Haverty Furniture Companies Inc (HVT.A) 2008 Q3 法說會逐字稿

Welcome to the Haverty Furniture third-quarter 2008 earnings and release conference call on November 6, 2008. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Dennis Fink. Thank you, sir. Please go ahead.

Good morning, everyone. During this conference, we will make forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as of the date they are made in which we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions and are more fully disclosed in the Company's reports filed with the SEC.

Our President and CEO, Clarence Smith, will now give you his update.

Good morning. Thank you for joining us for our third-quarter conference call. Net sales for the quarter were down 12.5%; gross margins were strong at 51.5%, up 193 basis points. But because of the low sales level, we were not able to outrun and reduce our expenses enough to make a profit. The loss for the third quarter was $1.5 million versus a profit of $0.6 million last year.

We continued to see very difficult selling conditions in all of our markets and expect to have challenging conditions for the near future. Over the past several years, we have deliberately deleveraged our balance sheet by bringing down our accounts receivables, outsourcing much of our new financing for customers and tightly managing our inventories.

Additionally, we have slowed our store growth and have put cuts in our capital spending back dramatically. With the tough business conditions in our industry for the past two years, we have focused on managing for cash and protecting our balance sheet. Our budgeted CapEx for 2009 is approximately half of the $11 million being spent for 2008. We are eliminating or postponing most any project that we can.

In October, we paid off all of our long-term debt and now have zero borrowings on our revolver as of yesterday. We believe that our conservative focus on reducing our debt and managing for cash these past quarters was the right strategy for surviving the brutal industry downturn and positioning for future profitability.

We have worked to better align our cost structure to fit the sales conditions and while serving the same number of stores, have reduced our headcount by 21% from the beginning of 2007 and by 13% since the beginning of 2008.

SG&A expenses for the third quarter were $6.9 million less than last year. But we are now seeing even tougher conditions and we are in the process of making deeper cuts in several areas of our operations. In some cases, we are furloughing staff to allow for adjusting back to improved volume in the future.

While we are resizing some staff to adjust to conditions, we are continuing to increase and update our training programs both in content and in systems upgrades to take the training quickly to the individuals throughout the organization. We have expanded live Web-based conferencing to eliminate most of our travel related for regional training.

Most recently, we began a Web-based video training program with many hours of product training, as well as product handling and installation training for our field associates. This is also a great medium to explain our philosophies through live and video online presentations to our staff on many levels.

We feel that our inventories are in very good shape. We have a better in-stock position on our best sellers than we've had in several quarters. The panic and scare about inflation of goods, particularly in Asia, has died. There is plenty of supply. The export rebates to Chinese manufacturers from the government have been increased as of November 1 and the pricing of commodities such as steel and fuel have come down significantly.

We have seen some domestic production return in upholstery, which is encouraging because it allows a much quicker response and better service levels. We are continuing to leverage our best sellers by adding different configurations in key selling items to our good collections. We have had good success with entertainment centers and home office. We are pleased with our recently added premium upholstery collections with quick ship special order capabilities. We think this will help us pick up some of the better customers who may be trading down from some of the higher-end lines.

Our average cost per SKU is slightly up from the third quarter, which is due to our selling of better quality products. We will not chase down to the bottom of the market to try to grow sales. We believe that our merchandise mix and our better quality goods is the right positioning for Havertys.

We continue to closely evaluate our advertising by individual markets to reach our target customers. We believe that our advertising mix by media and our brand message is more efficient due to our detailed analysis of our message and our sell-through statistics.

We have further rebalanced our delivery and distribution schedules to maximize routes and efficiencies without hurting our sales. This is through consolidating and reducing routes and adjusting staff where necessary. We are evaluating the number of drive teams by market, the number of delivery days by market and eliminating trucks where possible. With the recent decrease in fuel costs, we expect to see some savings in distribution and delivery in the coming months if oil prices stay down.

We are looking at every store and lease in our system. We have a number of stores with lease renewals coming up in 2009 and 2010. We are approaching property owners for possible rent relief and may choose not to exercise options if concession is not given where appropriate.

