Haverty Furniture Companies Inc (HVT.A) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Haverty's first quarter 2011 financial results conference call. At this time all participants are in a listen-only mode, and following the presentation instructions will be given for the question and answer session. (Operator Instructions) As a reminder this conference is being recorded today, May 5th, 2011.

I would now like to turn the conference over to Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, and good morning everyone. During this conference call 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 an update.

Thank you, Dennis. Good morning. Thank you for joining us on our call. The first quarter's comparable store sales were 0.6% less than Q1 2010 when comps had been up a strong 10.1%. Last year's first time homebuyer's tax credit was a stronger incentive than we realized at the time to the overall housing market and was a catalyst for some furniture and home furnishings purchases.

Our core customer has been negatively affected by the severely weakened housing market which may be beginning to level off from the precipitous declines over the past four years. We are hopeful that improvements in employment will help consumer confidence rise in the near term which is necessary for any significant recovery in housing and home furnishings to occur.

Our Q1 gross margins declined slightly from last year due to some inbound freight increases since that time, and the difficulty in quickly passing on cost increases at retail. Gross margins for Q1 are consistent with the level of the last three consecutive quarters. We expect to hold our current margins for the remainder of the year.

Our main store emphasis for 2011 is the significant improvement and upgrading of our store interiors with our Bright Inspirations project which we began last year. We are encouraged by the new brighter, easier to shop layouts with significantly enhanced signage. We will complete our largest major markets in almost 40% of our stores by the end of the third quarter.

For our best stores this includes painting, new carpeting, enhanced lighting and informational graphic signage. We feel that investing in upgrading our stores in this tougher environment will help us to attract a better customer and close a higher percentage of our traffic. This is because of better values, improved displays, and a closer tie to the web presentation which approximately 80% of our customers use sometime during the sales process.

We are investing in our store presentation while much of our competition is unable to do so. We've seen a nice increase in our bedding sales, both at the promotional and upper end of our price points. Upholstery sales have been positive, but in the first quarter we've had some weakness in the wood case goods areas.

We have a significant number of new collections which are targeted to appeal to the more style-oriented customer at strong values that are arriving currently. This new product which we've had in development for many months is hitting floors and we are encouraged to see the positive sales reactions this second quarter, particularly in the higher price point goods.

We've been working to develop and expand our selection in the better and best products, replacing some of the merchandise which was bought through agents and sourcing companies with merchandise designed by top designers and placed with the larger Asian factories and domestic upholstery suppliers.

For the second quarter to date, our average price per SKU and our average sale is up in the mid single digits for the first time in a number of years, which is a positive sign that higher price point goods are gaining traction. The new merchandise, our improved store displays, and our marketing are on track to attract a better customer, more customers, and to get credit for the higher quality and better values that we offer.

We do believe that we're gaining market share at the expense of the independents and the regional players who have historically controlled the better quality offerings. We are well positioned to gain share in the upper middle market with our newer designs, better service levels and special order capabilities.

We are presenting the styles, designs and higher quality that our customers expect from Havertys and more is on the way. We are in the process of reworking our accessory lineup which we believe will be more appealing to our customer base. Over the past year we have brought down our accessory store inventory levels by closing out slow sellers in the process and in preparing for the store remodeling program.

Over the past six months we conducted a search to find an experienced accessory merchandiser who could help us to develop a competitive program that enhanced our furniture while helping to drive our overall business. We hired Susan Black who previously managed the accessory and case goods program for Domain, a former Boston fashion retailer, as well as the former director of the Bassett store accessory program.

Susan, along with our merchandising team, has chosen products to enhance our merchandise and to appeal to a more style-conscious customer. We're enthusiastic about our new program which is in the process of flowing to our stores over the next several months. We are committing to making our rug, accessory, lamp and top-of-bed program the best in our markets, helping to drive our furniture sales as well as the profitable growth part of our business.

We are in the process of a major upgrade of our in-store point of sale system to make them easier to use and to better integrate into our website. The overall objective is to make any customer interaction with Havertys smooth, efficient and informative. With the addition of more quick ship options and special order capabilities, we want to make sure that our customers who shop and research online have the full function capabilities that we have in store and to make all of the processes easy to use.

Our inventory levels have stabilized after the Chinese New Year buildup. We feel our current inventory levels are where they need to be based on forecasted sales volumes. Our supply chain team continues to do a fine job in managing our inventory levels, in-stock positions, freight costs as well as the service levels.

We have moved some production to alternate factories due to service and quality issues which has delayed our first anticipated arrival dates on a few new groups. There is movement in Asia due to labor issues and material cost. We believe that we have a good handle on import issues, and we expect to have less disruption this year than we've had in the past.

