Haverty Furniture Companies Inc (HVT.A) 2012 Q2 法說會逐字稿

Welcome to the Haverty Q2 2012 financial results on August 2, 2012. 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'll now hand the conference over to Mr. Dennis Fink, Exec. VP, CFO. Please go ahead, sir.

Good morning, everybody. 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, 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 our second-quarter conference call. We are pleased to report earnings for the second quarter of $0.11 versus a $0.04 per share loss for the same period last year. We're encouraged by the momentum that we are seeing from the many investments and advances to our merchandising, store presentation, marketing and operating systems to better serve our customer.

Our 6% increase for the second quarter was consistent with our six month sales increase and we are pleased to see written sales for the third quarter so far improving to a 9.5% rate. We continue to roll out our Bright Inspirations store remodeling program throughout our regions which is a major part of our $20 million plus CapEx for 2012 and will be for 2013 as well.

We believe that our new enhanced interiors and displays are gaining real traction with our customers and are a significant factor in our larger average sale and improving closing rate for 2012. We are improving our sales per square foot and will continue to stress existing store improvements to drive our sales and profitability. We are gaining on our multi-year goal to bring our sales per square foot back to the $200 level.

We've had a major increase in our special order upholstery business with the addition of our in-store special order configurator. This tool has helped us to improve our average sale as well as our gross margins. It allows for a simple, accurate way to create your own unique look with a much larger percentage of our upholstery line.

Special order upholstery is a focus of our marketing theme, Discover Something New. We can help our customer realize her dream for her home, we believe that we are better able to fulfill our customer's vision than most any of our competitors.

Our stores have a fully coordinated presentation consistent across our footprint and with our Web presence. We believe that we will continue to separate ourselves from the franchise chains and the regional competitors with our better quality product, a fully integrated and interactive website and a centralized, seamless delivery operation.

We offer a better product value and better service levels through our top-drawer delivery featuring a team of professional delivery and distribution associates who are all Havertys employees. Most furniture retailers outsource their delivery operations. Our customer surveys and comments support the belief that Haverty's distribution and delivery teams are a major positive difference from any of our competitors.

We were pleased to reinstate our quarterly dividend of $0.04 for common and $0.0375 for A shares which was paid in June. Havertys has paid a dividend for 77 consecutive years but suspended the regular quarterly dividend in 2008.

We believe that we have the strongest balance sheet in the industry featuring no funded bank debt, no purchased goodwill, inventory valued at LIFO and over $50 million in cash. We are growing earnings while investing in our current stores, strengthening our position in our markets and developing what we believe are the best operating systems in the business.

I'm proud of the strong team of store and distribution associates and our support teams here at the home office for their dedication over the past several years to build a resilient and growing business in the face of a very difficult economy. I believe that we are poised to grow in the coming quarters and years ahead.

We will continue to focus on listening to our customers and providing great products at good values and excellent service. We believe that is the long-term formula for successfully growing our business and our profits. I will now turn the call over to Dennis Fink.

Thank you, Clarence. Last night's press release included several points about the results for the quarter and the first half. We'll answer questions about those in a couple minutes and I will just make two quick comments on a couple other topics.

First an update on the simple operating model for gauging Haverty's 2012 SG&A expenses. We expanded our store base by one in late June and will add two additional stores in the second half of 2012. Also, we will relocate one other store to a newly constructed site. As planned, these additions will require some increases in various expense categories.

We are still comfortable with the guidance given earlier in the year that our annual fixed and discretionary SG&A costs for 2012 will be approximately $213 million to $214 million. Some cost savings experienced in the second quarter should help us stay within or come out at the low end of that fairly tight range for the full year.

We had also pointed out previously that the fixed and discretionary SG&A costs will be greater in the back half of the year as the advertising spend is higher then and the additional stores will begin operations. The second half of 2012 total of these SG&A costs are expected to be approximately $6 million higher than the first half.

The other part of this simple model on SG&A is variable SG&A expenses, they have been expected to run in the 17% to 17.5% range as a percent of sales for the year and we are on track to stay in that corridor.

The other topic is just cash flow; we do anticipate having positive cash flow for the full year of 2012. Capital expenditures of $23.5 million are expected and they're about $4.5 million more than the depreciation expected for the year.

We anticipate earnings should generate enough cash to more than offset the increases in working capital required, together with the minor balance sheet lease obligation payments we made and the scheduled quarterly dividends.

In closing I will just point out again that the book value as of mid year 2012 is $269 million, it is a little over $12 a share. And we do have the LIFO inventory valuation which causes our balance sheet and our book value to be conservative. That LIFO reserve is about $18.3 million right now. And also we have no intangible assets such as goodwill recorded and we do own 45 of our 120 retail locations free and clear. Danny, at this time we will take questions from the audience.

