Haverty Furniture Companies Inc (HVT.A) 2018 Q2 法說會逐字稿

Good day, and welcome to the Haverty's Second Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Richard Hare. Please go ahead.

Thank you, operator. 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, CEO and Chairman, Clarence Smith, will now give you an update on our results and provide commentary about our business.

Good morning. Thank you for joining our second quarter conference call. We were pleased to see that we had positive sales for the second quarter and for the first half. Every region was up and delivered sales for June, which was the strongest delivered sales increase in over a year. Our store traffic was down for the quarter, but was offset by stronger store efficiencies, with higher closing rate and a higher average ticket of over $2,250. H Design sales for the second quarter were up to 25% of our total sales and continue to grow and help drive our average sales increases. In-store tablets have helped store transaction and allows our sales consultants to stay fully engaged with the customers throughout the sales process. Our 3D and 2D room planners help our designers engage better with our customers, providing services that are helping our customers vision of their homes come true.

Sales in havertys.com were up 18% for the second quarter. We continue to invest in making our website inspirational and easier to use by our customers and by our sales team. Our marketing team has invested a great deal in the first half to improve our SEO and organic search, which has helped increase visits to our site. Mobile traffic has increased to 80% of the total traffic.

Over a year ago, we began a concerted effort to reduce our damage and discontinued inventory, and we now have the most current and cleanest in-stock inventory we've had in several years. We have significant number of higher quality bedroom and dining room collections planned to hit our store this quarter, which we believe will be exciting for our teams and our customers. Our merchandising and supply chain teams have begun aggressive processes to make sure that we have inventory in our bestsellers for full year 2018.

In some cases, we are accelerating the receipt of goods, protecting us as best as possible from potential Chinese tariffs. We do note that the following Chinese currency has recently led 1 Chinese vendor to reduce their current price. This reduction will temper any potential tariff.

While we've imported close to $100 million annually from China, we're moving several of our top-selling groups to factories in Vietnam. Last year, we set up an office in Ho Chi Minh to operate a significant quality control team, which covers Vietnam and China. We see the increasing cost pressures and potential Chinese tariffs pushing more of our furniture production to other countries, especially to Vietnam. While Haverty's have been importing from some of the best factories in China for almost 20 years, we've developed excellent relationships with many of the top factories in Vietnam and the quality is excellent. We feel confident that, if imposed, we will work to minimize the full impact of the potential tariff, while realizing that it could be a genuine cost increase, which will have cause -- will cause us to have to raise some prices and potentially cause some disruption in the product sourcing in the year ahead.

In the first half, we closed 3 stores, which overlap with existing stores. We now have 121 stores and plan to end the year with another store closing, which is served by a nearby store. We believe that these store closings will allow us to grow comparative store sales in several of these markets and exit less productive stores.

Our recent rightsizing experience has been positive and we're optimistic that these store closings will help our comp store sales and profitability. Next week, we'll celebrate the opening of our 156,000 square-foot expansion of Western Distribution Center in Dallas with our Board of Directors and senior officers. The completed 395,000 square-foot facility is now fully air-conditioned, featuring a double state-of-the-art shop, all LED lighting, high-tech camera system and a modernized central customer service center. It features 48% additional storage capacity and 1 more -- 1/3 more trailer capacity. We're excited to have the finest furniture distribution team now with the finest facility in the West. We plan to utilize the D.C. to help grow our Texas business and to reach new markets within that footprint.

Our teams are closely evaluating our customers, their shopping behaviors and their reaction to our stores and products and promotions. We built a team that continually reviews the customer and what she wants and expects from furniture and our home fashions. We utilize different customer service -- customer platforms, which we've maintained for many years as well as our investment in the third-party research. We have a wealth of information on our customers buying behaviors because unlike the take with retailer, we deliver to our customers homes.

This week, we began rolling out a new TV and video campaign. The Why Havertys campaign is designed to tell our communities and markets more about who Havertys is and what makes us different from other retailers and online players. This campaign was pulled together by our marketing team and our outside agency Bernstein-Rein Unbound.

