Haverty Furniture Companies Inc (HVT) 2009 Q2 法說會逐字稿

Welcome to Haverty's quarter two 2009 financial results conference call on the 6th of August 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Mr. Dennis Fink. Thank you, sir. Please go ahead.

Good morning, everyone. During this conference call, 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 and 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 his update.

Thanks, Dennis. Thanks for joining our second-quarter conference call. Our sales for the quarter were down eerily consistent with the previous two quarters, with comparative store sales down 22.6% and 22.7% for the first six months of the year. This was also right on the decline for the fourth quarter of 2008.

We have been aggressively reducing our costs to track with the sales declines. Our total headcount is down 23% from the end of last year -- excuse me, from Q2 last year, and down 14% year to date. This has been a very difficult process of cutting positions and reducing staff across all departments, but necessary for the conditions and for the long-term health of our company.

The pace of cost reductions has accelerated and during the second quarter, which has historically been our weakest, our total SG&A expenses were down 19.2% or $17.4 million compared to last year's second quarter. Our SG&A for the first half of the year was down 17% or $31.5 million compared to last year.

The technologies that we have in place to manage our operations have helped us to react and to adjust very rapidly to the sales declines without affecting service levels for our customer base. With the systems in place and a significantly leaner operation, we believe that we will be able to leverage our existing infrastructure and with a growth in sales return to profitability.

Our recent market research shows that Haverty's has gained in top-of-mind awareness with the consumers, and is clearly the top brand for better quality merchandise in the key markets we serve. We intend to build on that position in the remainder of this year with excellent exclusive merchandise values arriving in our stores, combined with a strong advertising and marketing program emphasizing a value statement throughout the last five months.

We have been encouraged by the recent response to our new merchandise in advertising and are starting to see a bit of attraction in our sales. We have had excellent control of our inventories, which has allowed us to build our cash position and keep our markdowns in line.

Our gross margins were slightly up and our in-stock position has improved, even though we reduced our inventories by $10 million or 9.6% from year-end 2008. We expect to be able to keep our inventories well-balanced throughout the year. Our merchandising and supply teams have done an outstanding job during these extremely tough times for our industry.

Our cash position for the end of the quarter is $22.4 million, and it is over $26 million as of this week. We have no funded debt, and we expect to maintain this strong cash position this year and for the immediate future as we steer through this historic downturn. Once the economy and our results begin to turn positive, we will again begin to be able to grow and to consider options for available retail locations in our current regions. We will be very deliberate in considering new opportunities.

This quarter marks the three-year anniversary of the recession for the furniture industry. We began to see real decline in sales coinciding with the residential real estate slide in late summer of 2006. We think that while the return will be painfully slow, we well begin to see the consumer shop and buy more home furnishings, supporting the strong innate desire to have homes beautifully and comfortably furnished. Haverty's is well positioned to serve our customer better than our competition. We will be ready.

I will now turn it back over to Dennis, CFO.

Even with the very difficult conditions to generate sales of home furnishings, we have made important progress financially and operationally this year. Haverty's is very well-capitalized. Our assets are tangible. Inventories are conservatively valued using the LIFO method, which is approximately $19 million lower than the FIFO value. Our financing arrangements are adequate to endure a longer downturn than we hope will be necessary.

Our net loss reported for this year is very close to the pretax loss since we continued to increase our valuation allowance for net deferred tax assets, offsetting any current year tax benefits being generated. Cash flow has also been good and we expect it to be positive in the second half.

Depreciation and amortization is about $5 million per quarter or $20 million annually. Capital expenditures are being kept low during this downturn and are expected to be only about $4.2 million for the full year. Our in-house customer accounts receivable have been reduced by 9.5 -- excuse me, $9.5 million so far in 2009, and they should trend modestly lower during the rest of the year. Inventories have been reduced to $10.3 million in the first half and should be trimmed a little further during the remainder of 2009.

Net availability under our revolving $60 million asset-based loan was $39.5 million as of mid year. This is comprised of a calculated $57.1 million borrowing base, and it is reduced by a $7.6 million amount for outstanding letters of credit. It is also reduced by $10 million, since the fixed charge coverage ratio test is not being met. And the net again is $39.5 million available.

We have been pleased that our credit approval rate for customers seeking financing under our outsourced credit programs are only down modestly, and that the credit limits that are being granted continue to be adequate. Most of the expense reductions made during the first half of the year should continue with four categories of exceptions.

One is discretionary items such as the advertising spend we decide to make to support our promotional schedule and brand building. We advertise more in the second half of the year, which is seasonally stronger.

Another exception is commissions and incentive pay which will vary on sales levels and performance. Seasonal factors influence utility expense, with the first and third quarters being higher due to the heating costs in the winter and air-conditioning usage in the summer months.

The fourth category of exception is the cost of fuel, which has been extremely volatile over the last few years as we all know too well.

Operator, at this time we will take questions from the audience.

(Operator Instructions). Budd Bugatch. Please state your company name, followed by your question.