Our operations and training teams are rolling out a new improved sales training program this spring which focuses on better engagement with the customer. It's a more personal selling system which has received very positive reviews, and we expect that it will help us to better communicate and serve our customer.

We have continued to invest in associate training in every area of our business. We know that the real differentiator is our level of service to our customer at every phase of the interaction from the web to the store to the final delivery process.

In addition to the nearly 50 store remodeling projects that we expect to complete by the end of this year, we'll open in a former Carl's Furniture store in Boca Raton in the fall and relocate our Asheville, North Carolina store in the fourth quarter. We relocated our store in South Austin, Texas last week. We expect to finish the year with slightly positive store square footage growth for 2011.

We believe that our store remodeling program, our new better quality merchandise arriving daily, our state-of-the-art systems and our long history of customer-centric values that Havertys is well positioned to gain market share in the middle and upper middle markets that we serve.

I would now like to turn the call over to Dennis Fink.

Thank you, Clarence. Our sales are running a little behind last year thus far into 2011, yet we do expect to see sales growth for the full year. The increases are anticipated to be weighted to the second half when our business is usually the strongest and the comparisons to 2010 sales improvements will not be as difficult.

Gross profit margins are running in line with our expectations, some instances inflationary pressures, furniture manufacturer space are giving us reasons to re-merchandise groups to maintain key retail price points. Most of our suppliers recognize that the retail environment is not supportive of increases and are working diligently to keep wholesale prices stable.

During our fourth quarter earnings conference call we covered the expense category that would show changes in 2011. We mentioned that the cost of fuel used in moving merchandise from our distribution centers and making delivery to customers' homes was expected to rise modestly despite the experience in diesel fuel prices over the last two months is more than anticipated, and at the current levels is adding approximately 30 basis points to our variable costs.

We carry a small $14 million portfolio of customer receivables in house and saw favorable trends during the first quarter with little write-offs and improved delinquency balances. The $8 million increase in cash for the first quarter was helped by the inventory reduction Clarence mentioned and the depreciation expense of $4.5 million for the quarter being higher than the $2 million of capital expenditures.

For the full year of 2011 we expect depreciation expense to be about $18 million and capital expenditures are planned for $15.2 million. The capital spending is mostly for the leasehold improvements for one new store as well as two relocated stores and several renovated stores. We do not expect to have borrowings under our revolver at any time during this year.

Our book value at the end of the quarter is approximately $11.60 a share. We regard this figure as conservative since our LIFO inventory reserve is $17.9 million, we have no intangible assets such as good will recorded, and we own 41 of our 118 retail store locations free and clear.

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

Thank you very much. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions) And our first question does come from the line of Budd Bugatch. Please go ahead.

Good morning, Clarence. Good morning, Dennis. It's actually TJ McConville in for Budd.

Good morning.

Good morning, TJ.

Morning. A couple of questions for you. First on the gross margin, Clarence, I think I heard you say that you expect to hold the current margin rate for the remainder of the year. Is that accurate?

Yes.

Okay. That's helpful. So running in line with expectations. On the Q4 call, Dennis, did I remember you saying that you expect the full-year gross margin to be equivalent to last year? I just want to make sure that I'm putting this in --?

Yeah, that's right. That's right.

Okay. So then moving over to the sales of the higher-quality goods, it's very encouraging to hear that the ticket and the sale is up year over year. Is it a new customer that's coming to the stores or does it have anything to do with better availability of credit? What's driving that, Clarence, do you think?

Well, I really think it's product based. We are bringing in some collections that we have been working on a for a while that we know or we believe will appeal to the better customer. And we've had some good traction, so it's higher price point collections that we have historically carried that we might not have had on the floor in a timely basis. And we have had a few groups that we had shipment issues last year that now we're getting back in stock, so I think it's more product based and I also think the customer is a little more inclined to buy the better goods right now.

Okay. That's very helpful. And, gentlemen, any commentary on some of the competitive issues going on the markets? I know we had the liquidation of one of your major competitors in some of the key markets. Is that a near-term drag for you on sales as those liquidation sales are going on? And if so, when do you expect them to be over and what are your thoughts there about gaining that share going forward?

Well, we do think there's some opportunity for gaining share there, and I think the one you're particularly referring to is the Robb & Stucky bankruptcy who is in the higher-end part of the market. And I think we will gain some share there, and in fact the markets where they're in, we haven't been affected any more than any other market. In other words, it's -- the performance levels there are about the same as the rest of the companies, so we haven't seen any negative effect overall, and we know that at the end of the day there's going to be more market share that's available for us to gain and we think we will.