The Director was Ted Melfi, whose movie Hidden Figures was an Academy Award nominee for best picture. The new campaign is an extension of our tagline we began a couple of years ago, HAVERTYS LIFE LOOKS GOOD.

We know that furnishing a home is a very personal and sometimes emotional experience. And when it is completed, our customers feel very strongly about how that new vision looks and feels. The spots both 30 and 15 seconds are meant to run on broadcast, cable and digital formats. The spots emphasize the customization and personalization that we offer as well as the quality that goes into our product and our services. I've been impressed with the series and I must admit the message is powerful and emotional.

We've had a very strong cash flow this year and expect that trend to continue. We increased our dividend in the first quarter of this year and have a consistent record of paying dividends since 1935. After buying back $9.3 million in stock in the first half and $9.3 million, we have an additional authorization to purchase $10 million. Our board continues to review how to best utilize our excess cash, while recognizing that we are in an industry that is historically cyclical and very closely tied to housing. I'm very excited about our positioning and messaging for the important second half of this year.

We're in better shape with our upgraded store presentations, our strengthened marketing and H Design teams, our new collections that are hitting the floors, strengthen inventory supply of bestsellers and our inspired and energized sales and delivery teams. We are planning on a strong second half. We've been serving our cities for over 133 years and we're dedicated to making sure that we serve every customer better than anyone who has served them before. We're fulfilling our goal of helping customers vision of their home come to life. And if we do that well, we deserve to produce a good return for our stockholders. I would like to thank all of our team for their dedication to Haverty's mission of delighting our customers.

And now I'll turn the call back over to Richard Hare.

Thank you, Clarence, and good morning. In the second quarter of 2018, sales were $198.8 million, a 1% increase over the prior-year quarter. Our comparable store sales were up 1.3% for the quarter. Our gross profit margin decreased 20 basis points to 54.2%. The decline was primarily due to a slight increase in freight cost, product mix and markdowns related to store closures.

Selling, general and administrative expenses increased $1.9 million to $98.8 million or 49.7% of sales. This increase was largely driven by higher group medical cost and third-party credit cost. Our usage of longer-term credit promotions increased during the quarter.

Other expense of $183,000 includes the loss on sale of one of our closed properties. Net interest expense was slightly down $111,000 to $454,000 and pretax income decreased $1.3 million to $8.4 million during the quarter.

Our tax expense was $2.2 million during the second quarter of 2018, which resulted in an effective tax rate of 26.1%. In the prior year period, the effective tax rate was 36.2%. The Tax Cuts and Jobs Act of 2017 became effective in the fourth quarter of last year and significantly reduced the company's federal tax rate from 35% to 21%. The primary difference in the effective tax rate and the statutory rate is due to the state income taxes and additional tax expense associated with vested stock awards.

Net income for the second quarter of 2018 was $6.2 million or $0.29 per diluted share, which approximates last year's second quarter results.

Now turning to our balance sheet. At the end of the quarter, our inventories were $107.5 million, which was up $3.7 million over the same period last year. We ended the quarter with $74.7 million of cash and cash equivalents and our $60 million revolving credit facility remains untapped. As a reminder, we have no funded debt. Looking at some of the uses of our cash flow, capital expenditures were $7.5 million during the second quarter and $14.6 million for the first half of 2018. We expect to spend approximately $20 million in capital expenditures for the entire year.

For the first 6 months of 2018, the company paid a total of $9.3 million of cash dividends to the holders of its common stock and Class A common stock. We increased our dividend 20% to $0.18 per common share in the first quarter of 2018, which followed a 25% increase in the third quarter of 2017.

We purchased an additional $5.8 million or 280,196 shares of common stock during the quarter. Year-to-date, we purchased $9.3 million or 451,867 shares of common stock and we have $10.7 million remaining under our current authorization from our Board of Directors.

In terms of store count, we ended the quarter with 121 locations. Our earnings release list out several additional forward-looking statements include -- indicating our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. As a reminder, we stated in our press release the complete effect of any proposed tariffs on furniture, accessories and components used in the manufacturing of furniture imported into the United States from China is not quantifiable at this time. Accordingly, our future expectations of certain financial metrics that are detailed in our press release and/or included in our comments today do not include the assumption of potential tariffs on a portion of our cost of goods sold.

