Haverty Furniture Companies Inc (HVT.A) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for holding by, and welcome to the Havertys Q3 2011 conference call on November 3, 2011. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be a short opportunity to ask questions. (Operator Instructions).

I will now hand over the conference call to Mr. Dennis Fink. Please go ahead, sir.

Thank you and 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 these 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. Clarence?

Good morning. Thank you for joining our third-quarter conference call.

As we previously reported, our consolidated sales were $155.4 million, down 1.1% from Q3 last year. We produced a slight profit of $118,000 or $0.01 compared to $1,187,000 or $0.05 last year. Written sales were up 2.6% compared to last year's third quarter, with increases in July and September, partly offset by a weaker August.

Inventory levels were lower than planned. Incoming merchandise flow was improved in October. We are building inventories in Q4 to levels which will better allow us to fulfill sales quicker.

We had a 50-basis-point increase in our gross margins for Q3, which is due to more disciplined pricing controls, the strong product values we are developing, and lower inflation on cost. We are finally beginning to get credit for the work of the exclusive designs and the excellent direct sourcing our merchandising team has developed.

For Q4, we expect to be able to increase our gross margins by 1% over last year's fourth quarter. Delivered sales for Q4 to date increased 4.9% as we continue to fill backordered sales. Every region showed increases. This quarter we were encouraged by a high-single-digit increase in our average price per SKU and our average ticket. This is the first time in several years that we have seen a significant increase in these important stats.

We are pleased with the response to many of our new collections and expect our better inventory position will help us finish with positive momentum in the fourth quarter. Two main areas of focus on rebuilding our product mix and backup inventories are our case goods lineup in master bedroom and formal dining, and our rug and accessory programs.

We will be well-positioned in the fourth quarter for our main selling season in these last two months of the year. Our supply chain team has worked very hard to make sure that we are in stock -- that our in-stock situation is strong through the early Chinese new year, with good backup in our bestsellers through the first quarter of 2012.

We opened our new Boca Raton, Florida, store last weekend. This is our 29th store in Florida, and our 119th in the Company. We will grow our retail square footage slightly this year for the first time in three years. We are very pleased with our new South Florida merchandise mix, which we believe will allow us to better attract the condo and design market in that area.

We are experimenting with several new initiatives to serve the better-end customer with more special-order fabric choices and more Florida-specific product selections. Our initial response of the customers has been very positive. As we refine the product selections and our design service systems, we will pass these on to our store base in appropriate markets.

I believe we have a significant opportunity to reach and better cater to the upper-middle price points of the markets we serve with higher-quality products and better turnaround times than are currently offered by our competition.

Later this month, we will open our relocated Asheville, North Carolina, store in a remodeled former Circuit City site.

We are well along on our Bright Inspirations program to significantly enhance our in-store displays and customer experience across the country. We'll have 46 of our stores completed with the remodeling and signage program by the end of this year, with another 47 to be finished in 2012 and the remainder to be completed in 2013.

We are committed to having the finest store presentations in all of our markets. Our remodeled stores have a warmer, more contemporary look and feel, and feature attractive informational signage. They are more open and easier to shop than our former presentation.

Our teams in merchandising, real estate, and store operations have worked to develop a fully coordinated store layout, consistent across all markets, and more in keeping with our website presentation.

We have plans to open four stores in 2012. One will be a more centrally located site serving Baltimore, Maryland, our second showroom in that key market. We will be relocating a store in South Atlanta in the second half of 2012, as well as in our one new market, and add a store in an important existing market.

We believe that we are positioned favorably in all of our key markets, and we continue to opportunistically evaluate locations that complement and enhance our penetration in our current distribution footprint.

We've begun a new relationship with a top retail advertising agency, Bernstein-Rein. We believe they will assist us in a deeper analytical dive into understanding our existing and prospective customers' lifestyle and shopping behavior by individual location.

This should allow us to communicate with and reach our customer base more efficiently through the media mix they frequent. We expect to have much of the new targeting strategy and refined messages in place by the middle of the first quarter, which is focused on driving more customers into our stores and growing topline sales.

Later this month, we begin the testing of our new store point-of-sale system, which builds on the current business logic foundation, but greatly simplifies the sales process. It will give the sales associates much more information about the products and quicker access to key transaction information at the optimum points in the shopping process.

The new system was demonstrated to our full management team at our recent annual leadership conference, to rave reviews. We believe that this software will allow our sales associates to more quickly build sales tickets and access key details, such as custom-choice fabric data and delivery availability, more logically and accurately than our former POS system.

