Haverty Furniture Companies Inc (HVT.A) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Haverty's Q4 and year-end 2010 financial results conference call, on today, March 1, 2011. Throughout today's 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 Mr. Dennis Fink. Please go ahead, sir.

Good morning, everyone.

During this conference, we'll 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 quarterly update.

Thank you, and good morning, everyone.

As we reported earlier, sales for the fourth quarter were about dead flat with last year at $162 million. With positive comparable store sales of 1.9%, as we had closed four weaker stores in the past year. The fourth quarter represented our fifth consecutive quarter with positive comp store sales. Our written business for Q4 increased 3.2%. For the full year, our comp store sales increased 7%, with the rate of increase having slowed in the last half, after double-digit gains in the first.

Pre-tax profits for the fourth quarter were $5.7 million, down from $7.6 million, which had been a very good performance last year. We have previously given guidance that our gross profit margin would be lower in Q4, and the 51% was in-line with those expectations. A significant factor was the $0.5 million LIFO charge, versus a $0.6 million credit last year. Promotional pricing was also more prevalent, and some of the price increases over last year, such as inbound freight, were difficult to pass along for products hitting specific retail price points.

For the full year, profits were $8.7 million pre-tax, compared to a 2009 loss of $5.4 million. 2010 was a good turn-around year, after the past two years of losses during the recession. We're seeing a better balance of performance among our five regions, with improvement in some of the markets most impacted by the housing crisis, such as South Florida. While these areas are not leading the Company, they are no longer the drag that the past several years have been. All five of our regions delivered positive sales increases for the year.

The severe winter weather in January and February have impacted our delivered sales for the first quarter. We've been unable to deliver three to five days on average across the chain this quarter, with our largest markets of Dallas and Atlanta, where we have our main distribution centers impacted the most.

For 2011 Q1 to-date, our written sales are off 2% in total, with deliveries down 4%. Sales for the important President's Day promotion were positive over last year, and helped us gain back some ground from the earlier ice and snowstorms. We have a good pool of written business heading into March, which we expect to be the strongest delivered month of the quarter. We're beginning to get a steadier performance in our best markets, which indicates our business is stabilizing, even into the teeth of a struggling housing market. Our inventories are in good shape, with the best in-stock position we've had for several years.

The Asian factories are just starting back production after Chinese New Year. And while they're struggling to get back to staffing levels due to workers not returning, we expect that shipments should be in-line for the spring season. We've not seen any significant price increases on our lineup due to commodity pressures, but we're feeling a bit of pressure on the labor front. We'll be watching those pricing pressures very closely in the coming months.

We've just completed our 10th brand tracking report, based on 1,200 consumers in 35 markets, which we began in 2006. We are pleased to see that we've received our highest score, and rank number one in brand recognition. We believe that this does ultimately relate to market share, and also allows us to improve our margins as we bring in better quality product. We believe that we have strong opportunities to get more credit for the quality of our merchandise and our higher service levels.We're adding several new special order programs from proven vendors and improving our internal processes to speed shipments. These additions and enhancements should be important to our current lineup and continue to help separate us from the more promotional retailers.

In 2011, we're on-track to up-fit approximately 40 additional stores with our new interior displays, focusing on the largest markets first. Including the 13 stores we remodeled last year, this will convert almost half of our stores by year-end. This makeover insures that we have consistency for the Haverty's brand across our chain and a stronger appeal to today's customers. It's brighter, easier to shop with better signage, which is more consistent with our informational and organized website presentation. We've been getting very positive reviews and corresponding traffic and sales in many of the newly-remodeled stores.

Equally important, our store management and associates are very enthusiastic about the new program, with the sharper presentation and brighter store displays. We expect to complete all of the planned store conversions by the end of 2012. We expect to have a slight increase in our sales square footage in 2011, with four planned store openings and four closings. We're repositioning and relocating in three markets and our store opening in Boca Raton. This will be our first positive growth in sales square footage in four years.

We are evaluating several possible new store openings in existing markets, and expect that we may be able to tie-up favorable leases later this year. We're cautiously evaluating opportunities, which will strengthen our position in our best markets. Our main focus is making our existing property profile more attractive and more productive. With the major developments to our systems and distribution network we've developed over the past several years, along with the difficult reduction in employees across the board, we know that any increases to our top line will have a major positive impact on our profitability. We are well positioned to drive sales and to build our brand in all of our markets.

I'd like to now turn the call over to Dennis Fink.

Thank you, Clarence.

Although our sales are running behind last year for the first two months of 2011, we do expect to see an increase for the year, that will be weighted to the second-half when our business is usually the strongest. Comparisons to the prior year will also not be as difficult in the second-half. Gross profit margins for the fourth quarter of the year came in as expected, when we had given guidance in our third quarter earnings press release. We anticipate the gross profit margins for 2011 will be similar to the 2010 annual rate, with the second-half a little better than the first-half.