We believe that we are in a strong position to lower some of our rent expense in several of our markets. We are working to have the flexibility to close certain stores if markets worsen. We know that there are going to be many potential store locations come available in the coming months ahead with a large number of big-box bankruptcies in the news. A few may fit our profile at good lease terms in the markets we serve. However, we will be very deliberate and critical in analyzing opportunities in these difficult times. If the location isn't a home run, we won't be interested.

This week, we opened a relocated store in Mobile, Alabama, replacing an expiring lease location. We are pleased with the repositioning in the strong Havertys market. We will close an expiring lease location in the North Lake area of Atlanta by the end of the year. We will end the year with 122 stores, one less than last year. Sales square footage for 2008 will be down by about 1%. We may have several store closings in 2009 related to lease expirations and expect to have a square footage decline in the low single digits.

Every day, we read about failing furniture retailers due to the extremely difficult conditions that have affected our industry for over two years. We are firmly focused on adjusting our costs to the conditions and keeping a strong balance sheet. We believe that we are gaining share because of the fallout of competitors in our local markets. However, our associates are much more concerned with serving our customers better by providing better quality merchandise at real values and delivering the best quality service. This is what will make Havertys succeed through this industry shakeout. I would now like to turn the call over to Dennis Fink.

Thank you, Clarence. Following up on the comments about gross profit, we currently expect our gross profit margin for the fourth quarter of this year to be similar to the first nine months of the year, which, in fact, would be an improvement over the level of last year's fourth-quarter gross margin. In looking forward at our operating results at various sales levels, please be aware that almost 100% of the cost of goods sold for us is variable. There is very little fixed cost in the cost of goods sold line.

SG&A, on the other hand, is roughly two-thirds fixed or discretionary items that includes store occupancy, warehousing and also in the discretionary category is our advertising. The other one-third of our SG&A cost is mostly variable-type expenses. So we are focusing, as Clarence said, on managing SG&A by being as efficient as possible with the variable-type costs and squeezing as much out of fixed costs as we can and that is about as difficult as can be imagined in this environment, but Clarence outlined some of the areas that we are looking at.

Cash flow for the nine months of 2008. Cash provided by operating activities was $38.6 million. The largest source of the cash was about $32 million of decreases in accounts receivable from customers. In this economic environment, we are pleased to have generated this cash and lowered our risk exposure by outsourcing more of the customer financings.

Together with lower capital spending this year, which is roughly expected to be $10.5 million, we have reduced our debt by $12 million for the nine months and at the end of the nine months, we have increased our cash balances by $18.6 million. We actually used these cash balances during October to pay off all of our borrowings and it was ahead of schedule and without incurring any prepayment penalties. The only obligations that remain of a long-term nature on our books are for a view capitalized leases that we have. Further, accounts receivable reductions in the fourth quarter is expected to provide about $7 million more as a source of cash.

As a reminder, our book value is approximately $12.75 a share. Our inventory is valued at LIFO costs. So there is a LIFO reserve on our books that's about $17 million. That reduces the percent of value you see. We also have no goodwill recorded, so the book value figure is all tangible. At this time, operator, we will take questions from the audience and we would like to give everyone an opportunity to ask questions. So please, if you would, limit yourself to two questions and if you have follow-ups, we'd appreciate it if you reenter the queue. Please go ahead, operator.

(Operator Instructions). Budd Bugatch, Raymond James Associates.

Good morning. This is actually [TJ McConnell] filling in for Budd who is traveling right now. Thanks for taking my questions this morning, gentlemen. First, I would like to turn to the cost equation. Clarence went through a number of details on the specific items that you guys were looking to maybe assess. I was just wondering if you might quantify of that one-third of the variable costs, realistically what can we expect that could be trimmed out of that as far as -- quantificationwise?

Well, the main thing I just wanted to do was point out how these costs move up and down in relation to sales volume and in the shorter-term period, of course, it is hard to cut a lot out of fixed costs. But in the longer term, you right-size to the appropriate level. The answer is it just depends on how slow sales are and how much we can push out of the staffing and really the whole scale of operations.

We did cut costs, as we mentioned in the press release, and Clarence confirmed, we got about $8 million out of SG&A versus the prior year and then we did have the sort of one-time item on the -- actually it was on the stores that had been closed in prior years, reserving for possible sublease income issues and that was around a $1 million charge that we took in the quarter. So that increased our SG&A and that should not be a recurring type of expense.

