Haverty Furniture Companies Inc (HVT) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty Furniture Company Inc. fourth 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 February 19, 2009.

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

Thank you. Good morning, everyone.

During this conference, 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 that are more fully disclosed in the Company's reports filed with the SEC.

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

Thanks, Dennis. Good morning. Thank you for joining us on this 2008 fourth quarter conference call.

As we previously released, our fourth quarter total net sales were down 21.3% from last year with comparative store sales down 22.6%. The loss for the quarter was $10.1 million or $0.47 per share. Excluding a non-cash charge of tax expense due to a valuation allowance against our deferred tax assets, the Company had a non-GAAP fourth quarter loss of $1.4 million or $0.07 per diluted share. This compares to a $0.07 profit in the fourth quarter of 2007.

Sales for the full year 2008 were $691 million, down 11.9% from the $785 million in 2007. We continued our planned and aggressive deleveraging of our balance sheet by completely paying off all of our funded debt, and ending the year with no borrowings on our bank lines and cash in the bank.

We established a $60 million asset-based loan agreement in December, which was expensive but needed, to provide ample funding to get us through this recession and to be able to take advantage of potential opportunities later in the recovery. We are proud to have one of the strongest balance sheets in the industry.

2008 was the first year since World War II that Havertys has had a loss -- not a record we're proud of breaking. We made the difficult decision to discontinue the dividend during the fourth quarter, ending a 70-year streak of consistent dividend payments. We stopped all new store development in order to preserve capital.

We reduced our total associate count by 17% from the beginning of the year. Since the beginning of 2007, we have reduced our associate count by approximately 25%. This has been a very tough time for the Company as well as for the industry.

However, we believe that many of the issues that we'd tackled were positive for our performance and instrumental towards making us a stronger company, one that will be better positioned to survive in the current economy. We feel that we've adjusted our staffing and cost structure to allow us to be profitable.

We had an excellent management of our inventories throughout the year, and ended in line with budget and in good condition, even with the large drop in sales volume in the fourth quarter.

In January, our Compensation Committee approved management's recommendations that the Company's named executive officers, as well as other section 16 officers, receive no bonuses or cash awards for fiscal year 2008. Additionally, the named executive officers all have taken reductions in their salaries for 2009.

We continued to review and analyze every position in our Company and adjust to the conditions. We've developed a very flexible organization with our centralized distribution system, and unified marketing and merchandising program. We constantly strive to orient our merchandising, our promotions, and marketing to fit the individual markets and to service each store the most efficiently.

In March of 2008, we kicked off our new transactional website, which has been a good success. Sales are growing, feeding our average store performance, and it is a profitable business. We continue to enhance our site and believe that we have the best transactional website in the furniture industry. We have high expectations for continued success with Havertys.com.

In 2008, we opened four stores, closed five, and remodeled two stores. We ended the year with 0.8% less sales square footage and 122 stores down from 123 the end of 2007. This quarter, we will close our store in Hattiesburg, Mississippi, whose lease has expired. We have plans to relocate our Little Rock store later this spring.

We were pleased with the important Presidents' Day weekend sales event, which was down low single-digits in written business. Overall, for the first quarter to date, we're down approximately 13% written business, but our delivered sales were about 16% down, due to the smaller backlog of undelivered sales at year-end.

I'm proud of our management team and the dedicated associates who continue to have an excellent attitude, and who give our customers the best service in the industry, particularly after the difficult decisions we undertook to adjust our staff. We believe that we are a clear survivor and are well-positioned to benefit and grow marketshare, as this recession plays out.

Havertys has always gained the most ground on our competitors during the tough times. In the years of easier access to money when anyone was able to sign a lease, and have domestic manufacturers finance store upfittings and inventories, there were many players opening furniture stores. But things have changed.

In the difficult times, we tighten our processes, refine our strategies, and toughen up our teams to fight smarter. We have gained share by providing consistent quality at real values with high service levels.

Most other stores cannot invest in the systems, don't have the merchandising and sourcing expertise, and they don't have the depth of dedicated retail personnel with a long legacy of succeeding in adversity. Ultimately, we win over more of the home furnishings customers in our markets. We believe the ground-gaining move is now beginning to take place.

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

Thank you, Clarence. Only a few comments from me today. We tried to put a little more information in the release itself. On the deferred tax asset valuation allowance, it is a little complicated, but it is very standard in terms of those public companies who have been reporting losses, and the doctrines in accounting prescribe a treatment that requires this valuation to be set up.

We do expect, in 2009, there will be very little or no net income tax expense or benefit for the year. Also, we have the underfunded pension liability that was mentioned. And on both of those topics, I will respond to any questions you may have about it, but I think, again, they're both fairly standard and you've seen that a lot from a variety of other companies.