These enhancements are additional reasons why we believe that we can gain share from the higher-priced independent retailers who typically serve the custom-choice and special-order clientele in our markets.

Our executive management team is energized and fully engaged with the many important initiatives that we are taking on simultaneously to excite and inspire our customers. We know that our merchandise, store presentation, systems, delivery capability, and our marketing are as good or better than any of our competitors. And we are improving.

But, most importantly, our team of professional associates is heads-and-shoulders above most of our competition. They are the real distinguishing characteristic of Havertys. In my over three decades of serving this Company, I have never been as enthusiastic, or seen our team as charged up to grow our business, as is the case right now.

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

Thanks, Clarence. I'm just going to have a few comments on the cash flow and balance sheet, and then we will open it up for questions.

In the nine months through September 30, we have provided $30 million of cash from operating activities. The components of that that made the most influence was a $10 million reduction in inventories year to date. Also, we had depreciation and amortization of $13.5 million, and there was an increase in our customer deposits of $6.3 million for the nine months, which was partly due to the seasonality. Usually we have the lowest deposit level at the end of the calendar year, and this is a higher time for deposits, as we are coming out of our Labor Day and our better summer selling season.

And in this case, this year, we have a little more customer orders that had deposits on them, and we're a little behind in our deliveries, as Clarence had mentioned, as we have now caught up in the month of October.

In any event, the capital expenditures coming -- using the funds that were provided, $14.5 million -- that was about $1 million higher than the depreciation for the same nine-month period. We will have lower capital expenditures in the fourth quarter, and, as the release says, we will be about $19 million in CapEx for the total year. So there's about $4.5 million left.

We had mentioned last quarter the restricted cash, which is $6.8 million. It's cash, but it was set up in, deposited in escrow, in lieu of a letter of credit we used to have for our insurance programs.

The total cash increase is $8.4 million for the quarter.

And at this point, I'd like to turn it over for questions. Operator?

(Operator Instructions). Budd Bugatch.

Good morning, Clarence. Good morning, Dennis. Just making sure I understand, next year is a net three stores above the 119, so you end at 122 stores next year?

That's correct.

And how will the stores in Baltimore and the other two net stores open, and the replacement in Atlanta? By what quarters?

Yes, we are having one open, the Baltimore, in the second quarter, early second quarter. We have -- the Atlanta replacement is going to be in the fourth quarter. And the other two, not-yet-named additional stores, are -- there's one in the third and one in the fourth quarter.

Okay. Thank you, that's helpful. Next year, capital expenditures, as you are planning these quarters, what's the CapEx look like? What's your early read on that for next year?

It's probably going to be similar to this year, $18.5 million, roughly. We are still working on that. And we'll talk about it in our Board meeting, but that's what we expect. It's for leasehold improvements on these new stores, primarily, and then other things -- the improvements that we are talking about on the Bright Inspiration remodeling rollout.

And these stores will be leased, is that correct?

Yes.

And can you give us -- approximate the square footage of the three net new stores, or the square footage increase next year?

Sure. It will be about 100,000 square feet.

That's the delta between this year and next?

That's the (multiple speakers). Correct. And, as you know, we opened a store earlier this quarter in Boca Raton. And that was about -- that's about a 40,000-foot store.

Got you. Clarence, I was interested in your comment about the advertising and what you're expecting on that. Can you talk a little bit about how you think that's going to play out, and is there a change to the media strategy that will come as a part of that as well, or is it too early to tell?

It's a little too early. We've had a real deep dive over the last several months into our customer data, into their systems, and some of their research on consumers. And we've got a preliminary of how that will work.

But we are going to meet with them later this month, and we really won't have more information to tell you, or the markets, probably for another month or so. But this really won't impact our advertising until the late first quarter. We've already planned and put in place our first-quarter advertising.

But we think it's going to allow us to better reach our specific customers by market, and we recognize that individual stores and individual markets are different, and customers look at advertising differently. And this allows us to better analyze that and make good buying decisions.

Any new creative is yet to be determined. We may have some of that, also, early next year. But we have engaged with this agency who is a major retail agency. We particularly like the way they look at the analytical data behind how a consumer buys and what this person is doing.

Okay. And I think you also said you're going to end the year with positive momentum. I read that as being positive comparable-store sales. Care to hazard a guess for the fourth quarter? You started (multiple speakers)

We don't usually give that kind of flavor, so we feel okay about the fourth quarter. We have been negative for a while. So we feel a little better. That's my main flavor there.