But the answer is we just have to try to push and we can't really quantify it ahead of time very well. You can see that we have squeezed quite a bit out of the costs. The one that is the easiest to pick on and the one that you have to be the most careful about is, of course, advertising. That runs 6% to 7% of sales. As I said, it is mostly discretionary, so you have to decide really how much effort in media spending you're going to put forward and it does have an impact on sales itself because the less you spend, the less attention you draw and awareness you create. So we have been cutting back in that area and we just have to make that judgment three, four months at a time.

Got you. My second question deals with the outsourcing of the credit. I was wondering if you guys had seen any types of -- any pushback from those third-party providers. Whereas maybe if you had the credit in-house, would you have gotten the customers approved and now they are not being approved or is it pretty similar to what your credit standards have been?

They are very consistent on the outside and we have found their credit standards are very similar to ours. So we haven't seen a big change in approval rates at this point in time. I think you can expect that it will happen over time depending how deep and long this recession is, but just my view is the corporate credit has shrunk much more quickly and is much more challenging than the consumer credit is right now for things other than mortgages. The mortgage market, obviously, is extremely tight for consumers. But the credit card lending and lines you hear about, about that being squeezed, we haven't seen it that significantly yet in our business. So I think that you always -- we always have the option of offering longer terms and taking more inside, but, at this point in time, we are more likely to be concerned or be focused on generating cash rather than adding credit sales.

All right, guys. Those are the questions. Thanks for taking them and best of luck.

John Baugh, Stifel Nicolaus.

Good morning, Clarence and Dennis. Let's start with the stores, 122. If we can just go into some detail on, again, how many are owned, how many are leased, how many are coming up for lease renewal the next year or two. You mentioned I think a sale-leaseback that you were doing, what are the opportunities there? I guess -- it is possible for you to give me a number, I know, about what kind of rent expense you might save, but give us a feel for what rent expense is as a percentage of revenues and some ballpark on what you think you might be able to cut and what I guess was a fixed expense, but maybe now it'll be a little bit more variable. Thank you.

Well, it's really a market-by-market deal. We have about a dozen stores that the leases come up in the next couple of years or we are going to be discussing in the next year because we have to give notice and so we will be looking at every one of these, talking to our landlords, trying to see whether it makes sense to renew the lease or leave the market. These would mostly be in smaller markets and it would depend on how we are doing in each individual store. Many times, we are able to get leases with kickouts. That is another thing we are starting to look at just to give us more flexibility. In some cases, we have been able to reduce the rents in half for a period of time and these are the kind of things that we will continue to do.

I think, Dennis, we own about a third of our stores and I am not sure exactly what we expect to save as a percentage, but it is really making the markets more viable and helping to make them more profitable.

Sale-leasebacks?

The total rent expense for the Company is about $32 million a year.

Okay. And you mentioned a sale-leaseback I think in the release. What are the plans there?

We have one under contract and that market is not very fluid right now, so that is a -- a longer-term strategy would be additional sale-leasebacks, but probably not that many likely in the next, say, six months or so. We do sale-leasebacks from time to time. We did an 11 store sale-leaseback about six years ago and I believe this is the first or the second one we have done since that time. So that is a good source of cash in the right kind of market. Right now, that market is tight.

Got it. And then what is your, of the credit you have underwritten that is notional or dollar amount, what is the total outstanding, how are you handling the provision? Is it kind of overfunded? Just kind of walk us through the credit in-house.

Sure thing. We have got about, at quarter-end, I think it was $36 million outstanding in accounts receivable when you count -- we have part of it classified as long term. Most of it is expected to be paid off in the next year. Actually, let me correct that. It is about $34 million and that is down from $67 million at year-end last year and was about $75 million one year ago.

In terms of the choice, what we do is -- it is where the more aggressive credit offer is. We offer longer term, no interest through the third party and the shorter term is offered internally. Right now, the biggest program is 12 months, no interest, 12 equal payments, the internal program. And people have it there to choose. There is a size of minimum purchase to get the more expensive or the more desirable credit programs, longer term, free interest. It takes a bigger purchase to get that. So the financing side, you can have a small purchase on the outside. To get the better programs, you have to have a bigger purchase. And we let the customer choose. Our credit quality is very good from the customers who come into Havertys in the first place and so because of that, we have had approval rates over 85% over the years and we haven't seen much of a change in that. It has come down some, a few points.