Our capital expenditures for 2009 are expected to be about $4.3 million, which is quite a bit lower -- about half of what we had in 2008. And it's about one-fourth of the -- actually, one-fifth of the level of depreciation we're expecting of a little over $21 million.

Operator, we'll open it up for questions now.

(Operator Instructions). Budd Bugatch, Raymond James.

I guess I would say the word congratulations doesn't fit here, because nobody's happy about anybody's performance, and everybody understands the difficult times we're in. But that aside, you are doing the right things and we appreciate that.

Can you talk a little bit for me about maybe some merchandising and merchandise results for the year, and what do you see going forward? Any classification data that you can give us? Talk about what the consumer may be responding to more favorably than in other areas?

Well, overall, we're a little more promotional than we have been. We did notice last year -- and I think, obviously, with the bedding industry, you've seen what's happened there -- that helped carry us through some tough years. But that's over.

Bedding is a tougher sell. We are promoting heavier this year and we hope to get some improvement there. It has been averaging around 9% to 10% of sales. And we hope to keep it up to closer to the 10% level. But bedding was a kind of a savior for awhile there, and that's kind of over.

Case goods -- we're still strong in bedroom. We have been with good case goods merchants. Upholstery has improved slightly in a percentage. But with the sales drop we had, it's hard to see anything really positive.

Okay. And when you look at moving to the Havertys brand, as you've done over the last five to 10 years, any now idea of moving back into branded merchandise in any way? Do you see any opportunity with the dislocation that's going on in the industry?

Well, there's some brands that might make sense for us in the upper end. We are obviously branded in all of our bedding right now, and we'll probably continue with that. But we're happy with the Havertys branded product and we're pushing that.

I don't see there are many opportunities to bring on a brand that means anything. Those who have a strong brand are developing their own stores and aren't really interested in selling to us, unless we use their brand and don't compete with their stores.

Some of that would, frankly, relate to what those brands would want to do. I mean, we used to sell Thomasville and we've been told -- that was taken from us, and I don't see that coming back, because they're developing their own stores.

I think we're firmly dedicated to building the Havertys brand. If we brought in another one, it would be in a minor manner, probably on the upper end, kind of a co-branded deal.

Okay. Thank you very much. I'll come back if I have some more questions.

Todd Schwartzman, Sidoti and Company.

First question is -- we've all seen the horrendous building permits, housing starts, month after month; this week's really not -- no better than recent months. Can you speak to those metrics, if you have that level of detail, in some of your key markets versus the national numbers that we see?

Well, I think you see the same numbers we do, Todd. Yesterday, we got the numbers that said they were down 50-something percent from the year before overall. I would say it's pretty bad in most all of our markets. I would say that if there's any area that is not quite as bad, it's Texas.

But even the good markets that we're performing the best, like the Carolinas, are now being hit pretty hard and probably will be hit harder, because of the banking issues up there. So, there are not many areas that are better than what the national numbers say, that we operate in.

And in terms of product categories for fourth quarter, how did bedding hold up vis-a-vis other?

I mentioned bedding a minute ago. It is down compared to the previous year. I would say it was probably about the same as the other categories fell off. We had counted on it because it had been something that seemed to be perennially going up, but it is a soft area right now too.

And the written sales, down 13% year-to-date -- similarly, can you discuss -- are there any outliers there among your markets, relative to that 13%?

You know, we're down just about that across all regions right now. It is good to see Florida not as bad off as it was. I mean, they're all off. And they're all off in the teens. So there's not anything that stands out there.

Okay. And finally, what would you need to see to reinstate the dividend to its previous level?

That's for the Board to determine. I think we'd have to show consistent profitability over a number of quarters.

Thanks, Clarence.

John Baugh, Stifel Nicolaus.

The President's Day down, what, did you say mid-single digits? -- and then the 13% year-to-date, at least just indicate some level of year-over-year improvement. Is it just promotional activity? Are you being much more aggressive there? Because I just don't sense there's been any improvement truly in retail. If anything, I hear it's gotten worse the first seven weeks of this year.

I think the customers are reacting to promotional activity on limited periods of time, more so than in the past. I think holiday events are when people come out. And you've got to be there firing with everybody else or you're going to miss out, because the down periods, the middle of the week after those kinds of events, are softer than ever.

Customers need a reason to come out to buy. And we're trying to be promotional with great values, good-looking furniture, and be there to service them. And I think it only happens in the bigger times right now -- like New Years and President's Day, those kind of events -- that's when it's happening for us.

So the fact that you're talking to us now right after, obviously, the President's Day event, if we go out a few more weeks -- I'm not asking you to forecast, but you'd expect a sort of a hangover, if you will, to pull those overall numbers down as we go through the quarter -- would that be your expectation?

