Haverty Furniture Companies Inc (HVT.A) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Havertys Q3 2009 financial results conference call on the November 5, 2009. 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. Please go ahead, sir.

Good morning, everyone. Welcome to our conference call.

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 and which we undertake no obligation to publicly update or revise.

Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed 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 our third-quarter conference call. As we reported last night we produced a modest profit of $501,000 for the quarter. It's certainly something we are glad to see.

Business conditions are still very challenging, but the deep cost cuts we have taken over the past several years, including reducing our total headcount by one-third, have finally reached a point of helping us reach some positive profits. We announced earlier our comparative store sales for the quarter were down 11.9%, but an improvement over the 20-plus percentage declines we had experienced for several previous quarters.

Third-quarter sales were up sequentially from the second quarter by 17%. Clearly, our comparatives for the next several quarters are easier to beat, but we also believe that we are gaining traction with our new merchandise collections and our ability to provide timely delivery. Written business for the fourth quarter to date is flat compared to the same period in 2008.

Our gross margins for Q3 were improved primarily because of a positive LIFO adjustment of approximately 35 basis points and fewer markdowns and closeouts. We expect to be able to hold our year-to-date gross margins for the fourth quarter while providing strong values and promotions. We are managing our inventories very well in this difficult environment, reducing inventory dollars by $15.5 million from year-end '08 and $12 million less than last year's ending Q3.

Over the past three years we have significantly reduced our costs in reaction to the serious downturn while maintaining service quality to our markets. Our operating systems have been a big part of our ability to run more efficiently with fewer personnel. The warehouse and delivery teams are benefiting from our new internally-developed, product-specific videos which detail proper assembly and loading, which has helped us reduce our product handling issues and improve the customer experience.

Real-time tracking of delivery trucks provides information to our centralized distribution team and stores as well as allowing our customers to follow the truck on delivery day via our website.

Our management team is keenly focused on growing our sales in our existing stores and driving sales per square foot. We are committed to improve our sales productivity by market, individual store, and by salesperson. We fine-tuned our advertising for each market and are reinvesting more marketing dollars in our strongest producing localities.

We have given our sales and store management teams the finest tools in the industry to track individual daily performance and merchandise category productivity. Sales associates have received online product training that points out the features and benefits of our new collections. Tools to enhance and track the online communication between our sales associates and their customers have been developed and rolled out chain-wide.

The tremendous downturn in retail business has generated a number of available empty boxes and we are evaluating a small number of select locations, as well as reviewing our existing stores. The potential new locations are within the heart of our geographic footprint and include store relocations and new markets.

We are not renewing leases of our weaker performing stores. We have identified two of our stores which are reaching the end of their lease that we will close rather than renew. These stores are in Albany, Georgia, and Fredericksburg, Virginia, and will close during the first quarter of 2010. We do not expect to grow our square footage during 2010.

Capital expenditures for 2010 are under close review and are likely to be in the $8 million to $14 million range, which includes upfitting of a few new replacement stores and upgrades to our computer systems.

Even though we are one of a very few furniture retailers who are public and report sales results, I believe that we are gaining market share in many of our markets. We are developing stylish, proprietary product and excellent values through some of the industry's strongest suppliers, both domestically and in Asia. The new products now on our floors are hitting home runs. They are driving our business and continue to separate us from our competition while building the Havertys brand.

Our strong balance sheet and cash position allow us to negotiate for excellent retail locations which is helping us to reposition in some of our current markets and to pick up some fine locations in adjacent cities.

As has been our experience over our nearly 125 years as a furniture retailer, we gained strength and market share in the tough times because we stay consistent to our mission of providing the highest quality of service levels and better quality furniture values for our customers. We believe that in these difficult times the home furnishings customers in our markets will gravitate to Havertys strong values and tradition of service.

We are leaner and more able to adapt quickly to our customers needs, and we will stay focused on earning and keeping profitable market share gains in the months and years ahead.

Operator, we will now take questions from callers.

(Operator Instructions) Todd Schwartzman, Sidoti & Company.

Good morning, folks. Which financing option was most popular in the quarter and what do you plan to offer for 2010 if it's not too early to look ahead?

The most popular offer is really the 24 month with 24 equal payments, no interest program. We also have an 18-month same-as-cash program that requires a 1% payment per month, and that is also -- it's back-and-forth really between those promotions as to the most business done.

There are some changes in the laws coming up, primarily there is not going to be any programs that have no monthly payments. They will no longer be allowed. We only have some of those for a very short term. They are not the lead programs we advertise so it's not going to impact us very much at all.

