Haverty Furniture Companies Inc (HVT) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Havertys first-quarter 2009 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 7 of 2009.

I would now like to turn the conference over to Mr. Fink. Please go ahead, sir.

Thank you, operator. Good morning, everybody. During this conference we will make forward-looking statements which are subject to risk 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 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. Clarence?

Thanks, Dennis. Thanks for joining our first-quarter conference call. As we reported earlier, our sales were very weak, down 22.1%, nearly identical to the drop-off in the fourth quarter of last year. Because of the significant sales decline we produced a net loss for the quarter of $7.3 million or $0.34 per diluted share, compared to the first quarter of 2008 net earnings of $1 million or $0.05 a share.

We have not seen an improvement in our sales or store traffic, and we don't expect to have positive sales trends for the near term. Our focus is adjusting cost conditions; protecting our balance sheet by managing for cash; and strong promotional plans for driving sales.

We continue to reduce our costs while maintaining the infrastructure to serve our customer base. We operate stores and deliver in 17 states and maintained a strong presence in our markets. The fixed costs of operating stores and distribution centers are difficult to reduce. However, for the quarter, we cut our total SG&A by 15% or $14.2 million versus last year, with the primary cost reductions coming from staff changes.

Our total headcount today compared to the end of Q1 2008 is down 21.2%, balanced across retail and distribution positions, and approximately in line with our sales drop-off. We have reduced some of our store hours and cut back on delivery schedules as appropriate.

Even with the personnel costs cuts, we continued to get top marks from our customer base on the quality of our service. A recent third-party study showed that we received excellent ratings on our associates and the services they provide. We are proud of our long tradition of providing top-quality service levels.

We continue to evaluate each location and potential store closing. Currently, we do not have plans to close additional stores this year.

We were able to complete a $6.8 million sale-leaseback on our North Charlotte store during the quarter, which was a significant plus to our cash position. Excellent inventory management by our supply chain team and steady collections on our accounts receivables helped us to raise our cash position by $5.8 million from the end of 2008.

We have no debt and zero borrowings on our $60 million bank revolver. As of yesterday, we have over $10 million in the bank. Maintaining our strong cash position is a top priority during this difficult industry recession.

Next week we will kick off a modified print and TV campaign with the theme -- Havertys, Furniture Built for Life. This line conveys a powerful two-pronged message.

First, at Havertys you'll find the furniture that fits your style and the way you live your life. The second meaning is that at Havertys you will find quality that is durable and that will last.

Our advertising will key on the strongest entry-level price points by category. Also during this tough market we will be taking more advantage of specials that are available and make it clear in our markets that Havertys is the place for real values. We believe we will gain more recognition for the value and service we provide through our new affordability message, which should drive traffic and sales.

We expect to be able to maintain our gross margins at or near the Q1 levels throughout remainder of the year.

The furniture industry continues to go through gut-wrenching changes which will take out many more stores and suppliers. We're working very closely with our strongest suppliers to make sure that our service levels are consistent and that we exceed our customers' expectations with outstanding furniture values during these difficult and historic times.

I'm very certain that Haverty's position will strengthen while we stay focused on our customer and providing her the home furnishings she needs and desires. I will now turn the call over to Dennis Fink.

Thank you, Clarence. First I'll just point out that we had the operating loss, but there is a small tax expense; and that is likely the scenario for the next several quarters as we have -- as most of you probably know -- we have put a reserve against our deferred tax assets. So any future potential tax benefit from operating losses is reserved against further, so that we have a tax expense very close to zero.

The reason it is a positive is because of one state that would require some level of taxes even without income. It's a different computation.

The cash flow was very good for the quarter. We are very pleased with how we have been able to stay out of debt. We talked about the sale-leaseback transaction that was closed during the quarter. It was on favorable terms for the Company. The effective cap rate on that was a little under 9% and it was a 10-year lease with options, so it was a good deal for us.

There was no gain that was taken on the transaction. The gain was deferred as is the required and is offset against the cost of the lease going forward.

Capital expenditures for the quarter were low and we plan to keep it that way for this year. The expected CapEx is approximately $4.4 million, and we have very little in the way of commitments for 2010.

Our depreciation is running a little over $5 million a quarter at a $20 million rate. In effect, the earnings that we're reporting or the losses -- the depreciation can be backed out of that to determine the impact on the cash flow. So in other words, the $20 million is a adjustment back to the annual performance of the Company insofar as cash goes.

Again as I said, there is no tax shield or tax expense expected, except a minor amount for the year.

Otherwise, in the cash flow, we have continued to reduce receivables. It was down a little over $6 million for the quarter. We expect receivables to come down, but more modestly going forward since the balance is now fairly low.

