Haverty Furniture Companies Inc (HVT) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the first-quarter 2008 earnings release conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Thursday, May 1, 2008.

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

Good morning, everyone. During this conference, we will make forward-looking statements which are subject to risks and uncertainties and assumptions that are difficult to predict. Actual results may differ materially from those expressed 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 Haverty's actual results to differ materially from the expected results are disclosed in the Company's reports filed with the SEC and we caution you to give consideration to those possibilities.

Our President and CEO, Clarence Smith, will now give you his update.

Thank you, Dennis. Good morning. Thank you for joining our first-quarter conference call. Sales for the quarter came in at $185 million, down 3% from last year. Margins were greatly improved ahead of our budget at 52.1% and we held our SG&A expenses flat, producing an increase in net income to slightly over $1 million or $0.05 per share versus $0.04 last year.

We outlined the three areas that affected our gross margin increase in our press release. These improvements were due approximately one-third to our exclusive product, one-third due better inventory management, and one-third due to our move to more third-party credit. I would add that our team has adapted well to the shift to global supplies of our product from our former model of domestic suppliers located a few hours from our DCs.

We are finally beginning to get some credit for the exclusive product development our merchandising team has undertaken and we are handling the flow and movement of the product from the worldwide factories to our customers home much more efficiently. This has helped us significantly reduce our markdowns, closeouts, and demurrage while we are reacting quicker and better to solve our customers' home furnishings needs. We are much further along the learning curve of being a fully developed branded retailer from one only selling other manufacturer's brands.

Our inventories are 7% higher than last year end due in part to building stock because of the impact of Chinese New Year. However, inventories were 8.5% below the March '07 level, in line with budget and balanced. We are continuing to bring down our accounts receivable, but because our inventory did increase, we have a balance on our bank revolver of $8.3 million at the end of the quarter. Our debt to cap ratio is 11.2%.

We have not bought back any stock since January '08 when it traded below $8 per share. During that month, we bought 227,000 shares at an average of $7.95 for total of $1.8 million. As we have mentioned in past conference calls, we remain focused on maintaining our strong balance sheet. We see our financial strength as a major advantage in the current environment and for the potentially difficult months ahead.

We have adjusted our advertising to reach our specific customers better and I am pleased with the progress we have made in the efficient targeted advertising that our marketing teams developed. Advertising expense was 6.7% of net sales, down from 7% last year. We fine-tune our marketing for each market with detailed follow-up analysis on the effectiveness of each promotion to track results.

We are now operating as a unified brand versus a local furniture operator. Our research has shown that our brand recognition has strengthened in our key markets, while we have lowered our total dollars expense. We are encouraged by the initiatives that we undertook last year to lower our SG&A across most areas of our business. We believe that we will leverage our existing organization and fixed cost structure with any positive sales momentum.

We began selling on the web in the quarter with very few problems. havertys.com has nearly -- had nearly 500,000 unique monthly visitors in March. Just this week we added a new room planner to our site that will further assist our customers in their decorating efforts. We have recently begun promoting our site with several new events such as "when you wish list" and expect to see increases in website usage in the second quarter.

We expect our 2008 store growth plans to be flat in square footage with last year. This year we plan to open three to four stores, remodel and expand two stores, and close four stores. We are evaluating all of our markets to make sure we are positioned properly and reviewing possibilities for improved lease terms as renewals and options mature.

In these difficult times for furniture retailers, we believe that our financial strength will allow us to acquire better real estate terms than we have been able to do in the recent past. Our plans are to grow retail locations only in markets that our existing distribution can serve.

While we are encouraged by our performance in a number of our markets, we still see real weaknesses in many of the cities we serve. We are well positioned to gain real marketshare from the weaker players in our industry. We are committed to do all that is possible to serve our customers better than our competition to earn her continued business, and to grow our profitable share in the months and years ahead.

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

Thank you, Clarence. Our first-quarter SG&A expenses were flat with the first quarter of last year and actually decreased $7.4 million sequentially from the fourth quarter of 2007. We were pleased with achieving that 7% reduction from the fourth quarter to the first quarter and it helped buffer the impact of the lower sales being generated.

Cost of our outsourced credit promotions were up considerably from first quarter of the prior year as longer free interest periods were offered. Those longer free interest credit promotions had been deemphasized early last year. In the first quarter this year, the cost of the credit promotions was about equal as a percent of sales with the second half levels in 2007.