Do you think it's going to be higher or lower than what you've started for so far in the quarter?

I don't think we're going to hold the almost 5%, no. I don't think we'll hold that.

All right. Thank you. Good luck on it. Congratulations on driving your business in this tough time.

Thanks, Budd, appreciate it.

(Operator Instructions). Todd Schwartzman.

Good morning, folks. What do you target long term as square footage growth?

You, I think I've said a couple calls back, our real target is to get our sales per square foot back up to the $200 level that we had in 2006. We are not there. We are happy with our square footage. We like our footprint.

We'll be relocating and repositioning in certain areas, growing 1% or 2% a year. But until we get enough momentum to get our sales per square foot up, we are not looking to grow outside of that. I think we are investing in our current stores a great deal of money to make them look great, and our merchandising and advertising, all of that, to drive the base we have. And I don't see us growing that significantly anytime soon.

And in terms of the new relationship with the new advertising agency and the effect that that has on your total SKU count, if you are creating new items, market-specific, will there be any offsets to that if that does result in a bump in total SKUs? Or is that something that you're not too concerned with at this point?

Todd, I don't think our relationship with Bernstein-Rein will affect our merchandising significantly at all. It's really more about the message, or how are you reaching the customer in the individual market? Do you spend on X TV spot or X radio spot, or do you do more interactive versus television?

It's really a mix; it's a media mix, not a merchandising mix. I don't see the SKU count having anything to do with our relationship with Bernstein-Rein. It's just buying media, and reaching the customer, and then creating the right message to motivate her.

And on the SG&A side, at a quarterly volume of $160 million to $170 million, how should we think about, currently, the mix of fixed versus variable costs?

Todd, I'm going to need to come back to you on that. The variable costs are still running 18% to 19%. And I think the -- I'm really not prepared to comment on a fixed cost number. We'll look at that, and if we can put something meaningful in there, we'll insert it in the Q we're going to file.

Okay. Thanks for that. And Dennis, also in Q3, there are a couple of items that you've called out. I'm just wondering what continues, what gets better, what goes away in Q4 group insurance, your ad spend as well?

Yes, the group insurance is fairly level with the first two quarters and the third quarter and will probably be so in the fourth quarter. And the advertising, we mentioned a percent of sales higher than last year. You can just do that math on the basis point increase we had talked about in the release, which is about 0.8% or 80 basis points higher.

And then the fuel is difficult to call. It's down from where it was. It is still ahead of, or higher than, last year. And I don't know how to call that. It's probably not going to come back down further.

We also had some -- the summer months were very -- the highest cost of utilities. But that is typical. It was a little worse this summer. And that usually comes down quite a bit in the fall. The fourth quarter is better because of the climate we are in. But those are the main things in the SG&A.

And the incremental media spend for third quarter, when did that really kick in?

It was throughout the quarter

I think it started July event.

Yes, we had a July 4 event, and then Labor Day was a big event. And good you mention that, actually, because the fourth-quarter extra spend is going to be mostly November-December.

So we haven't yet had the benefit of that in the month of October or our fourth quarter to date. We've got a pretty aggressive plan for this month and next month.

Got it. Thank you very much.

Budd Bugatch.

Dennis, I fear to trade into this particular issue, but taxes, and what it looks like in the future for the deferred tax asset and the release of that as you return pretty much to normalcy in profitability?

I certainly hope we do return to normalcy in profitability. And we made a slight move in that direction in the third quarter. At the end of the year, we're going to look at the realizability of -- and the three-year moving profitability, and the valuation allowance is still around $13.3 million.

So, at the end of this quarter, this year-end, we'll review that and would hope to be in a position to bring that back into income and reduce those reserves. We just have to wait and see in this economy; whereas it may seem a slamdunk, it's still prudent to wait and see how that comes out this quarter.

Our guess is that happens in the first quarter of next year, and you think it might happen earlier than that in the fourth quarter as you go through the audit process this year?

Yes. It might, is a way to say it. And I think, with the kind of numbers you guys are probably looking for, it should. We just have to play the rest of the quarter out.

We have a lot of confidence in you. So (multiple speakers) that happens. Thank you very much.

There appear to be no further questions.

Thank you, Operator, and thank you for joining us on our call. We appreciate your interest in Havertys.

Ladies and gentlemen, this concludes the Havertys Q3 2011 conference call. You may now disconnect.