In 2018, we continue to expect our gross profit margin for the full year to be approximately 54.5%. Gross profit margins for the second half of 2018 are projected to be 20 basis points higher than the average for the year and 30 basis points higher for the fourth quarter.

Fixed and discretionary type expenses within SG&A are expected to be in the $257 million to $259 million range for 2018. Variable SG&A cost for 2018 are expected to be 18.5% as a percentage of sales. We expect our overall effective tax rate in 2018 to be 25%, excluding any impact from the vesting of stock-based compensation awards. Our federal tax rate is expected to be 21% and state and local taxes make up the remaining difference.

This completes our commentary on the second quarter financial results. Thank you for your participation in today's call. Operator, please open the call up for questions.

(Operator Instructions) Our first question comes from Budd Bugatch with Raymond James.

Couple of questions if I could. You talk about some succession in the website and you talked about I think in the script as well some success in the e-commerce area. Obviously, it's an area of significant focus and interest. Can you remind us if you have disclosed this, how much of your business now is actually e-commerce transacted? And what are you seeing in the trends there?

Yes, but it's not a major part of our businesses. We have said is actually the transaction. We were less than 1%, I mean, less than 2% last year, now, it's a little over 2%. And one of the reasons there is that we've made this very easy for the salesperson who deals with the customer in the store to also get credit for transactions that where they're involved online. So that's really the facilitator there. You know, I still feel that our customer, particularly, as we've upgraded our product and dealing more with the designer, wants to see the product, wants to engage with us. I mean, our average ticket is over $2,200. So and the average transaction when it's involving a designer is almost $5,000. So that will continue to grow some, but they're online, they're checking us out. And as I mentioned, 80% are on mobile, checking us out. Website is super important. We want to be as easy as possible, but I still believe most people want to deal with -- and physically deal with seeing the product and our designers, and we want to make it as easy as possible however she wants to deal with us.

I understand, thank you for that. The tariff issue is the one that you addressed in some detail. What are you hearing from your -- many of your imports come through other vendors? You're not the importer of record, if I remember right on that, I think there was a press release as well. What are you hearing from your suppliers on that issue? And can you provide any color on what they're doing? We're seeing...

What's interesting today is that the news that's come out that it might go up to 25%. We have seen the Chinese currency being devalued and coming down almost 5%, and I think that will help offset it and we've heard that from one of our vendors. I know that several of the major players we deal with have moved to Vietnam and are trying to set that up as quickly as possible. We're going to move with them. We think moving out of China looks to be an advantage and looks to be what the industry is trying to do. So if we get to 25% tariff, that's going to be a big hit and will impact the whole industry. Who knows whether that's going to happen. 10%, I think, the Asian, the China felt like they can probably work around that, maybe with the currency and we would try to work some around it. I've said in my comments that we have moved aggressively to bring product in earlier than when we think the tariff will hit, which would be probably October, but it's hard to know. We don't know that.

Okay. And finally from me you had talked about thinking you're having a good second half. Any idea or any you wish to hazard a guess as to what may be the comps would be? You've got some easier comparison I think in the third quarter. How do you...

We do have an easier comparison in the third quarter and in the fourth quarter. But we are not giving out advice on comps. It's an easier comparison, and we started this quarter positive. So that's where we are.

Okay. I thought I'll give you an opportunity. Good luck on the balance of -- on the third quarter and balance of the year.

Our next question comes from Brad Thomas with KeyBanc.

Just to follow-up on Budd's question at the tariff. So if it does go through as it's currently proposed, what's the timing that we would start to see that hitting the P&L if there were any impact? I presume we'd be looking at the first half of next year?

I think that's right. There'll be some impact late this year. But as I mentioned, we've moved as much as possible of our bestsellers to be in stock through the rest of the year, but it will impact us late year probably, and certainly the first quarter of next year, if it goes in place for goods received in say, October.

And just to reiterate, what Clarence mentioned earlier, Brad, that certainly would have an impact on our balance sheet as well, as we bring in more inventory in advance of potential tariff.