Our allowance for doubtful accounts on our in-house receivables portfolio is at $2 million at the end of the first quarter and is approximately 3.5% of the total AR balance. A year ago that allowance was slightly lower at $1.8 million, but at that time it was only 2.2% to total AR balance. Delinquency and problem category percentages have risen over the last year and thus the increase in the allowance as a percent of total AR. Total gross AR is now $56.7 million. That is $24 million or 30% lower than a year ago.

Our store expansion and capital expenditures are modest this year, as Clarence pointed out. We are now expecting total CapEx this year will be approximately $10.5 million. That is about $1.6 million lower than we had previously estimated. Our book value is slightly over $13 a share. As a reminder, our inventory is valued at LIFO cost and the reserve is about $16.5 million. We also have no goodwill recorded on our books, so the book value figure was all tangible and conservative.

Operator, we will take questions from the audience now. I would like everyone to give -- to have an opportunity to ask a question, so please limit yourself to two questions and if you have follow-ups, we would appreciate it if you re-enter the queue. Operator, go ahead with your instructions and poll the audience.

(OPERATOR INSTRUCTIONS) Rex Henderson, Raymond James & Associates.

Good morning, Dennis. Good morning, Clarence. First of all, a pretty impressive performance on the gross margin line. I wanted to dig in a little bit of that a little bit further. I was out of the room briefly while Clarence was talking, so I might have missed a little bit. But I am interested if you can kind of go through each one of the improvements in gross margin that you outlined in the press release and give me a little more color on exactly what each one of those means, what the source of those were.

Well, let me comment on the inventory management. Last year this time we had some significant markdowns that we had to take that we got behind us. Those are not affecting us like they were in the past. We are doing a much better job of managing the inventories and not allowing obsolescence to come in our stores. So that was about one-third of the margin improvement.

I also think we're getting a little better margins on some of our exclusive product and getting frankly better credit for that. And then, Dennis, you may want to comment on the credit part of that because of the outsourced credit, that did impact it also.

Yes, that is really just where it appears on the P&L and when it's in-house and it is longer than 12 months, we have to accrue a discount on that. And we ran more of those promotions outside. So it actually hit a little harder on the SG&A line. It did save us on the gross profit line.

Okay.

I will say that it was stronger than planned but it was certainly a positive and we want to try to maintain the margins the best we can in the environment that we are in. Which is pretty difficult and we certainly want to drive our sales and be promotional where we need to be. But we're seeing a lot of pressures, as you would guess with fuel and steel and foam, currency issues. We are doing everything we can to hold our pricing and to make sure we do maintain our margins.

Okay, now drilling -- returning to that topic on trying to figure out how much of this is sustainable, the markdowns that you had last year, did those markdowns continue into the second or third quarter? Were they pretty much done at the end of the first quarter?

They did continue into the second quarter and pretty much we are done. So we will see some months where that is a comparative part of it, but that will be behind us after the first half.

Okay, so we will continue to see that benefit through the second quarter but not in the third quarter?

I would say that is true.

And the benefits you are getting from fewer -- less damage, you think you continue to see that through the rest of the year? Can you talk about that a little bit?

I don't know how to put that into numbers, but I do know that we're managing that a lot better and I don't see that as a problem going forward.

Okay.

It is hard to articulate exactly how that will affect us, but I don't think it will be a negative, which it was last year.

Okay, so -- and when do you start -- when do you begin to anniversary those improvements in the way you are handling merchandise and limiting damages?

I would say second half.

Okay, thank you very much.

Todd Schwartzman, Sidoti & Co.

Clarence, could you shed a little bit more light on the color that you did provide on the three sources of the margin improving? With respect to the exclusive product, maybe speaking in terms of what categories you are referring to, or -- are there specific collections? I just want to get a handle on the true degree of exclusivity, if you will, and how you are differentiating product and how customers in your key markets are making that -- are differentiating?

Well, most of our wood product, as you know, comes from Asia and we do have a team over there. We are in Asia. We are working with our vendors there, some of them directly. And we have designers that we are using to develop our collections and those are now coming in and have been very well accepted. I do think we have got some terrific values because we have in many cases eliminated or reduced the middlemen that are involved in the process. And it is coming in. It has been a good while in developing this, but I think we are getting more expertise in developing exclusive product, exclusive designs, and it is now on the floors and we're getting better margins for it.