We reduced our inventories, and we are comfortable with the inventory levels we have going forward, and plan to maintain them at similar or slightly less levels.

There are no other financing transactions or sale-leasebacks scheduled for this year. So the cash flow, as I said, is going to be more from the combination of whatever the results are, loss or gains, adjusted by the depreciation. And we should be fairly neutral or even slightly positive on the working capital side insofar as cash flow goes.

We do have some tax refund still coming in. There is about $5 million that will be received from prior years over the course of the year. Maybe some of that will slide slightly into the first part of next year.

But we're confident of our strong cash position. Our revolver is a $60 million nominal amount. There is a holdback on that of about $10 million. We also have $9 million of letters of credit outstanding. So the real availability in terms of where we stand today is about $41 million, which was the same as it was at year-end.

Other than that, operator, I think I will just turn it back over for questions at this time.

(Operator Instructions) Budd Bugatch, Raymond James.

Good morning, Clarence. Good morning, Dennis. I guess I've got two questions, one kind of financial and one longer-term.

Can you look into that crystal ball -- mine is pretty cloudy or even broken -- a little bit farther and see if you are going to -- what do you think the year winds up at in terms of sales? I'm not asking for a number, but do you think you turn positive comps as we get to the end of the year?

We are looking at a rate of sales now versus a couple years ago of down about 33% pretty much. And that was what the three-year rate would be for the fourth quarter. Do you think we are coming to an end where we get to see positive comps?

Well, I think it's possible at the end of the year for the reasons you just described. I think the stimulus packages that are going out have got to help cause some kind of uplift.

So we're hopeful for that. I'm not saying we are budgeting for that, but I'd say that that is something that we hope could happen.

Okay, that was kind of the shorter-term or financial question. The second one is kind of a more philosophical. I read what you said and I listened to what you said about the taking advantage of the opportunities of purchasing. I am curious to know whether that is with new vendors or existing vendors or both; and what that might do to the ultimate brand image of Havertys.

In my experience and I think probably in yours too, it's awfully easy to trade down; but then once that's done it's very hard to get it back.

That's very true, Budd.

(multiple speakers) philosophy.

We completely agree with you on that. We are, first of all, dealing with our current vendors and in many cases some of our best current sellers that we are getting some price promotions on. We are not bringing our quality down. I think that would be a big mistake.

But we are recognizing that the consumers are looking at lower price points than they did a year ago or two years ago. So we are trying to react to that and give them really good values on key items and key price points.

So we do not intend to bring our quality level down. We are known as a quality player and have built our brand on that, and we don't want to deteriorate that.

I think, frankly, the promotions that I've seen -- and I've seen the campaign that we will be releasing next week -- is going to enhance our brand. I think it's positive, it is on mark and tells the customer that we offer value that we have offered in the past and may not have gotten credit for.

Okay. Good luck on it. Thanks.

Todd Schwartzman, Sidoti & Company.

Hi, good morning, guys. First, I want to talk about the media spend. You alluded to it I think in the press release. Can you discuss the shifts or changes in the spend for the quarter? Where you cut back; what if anything was eliminated; and maybe most importantly what you would need to see in terms of demand to ramp back up what might have been temporarily reduced.

Well, we have mentioned in the past we've moved away from ROP, as probably most of the retail industry has. We are holding pretty steady with our television. We think that is a very good way to get across the message.

We are doing more in Internet advertising and all of e-mail advertising, all of that type of campaign. That is a bigger part of us since we've got a website up and running. And our tabloids, which is our Sunday inserts, newspaper inserts, is pretty steady.

So I would say that going forward we will continue to emphasize television and preprints and the Internet, and less ROP. I think that will continue to fall off, and we think that's generally the right way to get to our customer.

As circulations dwindle in maybe some of the major markets, do you guys get a break on the rates, or do you intend to, going forward?

Yes, well that's negotiable in every single market. An interesting thing, for instance, in Atlanta they are de-emphasizing the daily papers and emphasizing the Sunday paper or weekend papers, as many of the major markets are. I think they see themselves as a distribution vehicle to get out those inserts, which is a big part of what they do.

We will go where the circulation is and negotiate the best rates we can to take advantage of that.

Okay. Last question I have is -- if you were to remove the Easter effect, can you talk to how sales and orders trended these past five, six weeks versus Q1 year-over-year?

Yes, Todd. This is Dennis. Generally, we had the first seven weeks or so of the first quarter were fairly -- were better, let's say, than the surrounding months, the fourth quarter, or the time since then.

