready to take any questions from the audience.

(OPERATOR INSTRUCTIONS) Todd Schwartzman with Sidoti.

Hi, good morning, guys. Dennis, a question on the property and casualty expense. You said it was going to be coming down in '08. Can you give us some numbers for that, please?

Todd, I can't right at this time, but it is magnitude of a few hundred thousand dollars.

Okay, thank you. Also, in general, nationwide and also as it pertains to Florida in particular, how should we think about the housing metrics that are out there, widely available? With respect to calling a bottom and maybe an eventual upturn.

In other words, should we focus on sales starts, residential permits, maybe some other metric out there as possibly presaging a recovery of some sort?

Well, Todd, I mentioned that we really don't have much visibility at all to that. I will say historically that one of the measures was existing home sales probably translates quicker to furniture.

But we are in some fast-growth markets, so housing starts in general are important to us. So, it is very difficult to say when we expect a return until we know something about housing.

It is still sliding in some of our most southern markets, in Florida, and we don't see any visibility there, as I mentioned earlier. I really don't have an answer.

Would you expect the lag, the historical lag between home sales -- pickup in home sales and pickup in furniture to be in line with whatever that historical lag is? Or do you expect it to be different this time?

Well, just going back to earlier times, I would say six to nine months. I think it will be a tighter comeback. In other words, if housing is showing any life, I think that furniture will come back quicker.

Okay, thanks a lot.

Laura Champine with Morgan Keegan.

Good morning. I was surprised and impressed to see that your inventories were down as much as they were on top of a 10% sales decline. To have inventories down over 20%, it seems to indicate some special activities in the quarter. What drove that change?

Well, we did move out a lot of our [old] merchandise over the last 90 to 120 days. So we are probably the cleanest that we have ever been as far as current merchandise is concerned.

We are leaner than we should be. We had some shipment problems getting in some of our better sellers and getting reaction from some of our factories. We had some factories that had to move production, so we had some problems there. We are correcting them.

I think that they will be corrected by this month. We did a significant improvement in October. But we also underestimated some of the sellers.

So, we did purposefully try to be conservative on our inventories. We didn't want to get into trouble there. We think that is a much, much tougher problem. We think we are going to get this corrected this quarter.

Great, thank you.

Rex Henderson with Raymond James & Associates.

Good morning. I had a couple questions about, first of all, store opening plans. I am thinking about whether or not the current environment has changed your thinking about long-term growth and what you might do next year in terms of new store openings. I can imagine arguments on both sides that you would want to cut back in order to preserve cash flow. On the other hand, there may be opportunities that present themselves that you might want to take advantage of.

What is your thinking about new stores next year and beyond?

We are going to be very conservative on new stores. We do think there are going to be opportunities. We don't see them yet, but there will be. And we want to be in a position to react to them, much as we did in 2002 when we bought nine HomeLife stores, which got us into Northern Virginia and Central Florida, some key areas we wanted to get into.

But we are going to be very conservative about it. We're not going to make moves on new locations unless we feel like it is something we have to do or a slam dunk. This is too tough an environment to take much risk in new real estate.

Okay, second question revolves around your credit losses. I saw that your provision for losses went up a little bit. What is your experience there in your credit business? Are you getting concerned about credit quality?

Well, we're not really concerned about it yet, although we are aware of all of the discussions and issues that are out there in the media. We did see a little rise in the delinquency rates.

Didn't see any increase in bankruptcies, no increase in write-offs. Just the delinquency rates were up in the magnitude of 1% between June 30 and September 30, so that is a formula-driven calculation and it is in reaction to that.

Okay. Are your customers having any difficulty getting qualified for the third-party financing? Have you seen any difficulties there?

Rex, we really haven't seen that. We have been looking for that, and the approval rates are still very high. We think a lot of the people that buy in our category, which is better goods, primarily, that they kind of govern themselves about their purchases. So if they are unsure about the future or their credit is not good, they may go somewhere else when they want to buy a big-ticket item, and not to somebody with the better quality.

So we are pleased that the rate of turndown has not increased. But in general, people's credit is not as good as it was six months ago. But I think they are just, as I said, are kind of self-disciplined.

Okay, so those people whose credit quality has declined just are not coming to the store?

We would like them to come to the store.

All right. Finally, on traffic, now that we have brought that up. Seen anything that is working in terms of driving traffic? I know your new website is very new. Any preliminary data on whether the website is driving any traffic, or any other other kinds of promotions are helping?

Well, our Web traffic is up, but it has been up by several multiples. So I would have to say there is not any new information about traffic. Traffic is still off in most of our stores.

We were -- I mentioned our new store in Rockville, Maryland. That is an important one for us because it helps us in the densest area up there. We were up there and have had great traffic in some of our newer markets. But overall, traffic is not any better; and it is hard to see what is going to make that jump.

Okay, and one final kind of mechanical question is that of the share buyback. Are you --? I saw there was a fairly sizable share buyback in this quarter. Are you going to continue that for a period of time? What's your thoughts on that?

We are in the market.

Very good. Thank you very much.

(OPERATOR INSTRUCTIONS) John Baugh with Stifel Nicolaus.

Thank you. Good morning. I thought it was an impressive quarter given the backdrop of cash flow and earnings. My questions are, do we see working capital, which was a huge source (inaudible) with inventories dropping, do we see that going back up a little bit?

Yes, we are bringing our inventories up a little bit. We will keep our CapEx in line, but I do think we got too low there. So yes, that will be going up. Dennis, you want to comment any further on it?

No, except to say that it is a modest increase in inventory from here, not going back to levels we were at.

Okay. Then it looks to me like, I don't know, somewhere around $195 million revenue per quarter run rate you are breaking even. That is a generalization.