We will expect that our credit offers are similar to what we have been offering, and we wouldn't expect that to be dialed up. If anything it might be dialed down some.

And as I understand it, Dennis, the no payment programs have to go away around February is it? Is that correct?

Yes, I believe they are no longer to be offered after December 31 and then for any deliveries that happen I believe we have till mid February. And that is correct; you have to have some kind of monthly payment. We believe that that is a 1% minimum right now. And as I say, we do have some of those programs that we have been offering so those would continue.

Okay. Clarence, what percent of sales for the quarter are manufactured to domestically? I haven't asked that in a while.

Well, let me just start by saying almost, if not all, of our wood furniture is manufactured offshore. So what is manufactured domestically would be upholstery and that has moved more aggressively to leather, which is done offshore. So I would say that only about 40% of our upholstery is domestic, so of that then that might only be 20% of total sales.

Got it. And just looking at your comment about the written business quarter to date, can you remind us looking back to Q4 of last year were November and December sales of last year noticeably weaker than October? What was the pace there?

No, they weren't noticeably weaker. November was a better month and December usually is close to what the October number is, but it's front-end loaded and we deliver heavily in December. So there is better business because of November. That is one of the best months, if not the best month of the year.

And in the third quarter were there any products or collections or categories even that you would call out as performing best or worst?

Well, I think upholstery is still performing better than case goods right now. But we had a number of new collections come in that had hit and started running right off, so we feel pretty good about our overall balance of mix right now. But this year and certainly during the downturn upholstery has done a little better than, let's say, formal dining room or master bedroom.

And what about average ticket?

It has held pretty steady. Both price per SKU and average ticket has held steady all through this year.

Looking ahead, what do you see as your best use of cash for the foreseeable future?

Well, we mentioned that we are going to be bumping up our CapEx some this year, this coming year and we are looking at different opportunities that makes sense right in our backyard.

We will have some issues in trying to upgrade our systems, our computer system, which has become very critical to us. And we will have issues and have to reinvest in that. So part of that CapEx is that, but there is going to be more behind that.

So you know as we have held back our CapEx over the last several years there is probably some deferred maintenance that we are going to have to keep reinvesting in our stores. We have over 120 stores, so new carpet, remodelings, all of that type of thing. So I think it's just going to be reinvesting in our current footprint.

The big-box opportunities that you talked about briefly, does that span a number of retailers or is it -- how much of that were vacated by furniture retailers?

Oh, these are not furniture stores. They are other big-box stores.

Got you. Okay, thank you very much.

Budd Bugatch, Raymond James.

Morning, Clarence. Just picking up on the store expansion, store count for next year. Expansion is the wrong word. You have two stores that you are going to close whose lease has come to their natural life. They are underperformers, I think, if I understood you correctly.

Well, the leases are expiring; we are just not renewing them.

And you said you were going to but you are looking for some other locations take the advantage of open real estate. Can you kind of look a little bit longer into the year and see what might also change as you go down to this --?

We said in my comments that we really don't expect square footage to grow and I think that is consistent. That means, clearly, if we open some stores we are going to be closing some stores.

Wind up with about 122 stores at the end of next year.

Well, we have won 121 now, and I don't anticipate having more than that under what we know right this moment.

And beyond -- what is your appetite beyond that? I know that that is -- it's hard to look at that today, but --?

We will feel a lot better after several quarters of profitability.

When you are looking at the comps, particularly in the written business which is always more important to me than delivery, can you characterize what you are seeing there? Is it simply better traffic? I think that is what I would infer from what you told Todd, but I will make sure I am right on that.

Well, we have said the quarter-to-date is flat. That is compared to last year, which we were down for the quarter 20-something percent. So I think we are just bottoming out and coming back a little bit.

I do think that we are closing a little better. In other words, our people -- our customers like what we are presenting. We are a little more promotional and more specifically promotional about individual product categories, and I think it's working.

However, our traffic really is not any different than last year. It's about the same. We haven't seen much improvement there.

And geographically any color you can provide on how that is looking?

I would say it's pretty balanced right now. Florida has bottomed out, it looks like. They were sliding pretty fast. That looks to be bottoming out and that is happening across most of our regions right now compared to last year fourth quarter.

Okay. And as you look forward, Dennis, for next year the 16% variable cost ratios that stands? Can you put any color to what the components of that are?

Yes, it's a pretty narrow definition of variable cost. And it is meaning we have the things in there that really will move up or down; it's sales commissions, cost of the whole salesforce or sales associates in the stores. That is variable; they are paid on commission.