For the full year of 2011, fixed and discretionary-type expenses within SG&A are expected to be approximately $207 million to $208 million, which would be up about $3 million or 1.5%, compared to those same costs in 2010. The main increases expected in this category are for group medical costs, employee compensation, one additional store location for part of the year, store remodeling costs and advertising expenses. Variable costs within SG&A are expected to run about 17.5% as a percent of net sales for 2011, based on modest increases in the cost of fuel used in delivering merchandise to customers' homes. Total 2011 SG&A costs are expected to be slightly lower as a percent of sales than in 2010, with a bigger reduction if sales increases are better than anticipated, allowing the leveraging effect on fixed costs to be greater.

During the third quarter of 2011, we expect to record a non-cash income tax benefit of approximately $13 million for the release of the deferred tax asset allowance, originally set aside in 2008. For the first two quarters of 2011, the income tax expense is expected to be a relatively low dollar amount for certain state income taxes. For the third and fourth quarters, we anticipate having an income tax expense rate of approximately 38% on pre-tax income, which would be more than offset by the $13 million benefit for the quarter, in which the allowance is released.

For 2011, we expect to use between $5 million to $10 million of cash to support changes in operating assets and liabilities. Depreciation expense is expected to be about $17 million, and capital expenditures are planned for $15.2 million. The capital spending is mostly for leasehold improvements for one new store, as well as relocated and renovated stores. Our goal is to maintain our existing cash balance and to have no borrowings under our revolver.

Presently, our book value is approximately $11.82 per share. We believe this is a conservative figure, since our LIFO inventory reserve is $17.9 million. We have no intangible assets, such as good will reported, and we own 41 of our 118 retail locations.

Operator, at this time, we'll take questions from the audience.

Thank you, sir. (Operator Instructions) And we'll have a short pause whilst participants register for a question. Thank you. And the first question comes from Budd Bugatch from Raymond James. Please go ahead with your questions.

Good morning, Clarence. Good morning, Dennis This is actually TJ McConville filling in for Budd. Congratulations on the quarter and this year's profitability.

Thank you.

Sure. Dennis, you gave us some great information on the geographic mix of sales and the improvements that were pretty broad based. Were there any changes, either this quarter or throughout the year, that you can point to in the good, better, best continuum? Any signs that one's set to outperform in 2011?

You talking about regions?

Well, no, just broadly across your business, was there any -- we've heard from some others that there was the barbell effect, where you had the good and the best categories performing, maybe at the expense of the better? So, I didn't know if that was similar in your business or if you'd seen any dramatic shifts?

I don't think we have seen any dramatic shifts, we had some categories that were strong last year, bedding was good for us. Upholstery was good. The rooms that people use the most.But, as far as the barbell effect, I don't think we saw anything dramatic there.

Okay. And then, Dennis, as you discussed, we had comps accelerate last year in the first half and they peaked in the second quarter. Is that really the primary driver of what we're looking at when we're looking at how 2011 should be shaped, or is there something else you are assuming in the guidance of up for the year? Are you assuming any type of economic acceleration in the back half?

It's primarily the seasonality that we have that would shape towards the second half, but we don't -- we're not expecting a double dip or anything like that.

Okay. That's helpful. The last question goes to the gross margins. Now, for flat gross margins, I'm assuming that the assumption is the offset to the cost increases is the lack of the LIFO charge where you had, I think a $2.6 million negative swing this year. Is that a fair assumption, Dennis, or am I missing something there?

No, that's correct. We expect some modest inflation this year, but not like it was in 2010.

Okay. That does it for my questions, guys. I'll defer to the others.

Thank you.

Thank you. And the next question comes from Todd Schwartzman from Sidoti and Company. Please go ahead with your questions

Hello. Good morning, folks.

Good morning, Todd.

First off, what -- in your gross margin guidance for the year, what assumptions do you make with respect to freight and labor costs?

What we're thinking that there will be modest, both modest increases in freight and labor insofar as fuel goes, and we don't think they will be exceptional and we don't think that we will -- we think we will pass them on. So, that gets back to the modest inflation comment. The actual container rates without cost appeal have come down a little bit recently for importing and costs of goods sold.

Dennis, if by modest you're talking single digits, primarily?

Yes.

Okay.

And that's just recently. That's really in the first quarter, just last couple of months.

And what about ad spending for the year? Is there any number that you would throw out, either in terms of dollars or maybe what you're targeting on a percent of sales basis for the full year?

We probably want to keep that a little closer to the vest, but there's no big changes expected. Some of the mix will be different, but, don't look for us to increase the as a percent of sales too much, and if we get good sales, it might even come down as a percent.

Okay. And, Clarence, last quarter on the call you had mentioned that labor issues were abating at that time. What if anything is causing the renewed pressure?

Well, the labor we're talking about from the Asian factories. There's certainly some pressures now. We're hearing that today to get these workers back, they're going to have to pay a little bit more, particularly in China. But we also heard this morning that the factories are back up and actually are asking to ship earlier for some collections, which shows us that they're getting the workers back. We are -- they are asking for some increases which we're resisting, but I do think in order to get the workers in all of the countries in Asia back to level, they're going to have to pay a little bit more. So, that'll probably continue to be a pressure.

And of the four store openings expected for the full year, Boca is the only new one, the rest are relocations, is that correct?