In fact, I think our written business was off 13%, 14% in that stretch really between January 1 and Presidents' Day. Since that time, it's been weaker. Fairly steadily weaker.

But you're correct, the Easter being in the second quarter this year versus first quarter last year, it might have made a point or two, a percentage point or two difference into which quarter sales fell in. But it wasn't that huge.

Really since about mid-February, sales have been off more, certainly over 20% in that time period. We felt like it coincided with the big dip that happened in the stock market and consumer sentiment right around mid-February.

I guess it bottomed out somewhere around the early part -- 9th or 10th I think it was of March. During that time we felt business much weaker and sentiment worse. But since that time it's just remained weak.

I will say also, certainly we are talking when I say weak, percentages compared to last year. But just seasonally the period of time between Presidents' Day and mid-February, and Memorial Day, late May, that is the weakest sales period of the year for us. The spring effect in the client -- or the latitudes we sell at. That is a real nice springtime and people are thinking outside, not inside. So we always have this weakness this time of year, and we are anxious for the spring to turn to summer with Memorial Day.

Up north, the weather has been not so hot these past month and a half. Has that benefited you somehow in some way?

Todd, do you need to move down here?

It's been nice down here. Whereas we have one store in Missouri and one in Kansas and one in Indiana and one in Ohio, and those -- they have had worse weather. The weather in the South has been rainy, which is probably good. So we can't say much about the weather and it didn't -- I don't think it had much effect.

We can't blame the weather in any way.

No.

Right. Thanks, Dennis. Thanks, Clarence.

(Operator Instructions) John Deysher, Pinnacle.

Good morning, gentlemen. The press release says that regarding lease renewals, you are going to focus on stores that are nearing the end of their lease terms and additional closures may result if satisfactory renewal terms cannot be reached.

I'm just curious, how many leases. How many leases come up for renewal between now and the end of the year, roughly?

There's three or four, I believe, that come up this year; and then there's several more next year.

Several more being about the same amount?

No, there is 10 or so; and some of those are towards the end of next year, the end of 2010.

Okay. What is the posture going to be in negotiating with the landlords for those?

It really depends on the location and how well we are doing, our position there, how profitable we are. We obviously have some leverage when a lease is coming up for renewal or a new option term, and we just try to get the best deal that makes sense for us and that the landlord will go along with.

In some cases, stores that are not doing well will try to get a shorter-term lower-priced lease and with kickout terms, so that if things don't get better we will be able to leave without taking a big hit. So it really is a location-by-location situation.

Does the landlord typically get a percentage of sales with a typical lease?

No, not with our -- most of the remaining leases. That used to be standard. It is not in most of our cases. I would say very few of them have percentage leases.

Okay, good. Back to the revolver for a second, $41 million available as of the end of the quarter. When does that mature?

It's good through December 2011. So we just did it in December 2008 and it's a three-year revolver.

Okay. The availability is a function of working capital?

It is, primarily inventory.

Which brings me to the next question. The inventory levels, I think you said you were comfortable with them. They are down, I guess, about 9% from a year ago on a 22% sales decline.

Can you do anything to bring inventories down? Or is it just a function of you got to have that much inventory available to be able to meet the sales that do occur?

If sales continue down we will certainly bring inventories down. I think that we are watching that obviously very closely every day.

I think we have a good control of it. We are flowing a lot of merchandise from Asia, and we just are getting goods in that were shipped after Chinese New Year. So that is something that we always deal with, but we think these levels are pretty good for what we expect sales to be.

As Dennis pointed out, we are coming out right now in the midst of the worst season of the year historically, and we expect to have better volumes in the summer and certainly into the third and fourth quarter. So I think our levels are about right. They probably will come down a little bit in a month or so. But I think they will need to be at these levels to give us the volumes we are expecting.

Also add to that that about two-thirds of our inventory is in the stores. So that's a relatively fixed number per store, per square foot. And the one-third is our inventory that we really manage, which is what we fulfill orders out of for the customer.

As Clarence said, we can squeeze it some, but we don't. The leadtimes are pretty long and we don't want to miss any upturns whenever they do come. So we are cautious about how far we take it down, and we certainly are not going to run it up.

Yes, obviously, you don't want customers walking into half-empty stores, so --

That's right.

That makes sense. I think that does it. Oh, one other kind of minor question. You said that there was one state that requires taxes with no income. Which state is that?

That is the great state of Texas. They have a gross profit tax, which was put in about a year, year and a half ago, I think it was. And it's tough for retailers.

Particularly furniture retailers.

Yes, because anytime -- there is a margin, but then there is a lot of overhead associated with the sale; and they have a tax rate on gross margin, so --

We didn't do a good lobbying job there.