So I would say it is mostly in the case goods collections, however, we are doing more in upholstery and that is coming from -- directly from some factories and also through some agents in the Asia. But it's product that's different than what most people have on their floors and it is being accepted. We are separating ourselves and becoming more of a unique furniture retailer than we were in the past.

Okay, with respect to both upholstery and case goods, can you talk about average delivery time versus a year ago?

Well, from the product development all the way through the end, it is a longer process. But I will say that in working directly with some of these factories in Asia, sometimes it is quicker than what we had to do with working through agents or other manufacturers just because they know it is going specifically to us. They can get the product cut and once it is designed and made, they know how much is going to come to our stores because it generally comes through all of our floors.

So on a new collection, it is still probably six months in developing or maybe even more. We are tightening that and I think getting better at it and as we were closer with these direct manufacturers, they are getting more comfortable with us. But the design process does take generally probably about at least six months. We would like to get that narrower, but that is about what it is.

And in the past, some of that was done by a middleman or a manufacturer and it probably took them that long. It is just by time it got to us it was probably four to five months in getting it from Asia or on our floors.

I see, thank you.

Laura Champine, Morgan Keegan.

Good morning. You mentioned briefly some of the pressures on your vendors from fuel and from foam and smother input costs. We're hearing a lot about price increases, but I know that you are able to offset some of that by reducing your middleman costs. Can you cite sort of a blended trend for your product costs, whether you are seeing that tick up or down on like-for-like product?

Well, I don't think we will see deflation any time soon. We are certainly seeing a lot of pressures, Laura, as you well know. We're trying to resist and try to make it make sense for our stores and our customer, taking it on some items but not on others in a collection, that type of thing. We are resisting greatly across the board discount increases, but there are certain items that we're going to have to take some increases, particularly those that have a lot of steel in them. Foam has gone up dramatically, as you know.

So it is hard to know what the impact of that is going to be, but we want to maintain our margins the best week and reduce those increases as much as we can.

Great, thank you.

John Baugh, Stifel Nicolaus.

Good morning. This is actually Stanley in for John. A quick question. As far as April, I guess last year had Easter in that mix -- in that month. Could you kind of give us more of apples-to-apples comparison what happened in this most recent April?

Well, April was disappointing. We haven't released the final number but it is definitely disappointing. Last year did have Easter in it, which is one of the toughest times in our industry. So we should've done better that that. I would say that it was a soft month. Most of the month, it got a little better at the end, but certainly disappointing particularly compared with the decrease we had last year.

So it is very tough out there still and we are still seeing softness as we mentioned in our press release in our Florida markets as well as others. So it is definitely still a very difficult environment.

I apologize if you touched on this, but as far as inventory levels, you expect those trends down for the balance of the year?

I think they will be flat. We went up and I think we are about where we want to be right now and I think they will probably remain flat through the rest of the year.

Very good, thank you very much.

[Carlos Ryerson], [Luxor Capital].

I just want to follow-up on Laura's question real quick. Just -- the raw materials that have increased, specifically steel and resin-based materials, did that flow through this quarter yet or is there kind of a lag effect for those increases? I am just trying to get to the question on --.

That did not flow through in the first quarter.

That did not flow through. Okay, because the gross margin was really impressive and I'm just kind of curious the way I think about you guys are trying to hold prices steady, but your vendors are seeing a ton of price increases. So I am just trying to figure out where that is going to flow through.

Most of that pressure, frankly, came right after the furniture market, which was in the middle of April. So it is on top of us right now and in the whole industry.

Okay, so maybe we'll expect to see a little bit of gross margin declines going forward.

Well, it is going to be a challenge.

Okay, that's helpful. Then just -- I know you guys have scaled back your financing. Just has the third party financing become more difficult for your customers to obtain, just with just the general credit situation?

This is Dennis. We have not seen that yet. There are -- I think what has happened is those who can't afford furniture don't feel like they can afford it are not out buying it. The approval rates have held up pretty well.

Okay, thanks, guys. Great quarter.

(OPERATOR INSTRUCTIONS) There are no further questions in the queue at this time. I will turn it back over to Clarence Smith for any closing remarks.

I'd just like to thank you for joining us on our first-quarter call and we greatly appreciate your interest in having us. Thank you.

Ladies and gentlemen, this concludes the first-quarter 2008 earnings release conference call. You may now disconnect. Thank you for using ACT Conferencing.