Right. Got you. Okay. Now the outlook for gross margin does look more positive here for the second half in line with the way you've been talking for the last couple of quarters. Richard, could you just remind us some of the other puts and takes on gross margin? Where do you think you have some opportunity?

Yes, we left our gross margin expectations the same as we forecasted last quarter. So as we look at the back half of the year, just looking at some of the new product offerings that Clarence mentioned kind of the closures are behind us there So we won't see as many markdowns on our closed locations. That and the product mix and some of the promotions we feel very optimistic and we -- that's where we left our margin forecast for the year.

Brad, I also mentioned that we have done a very good job in the last year and a half or so of getting out of our discontinued markdown goods. So that markdown was an effect on our margins and that should be lessened going forward.

And for 2Q or for the first half, do you have a specific number in dollars or basis points that the markdowns were a drag?

No, I don't think so. It started the -- let's say, the beginning of '17, late '16. So it's been there and it's now much less significant.

Okay, great. And then just in terms of the outlook for SG&A, I guess how should we think about level of spending in 3Q versus 4Q? And anything of note?

Well, we -- couple of things. The variable G&A guidance we gave remains the same at 18.5%. We pulled back our fixed G&A just a little bit and reduced that slightly because of the closures since we closed some of those locations we've got less cost there. So those are the 2 components to that. On a going forward basis, we feel really good about the 257 range for the G&A on the fix side.

Great. Well certainly it feels like you're headed for a strong second half. Good luck to you.

(Operator Instructions) Our next question comes from Anthony Lebiedzinski with Sidoti.

So first just wanted to follow up on the tariffs again. So at this point, how much of your currently sourced products in China could potentially be shifted to Vietnam?

Well, I don't think we have an exact number on that. I mean, I mentioned there has been about $100 million a year. There are a couple of key suppliers who are providing a lot of that. One of them is trying to move to Vietnam a portion of it. The other would be a more difficult play and would take more time. In a year, could we move that $100 million to $50 million, that'd be pretty significant. We might move into $70 million or something, but you couldn't move all of it rapidly. It would take us a while to do that. And I don't think we could do that. Some of that. Some of product is of the quality that we want, that I don't think we could get in Vietnam right now.

Okay. Thanks for the color. And assuming if this does go through and obviously there was some discussion even today, actually, there was some proposal you've been about 25% as tariff. Now assuming that the 10% tariff, what would you say is your ability to pass along that price increase on some of your -- some of the furniture?

Well, we would do as much as we could. It's probably easier on our wood collections because they're more specific and more exclusive to us. When you get into upholstery, it's a little more competitive or looks are similar. So we would certainly try to move the pricing up as quickly as we can. I did mention that one of our vendors in China has already reacted to what they anticipate happening, and with the devaluation of their currency, if the tariff comes, we would go back to our vendors to try to get some help, but they're going to have pressures and there'll be pressures on both sides.

Got it. Okay. And just looking at the second quarter, were there any notable differences in the same-store sales by region in Q2 and so far in Q3?

We haven't put anything out by regions. I don't see anything that really stands out significantly. Our closings were in several different places. I've said earlier in the year that Florida has been pretty good and it continues to be pretty good.

Got it. Thanks for the color for that. And also you did mentioned that you use the longer-term credit promotions more or so in Q. Just curious, how much of the same-store sales increase was driven by these longer term credit promotions?

We don't disclose that, but we did do more 60-month financing this past quarter than we had traditionally on items other than mattresses. So we were very pleased with that, but that drove up our G&A costs slightly.

Got it, okay. And lastly could you touch base sort of color as far as the timing of closings and openings for this year, and possibly for next year if you have that?

We closed these 3 stores, some of them earlier in the first half and several were late in the second half. We do have one store planned in Raleigh closing that overlaps with our main store there. That is all we have listed now. We have Chattanooga on the board for next year. We were hoping that get in this year, but it's going to be next year. We haven't announced any other closings or store openings until we finalize the leases on some of those. So that's what we have right now.

There are no additional audio questions at this time.

Well, thank you for your participation in today's call. We look forward to talking with you in the future when we release our third quarter results.