That's generally what happens, yes.

Yes, okay. Could you comment on advertising spend for the calendar year, for the fourth quarter of '08? And then the budget for '09.

We have reduced our advertising. Dennis, do you want to give him specifics on that?

I will. We've cut the ads -- ad budget in total and actually as a percent of sales. And -- looking for the right appropriate sheet here. The final for the year in advertising and marketing was about $49 million, let's call it $48.5 million. And that compares to about $58 million last year. So, 2008 versus 2007. And that's down from about 7.4% to just under 7.0% of sales.

For this year, we probably -- we'll definitely be spending less -- I'd say around that same percentage. And we'd rather not get specific about that going into the year, just because that's kind of a strategic sort of competitive number. But we have been much more selective about our ad spend and have tried to bring it in line with sales decreases, without causing sales decreases, if you follow me. So that's where we're at.

Clarence -- thanks. Clarence, is your strategy -- obviously, in an environment like this, it's a trade down number market to the extent there's volume. Is your idea to try to bring more groups, more products at lower price points and sort of move down and capture what's there now? Or just hang on, you've already moved down enough; if anything, you'd like to hold it or take it up over time, so we're not going to react. What's your strategy there?

We don't want to move down in price point. The lower end of the market is pretty ferocious; there's strong players there. We have established ourselves as a better furniture player, a better furniture style, and we want to stay with that.

And I think I'm pleased with our new merchandising team. You've heard about Tony Wilkerson retiring, and Richard Gallagher's been here a long time, who has taken that over; Rhonda Wolf. They've done a good job of developing better product, a better looking product at a real value that's exclusive to us, in designs. And I think we want to stay with that.

Now, I will say that we will do some promotions with hot individual values that will stand out. And that's how we think the best way to go about this. But to move down to $399 sofas is not something we're interested in. That's just not who we are. It's not the quality that our customers are expecting.

So I think it's more the latter. We're going to stay where we are and gain customers, recognizing that we really do have values. And we want to get across that value message in our promotions and in our advertising.

And my last question is on the credit size. How many of your customers are using credit? And is your turn-down rate any different? Some color there, please.

In total, it's around 45% of the sales volume is finance. And surprisingly, our turn-down rate has held up pretty well; it's down slightly. But we believe selling a better product -- on average, a little higher price point and better quality product -- that people kind of govern themselves insofar if they can afford to spend or not.

So we do see the curtailment of those people who don't think they have the money to buy furniture. And we haven't changed criteria nor has our third party provider changed criteria dramatically. I think they've changed it some, but so far so good, in terms of the approval rate hold-up.

Great. Thank you. Good luck.

John Deysher, Pinnacle.

You, I guess, indicated that you ended the year with 122 stores, down from 123 a year ago. What will be the net closings for the current year, do you think?

We only have one planned that's already in the process of closing. We are looking at different leases and there may be some that come due that we might not open -- or continue with. But as right now, our plan is to close one store and relocate another one.

Okay, so, no new openings?

Well, it's an opening and a closing [in the current market].

I was just curious -- we don't have any of your stores up here in the Northeast, at least I'm not aware of any. But for your markets where you have stores, are you noticing competitors closing their doors? Or are they adopting the same posture you are and just keeping the doors open but not opening new stores?

Well, there are closings in our marketplace and there are a lot of independent players who are closing. There are some chains stores who are closing their franchisees' stores or even their own stores, like Thomasville's closing in our markets, a number of our markets -- their own stores. Broyhill closed their own stores in our markets.

So yes, we are seeing closings and I think there will be a rash of those in this year. I think there are going to be more stores closed because they won't be able to live through this.

What would you guess would be the capacity that might come out of the market as a consequence of that -- 10%? 15%? 5%?

I think it's on the high end of that. I'd say in the 20% to 30%.

Really? 20% to 30% of the capacity might come out?

We're that much over capacity in my mind today, yes.

But you think that might actually go away?

Yes, at some time. I don't know when, but it will happen.

Okay. But you are seeing evidence of it today?

Yes.

And then a kind of a financial question. On the underfunded pension plan -- that's a defined benefit plan?

Yes, it was frozen two years ago.

Okay. And it said it was under-funded by $11.7 million at the end of December, but no funding contributions were required for '08 or '09. Why is that? Just because people are not scheduled to retire or how can you --?

No, it has totally to do with the calculation under the Pension Act of a year and a half ago. And there has been some other legislation in Congress about how fast the funding has to take place. I think there will be -- it certainly depends on the investment returns from this point forward, but we'll pick up a lot of that funding probably in 2010 and '11, is what it looks like.