(Operator Instructions). Budd Bugatch, Raymond James.

good morning, Clarence, good morning, Dennis, it's T.J. McConville filling in for Budd. Congratulations on this quarter and thank you for taking my questions. Clarence, can we parse apart some of the delivered results in the quarter between maybe traffic and ticket or even the written sales increase to date? Pretty solid result ahead of some of the others out there that are reporting, so just trying to get a sense for exactly what is driving here.

Well, our average ticket is up nicely. And it is probably one of the bigger drivers. Our closing rate was up, we did see a decrease in traffic and we are hoping that will come back. But traffic has been down; I think we are getting a better targeted customer who likes what we are presenting.

I think our product mix and our advertising is resonating with them and we are selling a better product price point than we did a year or so ago. So we have upgraded our quality somewhat. I mentioned special order upholstery which is a new focus of ours and it is mainly average ticket and an improved closing rate.

Okay, that makes sense. And then -- and I realize it is a very short time frame that we are measuring -- that impressive written comp for the quarter to date. But was that concentrated mainly around the July 4 promotion or was it may be a bit steadier than we might think or than you might have expected?

It was more concentrated around the 4th of July holiday, which fell in the middle of a week. So we carried the promotion over two weekends and that was the strength of the month for sure.

That seems to be how the consumers are buying these days (multiple speakers). So if we could move down a little bit, down the income statement to that gross margin improvement. You mentioned a couple of items in the press release. Can you maybe quantify what the mix versus promotion versus maybe some input costs or at least maybe rank those things for us?

Well, we are selling more upholstery; we are selling more higher end upholstery, getting better margins on that. It is a larger percentage of our business and continues to grow. We are doing well with bedding, which, as you know in this industry fight going on right now, there are higher priced points and that has also helped drive our business too. So those two areas are probably the ones that have had the most impact.

And the back half expectation for maybe a little bit more moderate gains, is that a function mainly of the strength you had in the back half last year or are any of those things expected to change in your mind?

I think there is a little bit of concern about what is happening in the macro level. We are clearly encouraged by what started off in the third quarter, but I think that we are being conservative in our view for the second half.

Okay, that is fair enough. Last one for me, guys, and I appreciate you taking them all. We haven't talked about credit availability much in the last couple of quarters. Any discussions with your partner recently or anything you have seen that indicates any change going on there?

It seems to be pretty good. In fact, if anything it is a little better than it was a year ago, two years ago. Part of it might be that we are upgrading our price points somewhat and customers we are bringing in are really more prepared to purchase and probably have decided to buy a little better product than they might have available if they wanted to spend less. So I think the credit for us with our consumers is not a problem, it is very good.

Okay, gentlemen, thank you very much for those. Again, congratulations and best of luck on the back half of the year.

Todd Schwartzman, Sidoti & Company.

I realize the July comp -- and you explained that, the solid performance there, Clarence, thanks for that. Realize that was certainly a good result. Notwithstanding that though, are you seeing any evidence that your consumer in some ways may be taking longer to reach a purchase decision?

I do think that our consumer is doing more research; they are going to the websites. I think our website has helped us there because we have a fully integrated one and one that I think is probably better than most of our competition, they can find more information. But they are checking out more about the product before they come into the stores.

But I would say that there may be more cross shopping now than there was a year or two. I think they are looking around, they are doing more research, they know more about it before they come in the stores. And I think that might be helping us in that when they come in they are happy with what they see, we deliver on what they expect and it has helped our closing rate.

Okay. And on advertising, how should we think about the back half versus the first half? Would the incremental spend be commensurate with the bump in store count? Is it going to be something more, something less?

Todd, it is more -- it is viewed better as part of that increase of $6 million in the fixed and discretionary SG&A we talked about. That is -- one of the parts of that increase from the first half to the second half is advertising. The number of holidays and the consumer shopping patterns are such that there is more business to be had in the second half and we do advertise more. But, so that does step up third and fourth quarter, both are at a higher level.

Okay, Dennis, thanks. And finally, without quantifying the average ticket, I'm just really trying to get a handle on your success with moving upstream as to price points. Can you possibly quantify the increase, if any, in ASPs just in terms of all the units that you have sold?

The increase is in the low single digit level. I think we are selling -- let's just look at a category, for instance. If you look at upholstery, more people today are buying sectionals or larger upholstery groups which cover the entire family room.

So it is a little better product quality, but also it is just more product that goes into the purchase itself. So I think that has helped drive the ticket. And clearly with the bedding with all the new foam bedding, that is at much higher price points than we've sold in the past. So I think those are the main indicators there.