That's right. There are three locations -- relocations in existing markets and then there's one store, which is in a neighboring market in Boca Raton, which we're taking over from an existing retailer.

Have you named those other markets yet? Those other stores that are moving?

No, because we haven't finalized a couple of those leases.

Okay. And are you seeing anything new with how consumers are using the web these days?

It is becoming more important to us. I think I've used the figure before, that 80% of our customers use the web in the shopping process, and that's at least that strong, possibly getting stronger. We have a good presence and we are recognized as one of the top furniture sites, but we still see most of our customers buying from us. And while the category's growing -- internet sales, it's not a major part of our business. It's less than 2% right now. So, we're driving people to our stores and we think that's going to be the most important part of what the web does for us.

And lastly, can you give us any detail on the new programs from vendors that you alluded to?

Well, we're trying to add special order programs, and we've had, what we call, special collections, Custom Choice program. But, we're trying to add true special order programs from existing vendors, from proven vendors. So that, we can reach the better customer who would like to have custom material or custom products that we haven't provided in the past. We think that will help us reach the better customer who is starting to come back to us. And, as we just saw with the Robb & Stuckey bankruptcy in Florida, we think that would offer us some opportunities down there.

Terrific. Thank you very much.

Okay. Thanks, Todd.

Thank you. The next question comes from David Berman from Berman Capital. Please go ahead with your question.

I like the accent on that. Hello, guys.

Good morning.

A quick question. If you can just address the balance sheet in terms of the accounts receivable and accounts payable. I notice the accounts receivable went down quite a lot, down 10%, sales are flat. So, if you can talk to that? And then the accounts payable, the number of days payable went down from 23 to 20 days, which is a good thing, but, you paying the stuff on time with only 20 days.I was just wondering if you could also address what -- why it's come down and why aren't you taking more advantage of borrowing money from your vendors? The receivables and the payables?

Sure thing. The receivables, that's our in-house program, which we're using less of and also we're offering fairly short payment terms. It's a 12 months no-interest with 12 equal payments. It's really there for people who don't want to use the finance company, or don't want to -- or have had an account with us. Just want to keep purchasing under that account, most of our credit sales are really through a third party finance company. So, we think the numbers come down dramatically over the last few years, and it's probably at a steady state right now.

I see, okay.

And then, in the case with payables, we're buying a little more direct from Asia right now, where in some cases, we're paying by wire transfer after the merchandise leaves the port in China. So, that part of the mix is growing a little bit. We understand about the terms, certainly, and we've used our good credit rating and our buying power as a reason to get the best pricing and other services and have not really pushed hard on the term side. Some of the others are doing that. It's refreshing that we are -- to our vendors that we're looking more for service and pricing, as opposed to them taking risks on credit, which they're doing a lot of these days.

So, are they giving you enough of a discount, is it material?

Yes. I mean, it's all baked into the whole package. But, it's really -- it's not something we're pressuring for, since our cash flow is good and our balance sheet is strong. We, again, we try for it in other areas. It's hard to say exactly what you're getting for any one part of the arrangement, but it's just not something we're pushing for. A lot of times they have to go to a factor, third party factor, to carry the receivable and it costs them more. So, we're really not pushing that direction very hard.

Right, okay.

Again, the other thing is a key is that we want our products on time, predictable and our orders filled on schedule. So, they -- it's not just volume that they respond to, it's --

Sure.

Yes. Who pays their bills and who's credit worthy.

And if I may, I presume the cash, you have now got over $2.50 a share, I presume at the moment you're still in tough times, you're just not going to be buying back shares or paying dividends, only one-time dividends. You're just going to keep on building that, is that the plan?

Well, I don't think we'll be building this year, and what we're likely to do is to expand more when times are better and there will be at least -- capital expenditures and possibly even -- if there is additional store locations, it would be inventory in the stores. And we would be using that cash to grow the business. But yes, times are still tough, and we are being conservative, no question.

Have you seen any changes in the competitive landscape, in terms of competitors, maybe going out of business, that might be helping you, or anything like that?

Well, I mentioned the Robb & Stuckey bankruptcy in Florida, which was a big announcement for the industry there, on the upper end of the business. That might help us. There are a number of independents who are very weak and are failing. You won't hear much about them because they're not large enough, but this industry has historically been dominated by the independents, and they are shrinking. So, we do think that's where we'll get most of our growth, is from players who are dropping out of the market. And as business gets better and they have to build back their inventory, they can't get the product and we can. So, Dennis mentioned our strong balance sheet and the fact that we pay on time. We think that's a huge advantage, not only domestically, but for dealing with the Asian suppliers. They want to deal with us, and we'll get the product. And I think it will help us to gain share from the weaker players.

All right. Very good. Okay. We'll keep up the good work there. Thank you very much.

Thank you, David.

(Operator Instructions) We don't appear to have any further questions. Please continue with any points you wish to raise.

I'd like to thank you for joining our call and thank you for your interest in Haverty.

Ladies and gentlemen this concludes today's presentation, thank you for your participation and you may now disconnect.