Then there also is the credit costs with both MasterCard Visa, which is as everybody knows has a fee associated with it. If it's credit there is then the upfront discount we pay to our third party.

Then the other big item is the cost of deliveries. And then on top of that there is some other categories of expenses that vary slightly. We have a small piece in for that and they add up to about 16%.

And advertising then, you didn't mention that. So you were considering that in the fixed part of it?

Yes, and we said mostly fixed. It's really an item that you budget or you determine in advance and then decide to spend it. So it's -- you might call it a discretionary cost. Discretionary only that you pick the amount.

You have to run advertising, but the --. It behaves more like a fixed cost than a variable in you determine what it's going to be and then put forth the media placement to fit that budget.

I understand. And in advertising the sales ratio in this order was what?

We will tell you that at the end of the year. It runs in the 7% range. It's fairly steady, a little bit less sometimes. We had cut back in absolute dollars in the second quarter expecting business to be tough, and so the dollar level is just back up along with the sales bounce back from the second quarter.

As you look at the 2010 with the $8 million to $14 million CapEx, what is the determinant between the low end and the upper end of that amount?

It's how many stores we decide that we are looking at that we decide to pull the trigger on and how much upfitting is required. Typically, the ones we are looking at now the landlords aren't -- is bargain rates are there per square foot. So-called bargains; lower than they have been in many years.

But they are not interested in building in or, let's say, financing the upfitting that is needed to convert it into our space. They prefer just to have somebody come in with the financial wherewithal to do their own tenant improvements.

Some require more tenant improvements than others and they all require more than we have had over the last few years, because a lot of that has been built into the lease rates. This is to take it beyond the white box level. Everything that you would see that makes it into a Havertys store from whatever kind of store it was before.

So there is a variation there, but they are all a little more expensive in terms of CapEx upfitting than we would have seen over the last few years because we are on the hook for it. We are paying for it.

Okay. And I know you don't like to give guidance, but the question for 2010 is can you look into that crystal ball of yours, and what do you think about sales? Where do you think comps will turn positive? What are you budgeting?

That would be guidance wouldn't it?

Budd, you have got ways of putting the question so it seems so harmless.

We are not confident in this economy and we are glad to see signs of things getting better, but it's still so far below the levels we were at 2004, '05, and '06 that it's just hard to know when the furniture buyers come back. Housing is starting -- it looks like it has bottomed out so we feel like we ought to be able to get increases. But we are not highly confident of it.

We are going to play this like a shortstop and be ready to go either way and hope that we are successful with sales going up.

Thank you very much.

David Cohen.

The slight deflation in the LIFO inventory valuation, what impact would that have been on a dollar basis?

It was about a $0.5 million positive for the quarter.

Okay. And is that something that could recur and under what circumstances would it recur?

It's likely to be the same number or the same ballpark number in the fourth quarter. Then next year I don't have a good judge on that, but I would expect that there is -- the best assumption is there is very little inflation and probably not any more deflation.

Okay. And then the break down of the SG&A that you provided was pretty useful. I haven't seen -- maybe I haven't looked in the right place -- but I haven't seen those breakdowns before. If you looked at prior quarters for this year what would those have looked like?

The reason we decided to put those out there was because we have cut a lot of expenses and we are kind of trying to hit the restart button on SGF&A. And the fixed costs were quite a bit higher; that is the items that we have addressed and cut back on.

When you are dealing with the whole scale of operation though it's a little tough to say what is fixed and what isn't, because you are reducing your whole scale and cutting a lot of jobs. So the purpose of that was to tell you the relative level of the fixed type of cost and then we are going to try to hold to the variable costs going forward, purely variable.

But to answer your question directly, the last five quarters the fixed cost portion has been higher.

Okay. So on a dollar basis -- so this works out to be just under $55 million on a dollar basis. So you are saying that on a dollar basis it has been higher in prior quarters or on a percentage basis?

It has been higher definitely on a dollars basis and it has been on a percentage basis as well. If you are talking about the recent three or four quarters.

Yes, yes.

When you go back to when sales were a lot higher that figure as a dollar amount it was higher but as a percentage it was quite a bit lower because we were leveraging the fixed cost back then.

And then your cost of goods sold is that -- what is in that line item other than product cost?

Inbound freight, which is part of product costs really but a lot of this comes from Asia, and then the cost to transfer the merchandise to the point of delivery. So that also, all those components are almost totally variable in our cost of goods.

Great. Thanks a lot.

(Operator Instructions) There appear to be no further questions.

Thank you very much for participating on our call and for your interest in Havertys.

This concludes the Havertys Q3 2009 financial results. Thank you for participating. You may now disconnect.