In terms of coming up with a provision, we look at delinquency and the biggest factor is the status of the accounts. If they are delinquent or if they have any problems that are on their credit files, we will reserve against it and then we also have a general reserve that is based on a one, two and three-year lookback of writeoffs as a percent of AR and that has been going up some and so we have increased our allowance for that reason, but because the absolute dollar receivables has come down, our allowance for doubtful accounts on the balance sheet actually is a little lower than it was a year ago.

And then just refresh me, combining the outside credit and your credit, what typically that is as a percentage of your sales?

It was running in the 50% range and it has come back down. In the quarter just ended, it was about 43% and that 43% is made up of about 8% inside and 35% outside of total sales. Just in the year-ago quarter, it was about 51% and the biggest decrease has come inside as I said before. One of the reasons is we were more aggressive with credit offers last summer. We had little longer terms available. We were doing no interest until 2010 and 2011, so that was 42 months roughly or 30 months, one of those two programs and we are also allowing no down payments during that time period and backed off at a minimum. So that was a pretty liberal time creditwise in terms of qualifying from the purchase standpoint, not from the credit quality. But it has come down. People are -- I could just make a generalization. People who don't have the money aren't spending it, which sounds like a Yogi Berra statement, but they are not -- it is quick to want to add debt.

Got it. And Clarence, quickly, any comment on the regional performance of the business?

Well, every region is weak right now. Texas is better than most and I don't know if that is going to hold. I am sure it was affected at some point by the increase in oil, but we have weakness across our Company right now.

I have heard some people saying Florida in parts are showing signs of bottoming. Do you see that or is it still deteriorating?

I like that thought. Let's hope that is what is happening. It is very tough in Florida.

Okay, thank you so much for answering my questions.

Todd Schwartzman, Sidoti & Co.

Hi, good morning, guys. Clarence, you mentioned that you are happy with the entertainer and home office sales during the quarter. Can you maybe speak to how bedroom has been trending and specifically maybe talk about youth versus adult bedroom?

Well, our bedroom category has always been strong and it continues to be. We are happy with our program. I would say that we want to improve our youth program and we will be adding to that, but we have had some challenges in the last several quarters and keeping in stock some of our better sellers. We had to move some of the production from countries to different factories and we are now back in stock on our bestsellers, as I mentioned, and I feel good about our bedroom sales for the fourth quarter. It is a strong category for us.

So it sounds like adult might be faring a little better for the production reasons that you mentioned?

I would say, right now, it probably is just because we are better in stock with them, yes.

Okay. Also in terms of Florida, do you have any sense now of the mix of sales in Florida or in your Florida stores or for delivery to Florida, mix between consumers that are furnishing primary versus secondary or even part-time residences?

I don't think I have a good figure about part-time versus full-time residences there, but I would say that there are a lot fewer in both cases. We don't give our particular percentages by region, and I know in the past, we have said we have about 25% of our stores and that is, I think, about the same number right now, but we haven't given our percentages by region out.

Do you track out-of-town sales within various territories, various markets?

You mean whether they are initiated in another city?

(multiple speakers). For out-of-state delivery. Yes, specifically, again, just trying to get a feel for how building is maybe bottoming in Florida versus any --.

We could get those numbers, but that is not something we normally track. I don't think that's a usual something analysis that we have.

Okay.

We definitely know it because we know the billing address and the delivery address.

Right. Thanks, guys.

It's a good question. I know where you are heading there. We're all trying to find out when is this thing going to bottom in Florida.

Well, yes, what I am getting at, of course, is that I would expect -- you probably, I think, would expect to see a little bit of an upturn in your shipments within Florida potentially before there is any type of low single digit type increase in sales, in home sales down there because of the presence of the out-of-town consumer.

Well, we are moving into our season in Florida. This is historically the season now through early spring. So we hope to see some better uptick and we will probably have a better feel in the next several months.

Got it. Thanks.

(Operator Instructions). There appear to be no further questions, sir. Are there any other points you wish to raise?

No, I don't. I just want to thank those for participating in our call and we appreciate your interest in Havertys. Thank you.

Ladies and gentlemen, this concludes the Haverty Furniture third-quarter 2008 earnings release conference call. Thank you for participating. You may now disconnect.