Has the bedding category for you -- or did the bedding category for you grow in Q2 about at the same rate as Q1 year-over-year?

It has been pretty flat for the year. And I think that we are probably seeing a little fraction now because of all the continued advertising from all of the different vendors that most of whom we carry. But it has been pretty flat with -- throughout the year this year.

Flat on a sequential basis?

Yes.

Okay, thanks, guys.

John Baugh, Stifel Nicolaus.

I guess I wanted to start with a high-level question first and pertaining to import and deflation historically at least. Has that played out in your mind and is the increase you are seeing in average selling price got anything to do with furniture prices in general stabilizing or re-inflating? Or is it just a mix issue and you are getting a better customer in?

Because I know in this downturn there has been a bit of a mixed trade down from the consumer as well, a lot of cross currents. I was wondering if you could put some color on that.

Well, we definitely -- let's say in 2008 we went down in price points on purpose because the customer did and we targeted a little more promotional customer. And in doing so we might have lost a little ground with the better customers.

We focused particularly over the last several years in upgrading our presentation and our product mix to appeal to a little better customer. One that historically we'll not have appealed to in the past, but I think one that we're now better able to serve and we execute better than we were in the past.

So I think it's product mix mostly and I think as far as deflation, we are not really seeing deflation -- as you know, the labor issues in China are a major problem. We are moving to other countries, Vietnam, Indonesia, to try to get the best values. And so overall I would say right now it is pretty stable. I don't see the average ticket going up primarily because of inflation I think it is because of a better product.

And staying on this topic, is traffic maybe not a good measure? I know one of your competitors has talked about what you referenced, the consumer is doing a lot more work on the Internet before they come in.

So maybe they are not on a Saturday hopping around to five stores like they used to, they have narrowed it to one or two because they have done their homework on the net. And obviously your close ratios with those coming through the door are better. Do you think that is what is maybe driving it and the traffic is not a good metric to look at?

Well, it is certainly a good metric still, John, but you do have a good point. The way the customer shops today is really different than it was three or four years ago. And I do think she is doing more research. So it might not be as important an indicator as it was. However, we certainly don't like to see fewer people coming in our stores. And that is not what our focus is. But it may be a bit of a change in the way people do shop and look for furniture.

And you mentioned on bedding that you have a lot going on. I am curious when you look at your bedding floor today versus where it was a year ago, what is the mix of specialty today versus then? And have you seen your average unit selling price go up in bedding, is it stable year over year? I'm just kind of curious.

Well, we have a much larger percentage of our bedding shown in alternative foam bedding, I mean much larger. And so those are at much higher price points and that mix is going up. We still carry inner spring and will, but you know the industry, it has changed dramatically and continues to change and I think our average price is up.

However, some of the higher price points have been coming down too, as you know, with the Tempur-Pedic promotions and that type of thing. So our average ticket is up nicely in upholstery -- I mean, excuse me, in bedding.

Okay. And then on --.

On price per SKU, too.

Okay. On advertising, the cost of it, battleground states like Florida I guess where you operate, what have you seen there? And are you worried at all between now and the election in terms of you're not going to get the same prints or eyeballs or whatever it is?

Well, our biggest promotions for going into this second half here are around Labor Day, as you know, and that begins in a few weeks and goes through Labor Day. We tend to, because of that and because of what we know is going to happen here, back off a little bit after Labor Day and a little bit into October.

We don't really start back up a lot of our heavy TV advertising until right at election time or certainly November, which is our -- November, December are our two best months. We think, yes, it does have an impact on us and it will increase some of our costs for those spots. But the majority of our dollars will be spent both before, meaning this month into Labor Day, and after, or November and December.

Great. And my last question is as you look at your business regionally are there many differences -- and I'm curious, those areas where you are doing better, and it seems to be you are doing better everywhere, but there may be gradations of that. Is that due to the macro environment within that region getting better or competitors going away and/or you're improving your competitive position? Thank you.

Well, it's a combination. We have invested real heavily in the last several years in making our stores look better. And I think it is starting to pay off. But there are certain regions that are better and one of them is clearly Texas, Texas is better. And oil and the gas, all of that has impacted most of that state. We are well represented, it is our biggest state and it is doing well. The other states -- the other regions are doing well also, but not to that level.

Right. Thank you.

(Operator Instructions). We do not appear to have any further questions. Please continue with any points you wish to raise.

We would like to thank you for joining us on our call and we appreciate your interest in Havertys.

This concludes today's presentation. Thank you for your participation and you may now disconnect.