Okay. And lastly for me, guys, we've heard a lot about whether impacts early on in the quarter and that abating somewhat throughout the rest of the period. Have there been any increased promotional responses that you've seen in the market to try and get back some of those sales later in the quarter?

I don't think there was anything unusual as far as the competitive reactions. We did have weather in January and February, and March was better than January and February, which is historically the case. So overall though each of the months were down about the same as the overall quarter was, so at the time it felt like it was something we couldn't gain back and I do think it affected us, but it's really an overall balance that came out at the end of the day.

Okay. Thank you, Clarence. Thank you, Dennis. That was very helpful.

Okay. Thank you, TJ.

And our next question does come from the line of Todd Schwartzman with Sidoti & Company.

Hi, good morning folks.

Morning.

You spoke to the pace of sales through the quarter, Clarence, but was the pace of written business commensurate with that earlier in the quarter due to weather and then a little pickup in March?

You want it, Dennis?

Yes. As you look at the three months, really the deliveries were the strongest in March, and so we were -- we had some delivery impact from the weather in January and February. But on the written side, it was a little more even in terms of, like Clarence said, compared to the prior year. There wasn't any big swings between the percentage decline, slight declines in each of the three months compared to the prior year.

Got it. And for the full year and for the second quarter, Dennis, how should we think about the tax rate?

The tax rate ultimately is going to we believe go to around 38% after we have crossed the threshold that allows us to reduce our deferred tax asset valuation allowance. We don't know when that point will be. Likely it will be later in 2011 or in the near future thereafter, but when we cross that threshold the valuation allowance is about $13.3 million of that allowance that will be released.

Between now and then the taxes should be fairly minor dollar amounts that are related to state income taxes, and when you -- in the quarter in which that release takes place you'll have that as a positive. That amount would be a positive to taxes. That is a benefit. And then also at that time you'd have the 38% rate on what the pre-tax earnings are for that quarter, and then after that we'd have more of a normalized 38% rate. Does that make sense to you?

Yes, it does. That's helpful. Thanks. And what's driving the -- aside from your normal inflation, what's driving the rise in group insurance premiums and how should we think about that? When does that or does that actually stabilize at some point this year?

Yeah, it really ratchets one year at a time, and we have a sign-up open enrollment as you're required once a year, and late in the year. We had rates go up and we also had some people switch coverage to more family coverage, so there was a mix change and that's kind of set in place a year at a time. We think we can do some things to mitigate the increase next year, but yes, it's inflation driven and also some of it is legislation driven with the requirements on covering dependents longer and the lifetime caps taken off, that sort of thing that was part of the healthcare legislation. But it should be stable. The first quarter rate is what we'll have for the rest of the year, and then we would hope next year we don't have as big of an increase.

So no meaningful year-over-year change in total head count?

No, there's not. And what -- like I said, we had a little bit of a mix change with the portion of people taking full coverage or family coverage instead of on just themselves or -- and I think that's probably because we have decent benefits and some other companies are cutting benefits that the family might have availability because of a spouse or something. But they've chosen our program a little more often it looks like.

Yeah, that makes sense. What about advertising expenditures for the year? Anything you care to tell us about a change in the mix of media?

I don't think we'll see much media change from what we had last year. We did move away -- well, this year from regular ROP advertising, so more of our advertising is television and internet, and most of the print advertising are inserts in the newspaper on the weekends. But that's something we had in place late last year and that's really not changing. And I don't expect the percentage of advertising to net sales to change this year.

And lastly and just returning for a minute to the demand side, geographically speaking are the better performing markets typically where the higher-income consumers reside or what should we know about that for the first quarter?

Well, for the first quarter there was pretty well balance. I mean, we were down in the low single digits and it was pretty consistent across the region. One of the things I mentioned in my comments there was that they -- we're seeing some traction this quarter in the better tickets, and that's we believe because we're getting the product in and it's appealing to them. So we'll know more about that at the end of this quarter.

I think, Todd, just as you look market-to-market, the markets where there's been the biggest decline in housing values and where unemployment is the highest are the ones that are the weakest, so pretty normal expectation there about that correlation.

Thanks, Dennis. Thanks, Clarence.

Okay. Thanks, Todd.

(Operator Instructions) And I'm showing no further questions in the queue. I would like to turn the call back over to Clarence Smith for any closing comments.

Thank you. We want to thank you for joining us on our call and look forward to talking to you next quarter. Thank you.

Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.