But what is your plan going into '08? We obviously don't know where it is going to be. But what are the levers you can pull if sales keep dropping to further reduce your costs and lower that breakeven point?

We're looking at every area. We are doing some things in logistics, which we think can lower our cost there. They may be offset by any increases in fuel cost, which is continuing to be a challenge. But we are looking at a lot of things in logistics, in flow of merchandise, in routing of trucks, additional to what we have already done, and gearing that down.

Advertising, we're spending a great deal of energy on, just to make sure we are very efficient market by market, medium by medium.

Same thing with the personnel in every department and throughout our budgeting. It is continuing to tighten down any unnecessary expense and to leverage where we can. I don't know how much more we have, but I would agree with you that that number is about breakeven right now. That number 195.

Where is your ad cost? You are giving dollar declines, Dennis. Where is it going to come out sort of on a percentage of revenue basis in '07?

Then, if we continue to drop, I guess, in volume in '08, it sounds like advertisement will go down further. I'm just curious where the percentage is running.

It's a little under 7%.

Okay, and where -- you've got a strong balance sheet. So obviously your stock is way down, so you can buy back stock. I'm curious as to the internal discussions about doing that today versus a year from now. Because you said the opportunities aren't there.

But there might be 10 or 20 stores in Florida that are available for a song a year, two years from now. I am kind of curious as to how you think about that with your capital structure.

Well, we are in the market, as I mentioned earlier. We know it is a value, and we haven't expanded the program. We will be meeting with our Board later this month to review that. But we know it is a value, and we don't want to spend money now in real estate, as you point out.

Eventually we will, but -- and we do have some capital to do that. So we are looking at it.

Okay. Dennis, could you review again how many stores are corporately owned? Is there going to be any sale leaseback activity or any sale of assets at all in the next 12 months if you had to guess?

We have in our 10-K, we report 47 stores that are owned. That is actually those that are on the balance sheet. Seven of those are, I believe, are capital leases of some sort or another, or consolidated under a lease.

It is likely that we will have a couple of sale leaseback opportunities that we will explore or even look to pursue. It is not so much to just raise money, but it's in those situations where we think that we may be in a location for another five years or so; and it is probably a good time to go ahead and lock in the value of the location and then lease it back for a short period of time.

There are some property sales that are coming up. They are difficult to know about the timing of them. But there's some profit that will arise from those sometime over the next six to nine months.

Okay.

We're not looking for any big sale leaseback, although that certainly could be done for a source of funds, which kind of goes back to your previous question about the whole capital structure.

We'd just as soon own the property. New property is better candidates for sale leaseback, I think, than older property.

All righty. Then is there anything in the product-wise, mix-wise going on, Clarence, that is worth discussing? Trends?

Well, we are importing more. That continues to be what is happening not only in cases but in upholstery.

So we have had a lot of collections just recently come in that have been in development for -- some of them well over a year. We are glad to get them in. We have got some fresh looks that are being real well received. Frankly, I'm pretty excited about our product selection right now. But nothing particularly unusual about it.

Okay, great. Thanks. Good luck.

(OPERATOR INSTRUCTIONS) Budd Bugatch with Raymond James.

Good morning and my congratulations, too, on not a great set of financials, but a good, a hell of a good set of financials in this environment.

Thank you, Budd.

Occupancy costs, I know that has got to be a challenge. You told John about where advertising was going to wind up. Can you give us occupancy kind of on a percentage of sales basis, and what you see with some of the new stores, and how you're handling that?

You know, in the general order of magnitude, occupancy is a little higher than our selling -- or advertising expenses. We have opened some new stores and they are more costly, so we have seen that go up as we mentioned.

We have three new stores that are opening next year that we are committed to. So the occupancy costs on those will be higher. We have also -- we will be closing a few stores next year that are lower-cost operations. So probably we will still see increases in the occupancy expense for next year.

We are very mindful of that, which is why we really don't want to increase our breakevens very much in that area, and we are trying to curtail costs in other areas.

But property, the prime property is still very expensive. There hasn't really been any falloff in prices in that. So whether you rent or buy -- mostly we are leasing, these days -- it is just very expensive.

The sales that can be generated are not as easily predictable as during normal times. So, we are being cautious.

I think the other thing that keeps going up is utility expenses, energy expenses. We talked about the insurance which had gone up this year, but should be going down next year.

So the only other thing to cut occupancy is to close stores. We always continue to evaluate that and try to look longer term before we make those decisions, and not just in a one-year sort of view.

Okay, I certainly understand that. The footprint square footage today, how much square footage is there?

It is a little over 4.2 million. Let me dig for that number, Budd, if you could ask for another question, if you have got another question.

That and the selling square footage if you have it, Dennis.

The other question I had was kind of a merchandising question, back to Clarence. Any categories doing better? I think you were asked a little bit of color on merchandising. I would think bedding might be outperforming.

Bedding is still good. You wouldn't be surprised that casual dining is kind of replacing formal dining. That is probably happening throughout the industry, and that is -- so that means casual dining is very good.

Entertainment is good, as you would guess, with the plasma situation and home office. Those areas are all growing categories.

Average ticket? Can you give us a feel of what is happening there, progressing, or is (multiple speakers)?

It is okay. We are slightly down, but it hasn't been a drop of any real significance. It is down, though.

So it is basically -- everything is traffic related. It is not close rate, it is not any of that. It is getting feet in the door.

That is correct.

Budd, on the selling square footage, at the end of the quarter we were at 4,298,000; and we expect to end the year at 4,324,000.

Great. All right, Dennis. Good luck on the balance of the year. Thank you.

(OPERATOR INSTRUCTIONS) I'm showing no additional questions at this time. Please continue with any closing remarks you may have.

We appreciate your interest in Havertys and joining us on the call today. Thank you.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.