That's okay. I mean I don't think Texas has an income tax, do they? At least not for individuals. I don't know if they have it for corporations.

That's right.

Yes, that's right. That is their so-called -- it's a kind of income, it is just not pretax income, probably a better way to say it.

Okay. Very good. Thank you.

[David Berman], Berman Capital.

Hi, guys. Very impressive cash flow control. I was wondering if you could share with us -- a lot of that is obviously coming from inventory reduction. Inventories are down 9% year-over-year. Sales are down 22% year-over-year for the quarter.

It would be nice if inventories could come down even further, improve your cash flow, and certainly help you in the margin. So that at least your inventories are down in line with your sales.

How are you thinking about inventory reduction in that sense? Can you bring it down much further? And what are your efforts over there, please? Thanks.

Well, we just answered something similar to that in the last question. We think our levels are pretty good right now. I think they can come down in the very near term; but as we go into the summer and certainly into the third quarter, we want to have levels that can support the better volumes that we're expecting then.

As Dennis pointed out, we've got a long tail on our supply chain. A lot of this is coming from Asia. So we have to plan far out and flow it to a time when we bring in new collections and time when we think sales are going to be there.

So I don't see that as a -- we can bring it down some, but I don't see it as a major driver for our cash flow.

In terms of your accounts receivable, they went down a lot, which is I guess also a good source of cash, from a $49 million to $18 million. Can you just share what that is about?

I sure can.

They are down 64% year-over-year. Sales are only down 22%.

Sure thing. The real change there is we have in-house receivables and we have got a third-party finance company that we started using back in 2001. We have directed more of the business to the third-party finance companies, so that is non-recourse to us, and it is driven by the credit offer itself.

So we just have less attractive programs that we are keeping in-house and the more promotional ones, longer free interest, are on the outside.

Right. And I guess provision for bad debts, that is not much of issue given that the balance is so low now.

It is certainly something we have to watch carefully and work hard at, but it's not as big of an issue because the base, the receivable base is much smaller and therefore the risk to the Company is smaller. But we work hard on that area and stay in close contact with the customers.

From the pure risk standpoint it's good to have that number down, as also it's helped the cash flow.

How do you work with -- who took over your receivables? How do you work with them in terms of -- if you are getting new clients and how much they have charged you for the bad debts from their point of view?

With the third-party, it is without recourse to us for bad debt, so that they underwrite.

Right, but then they surely have to approve it then, right?

They definitely do. So if somebody comes into the store or goes online and fills out a fairly short credit application with their information on it, it's automatically scored in their system.

Are you finding that their standards are much different to your standards were before?

Their standards haven't changed that much. The people's credit is not as good because there are more people past due, and their appetite to approve is probably a little lower. Because the risk is just perceived higher in all sorts of lending, including consumer landing.

But we found them to be pretty consistent with how we approve internally over the years. There is some tightening, but thus far it has been a few percentage points, not major, like we have heard some consumer credit operations have really tightened up a lot.

Right, right, right.

Yes, so we haven't run into that, and hope we don't.

Do you get to see through what their bad debts are for sales that are to you?

They do disclose that to us.

They do? And what has that been like?

It has definitely gone up. It is still below the average credit card receivable write-off rate. But I'm not sure they would want me to do disclose it, but it is single-digit percent.

So the fee that they charge you takes that into account how obviously.

It sure does.

Then do they revalue that every year? Because obviously their bad debt percentages are going to get higher in bad times.

Exactly, and the way it has worked, our arrangement is that we don't have any so-called lookbacks or adjustments for prior sales. It is only prospectively they have repriced with notice to us for new credit they approve.

They evaluate that periodically. If -- with all the factors moving, as rates move up or down, it certainly is -- bad debts the environment is tougher, they adjust rates up in these kind of cycles.

Right, right.

So it's more expensive for the retailers everywhere to offer competitive free interest credit programs.

Right, I got it. Okay. Well, good luck. Thank you very much.

Stanley Elliott, Stifel Nicolaus.

Good morning. Sorry I missed it earlier when you guys were giving guidance or outlook for gross margins. Could you just reiterate that for me?

Well, we feel that our gross margin will be consistent with what we've had in the first quarter. That is really where we believe we'll go from here on out for the rest of the year.

Great. That's what I thought I had. Thank you very much.

Thank you. I'm showing no further questions at this time. I will turn it back to management for any closing remarks.

Well, thank you so much for joining us on the call. We appreciate your interest in Havertys.

Ladies and gentlemen, this concludes the Havertys first-quarter 2009 financial results conference call. You may now disconnect. Thank you for using AT&T teleconferencing.