We're still needing to go through that in detail with our actuarial firm; but it's just how the calculations actually go. And we're not going to put in more than the minimum in this kind of a market environment, and with the desire to hold onto cash. In previous years, we wanted to be fully funded for accounting purposes. And we'll change our posture on that to stay up with the minimum requirement.

Okay, got it. And in terms of the expense reductions, what would you say is your breakeven level now in terms of sales -- just kind of on an annual basis?

Well, on an annual basis, it would probably be in the $620 million to $630 million level. We believe it is lower than it was in the fourth quarter. Of course, about $162 million in sales led to a $2 million pre-tax loss. And we believe that our breakeven is coming down from that level on a quarterly basis in 2009.

So perhaps $160 million to $163 million, somewhere in there, per quarter would be breakeven -- assuming the gross margin will hold up. And of course, we are in a difficult market for pricing, but our assumption is we're going to be able to keep margins fairly steady.

Okay. And pricing you think will get worse or stay the same?

I think with, as Clarence was talking about, with all the store closings coming up and a lot of close-out of inventory in those structures and other people churning for cash, I think prices are going to be tougher. But it's really a matter of being worth what the people pay. And that's where the challenge is on us -- to have the best merchandise and the best service, et cetera. So yes, I think the environment will get tougher.

Okay, but then it may improve once that inventory clears?

Yes. And when people start -- when this whole thing starts turning and people let loose with discretionary spending a little more. Irrespective of housing -- I think that may be a longer recovery. But people are really holding back on purchasing any big ticket items right now.

Okay. And then finally, can you take any more out of SG&A at this point?

We've taken a lot out. Yes, we can. We have taken some big cuts in distribution and we've adjusted that to what our current volume is, and we can cut that further if volume drops further. We have about the same number of stores as we had when we started into this recession. So there's the minimum level of people necessary to staff that, but we've cut that. And we watch it very closely.

We think we're staffed about right now, but we thought that coming into the year. So, we'll make cuts as necessary. We believe we're lean right now.

I need to correct something I said. We think our breakeven, in terms of quarterly numbers, and this $160 million, $163 million is a good number -- but times four, I mean, that's $640 million or so. And I think I might have said $620 million. I meant to stay $640 million, it's a little higher than that; so pardon me and please allow me to stand corrected.

Very good. Appreciate it. Thank you.

Budd Bugatch, Raymond James.

Yes, most of my questions were addressed -- the profitability question. You had said you wanted to return to profitability, Clarence. Do you think you're going to get there this year at the pre-tax level?

We would like and believe we can get back to profitability late in the year. That's what we believe.

But not for the full year, necessarily?

We're not giving estimates, but that probably wouldn't add up that way, right.

Okay. And secondly, just on the gross margin issue. Freight-in has probably dropped pretty dramatically, particularly on the imported goods that you're bringing in from offshore. Is that something that is helping margin?

Well, it hasn't yet hit. It will start to hit as the product comes in this quarter and as we fill orders. Yes, it should help us -- let me put it this way -- it should help offset some of our promotional activities. I don't see our margins going up. Dennis talked about that. I think we can hold them.

I don't see them going up, just because of the promotional activities that are necessary right now. We'd like to get them up, and at some point we could, but I don't see that right now.

And fuel should be a drag, I guess -- well, probably a drag till mid-year and then come down? Or how will that work? (multiple speakers) delivery cost to consumers.

You mean a positive?

Well, it will be a drag I think early, right? And then, because it started to peak latter -- you know, kind of second quarter --?

Yes, it's going to be a drag until we bring in the new product, which is starting to happen --

No, I wasn't talking about freight-in; I'm talking about delivery costs on the -- your -- part of your delivery costs (multiple speakers) --

Okay, year-to-year? Yes, it will look better in the second half. We're still -- we're lower now than we were at the beginning of last year in fuel costs, as far as I can remember.

Okay, all right. Thank you, sir.

Hey, Budd, this is Clancy. Let me ask you a question.

Yes, sir.

I know you follow developments in the state of Florida particularly closely in our industry and others. What do you think of the state of Florida's appetite for furniture retailers in the coming year?

I think it's been -- you know it's been extremely difficult. We've seen -- we're seeing a lot of pressure on folks that have happened over the last couple of years. And I think you're right when you're going to see some probably some exits for that.

We are starting to see some activity housing-wise. So, we're starting to see some velocity of sales at lower prices, so housing values are starting to clear some of that inventory in some of that. So, you need that movement first and then we'll need to rebuild from here. So, I'm not sure the trajectory of the way back up, Clarence, to be honest with you -- or Clancy, to be honest with you.

Yes, thanks.

Thank you. And I show that there are no further questions at this time. (multiple speakers)

We appreciate your joining our call this morning and we appreciate your interest in Havertys. Thank you.