Good morning, Dennis. Good morning, Clarence. This is actually [T.J. Macondo] filling in for Budd Bugatch, both with Raymond James. I had a couple of questions for you. The first one is on actually the written business decline this far in the third quarter. The down 19.6%, can you guys give us a sense of the components of that, maybe traffic versus ticket, and maybe give an order of magnitude as to how much the new value focus is impacting each of those items?

Well, I think the traffic is pretty consistent with the falloff in sales. We are not seeing anything significantly different there. Our average ticket size has been holding fairly consistent. We are not seeing any major falloff there. And frankly, another issue, our average price per SKU is also holding steady, actually up slightly. So it is pretty consistent with the falloff.

Dennis, do you want to comment any more on that? Okay. I don't think it is different than the breakout in the individual components. The 19.6%, the only reason we mention it is it is less than 22%. I mean it is not much of an improvement, but we are starting possibly to see a little traction and improvement there.

Got you. Got you. Yes, it did look like you were stuck on that number there for a little while. Then the second question I had was back to the expenses. I know, Dennis, you just went through some of the things that maybe were outside of your control a little bit. But understanding that Q2 is seasonally the low period for both sales and expenses, it still looks like you pulled some out sequentially if you look back historically as to the changes.

Do you think Q2 is a fair starting point to look at for a seasonal baseline, or are there still more expenses to come out in the next couple of quarters? Just wondering what your take on that was?

It's a fair enough point with some adjustments. As I said, the things I called out -- we don't know about fuel costs and almost can't speculate about that. But the discretionary items will definitely have a higher advertising spend in the third and fourth quarter than we did in the second.

The weakest quarter of the year, it's not as advantageous to spend as much. The better times or the better shopping seasons or holiday periods make more sense to place more advertising during those times.

I mentioned the things that vary with volume. Probably the most important is just commissions that we pay. So this depends on the sales volume you are looking for that we have compared to the second quarter, and it is seasonally the weakest, so you expect those expenses to go up.

And then utilities can be a big issue, so they will be up in the third quarter as they always are. Spring and fall with the weather being closer to comfortable, it doesn't take as much utility expense in the stores, and the warehouses for that matter, too. So those are the key items that change.

There are some other expense reductions coming, not as significant unless we were wrong and the sales volume drop from here. We don't think it is going to. We think we have had our seasonal low point for the year, and so the other improvements are more related to efficiency than they are just scale of operation.

Fair enough, that is very helpful. Those are my questions, guys. Thanks for taking them, and good luck in the coming quarter.

Thanks T.J.

Todd Schwartzman. Please state your company name followed by your question.

Good morning, guys. Firstly, what percentage of volume were accessories for the quarter, and what was that mix a year ago if you have that information?

We have not usually given that out, but it is around 3% and it is pretty consistent. You know, that might be down a slight amount, I am going to guess 20 or 30 basis points, but it is pretty consistently around 3%.

And I know this will take a little while, but maybe I can get you to venture a guess here. What gross margin would you associate with an annual volume of around 650 to $7 million going forward?

I tell you, Todd, the gross margin is just about 100% variable -- the cost of sales is about 100% variable. So it isn't influenced very much at all by the volume levels. That is totally unlike SG&A which is heavily fixed cost, and you have to cut when sales decline and try to leverage when they go up.

But the gross margin target in our expectation is that we can continue as we have at the second quarter, at that kind of level, unless conditions change drastically. But we are looked at as a very good customer to have, and especially as so many retailers are in trouble today.

So we get very favorable pricing and treatment by the vendors, and we are able to have a fairly consistent markup on the product and have quite a few exclusive items in our stores, such that we are just not meeting the latest 800-number or Internet price on some item that is sold everywhere. So all those factors are helping us keep our margins pretty steady, and they should be -- should stay at that irrespective of volume.

Got it. Thanks, Dennis. Also I wanted to talk about promotional activity. Are there any geographic markets in which increased discounting has had more of a positive impact than other markets?

Are you talking about our own discounting?

Yes.

You know, you are calling it discounting. I am really calling it value pricing because we are really just trying to get more credit for the value that we have and the products that we have. We haven't changed our lineup. We do have some price points we have lowered. A lot of that is working in conjunction with our vendors to get special pricings and individual promotions. But, you know, the overall performance, Todd, is pretty balanced across regions and frankly across most of our markets right now.

I notice that you've talked about Florida. Florida is not falling as fast as it did, but it is still down. And it is not as bad; it is not the worst anymore. But frankly, the sales performance is pretty balanced across almost all of our markets and regions. So there is nothing that really stands out there.

Thanks, Clarence. And my final question is can we expect any additional sales leaseback transactions in the balance of the year?

We don't anticipate any.

Great. Thank you.

Carlos Ryerson. Please state your company name followed by your question.

Hi, LCG. Just a question on ad expense. Can you kind of break out what it was in June '08 versus the June '09 quarter, just on absolute terms? I am just kind of trying to get some sense as to whether or not it fell more than the sales volume did.

Yes, it was down as a percent of sales, and the absolute level quarter to quarter in the prior year, it was down about $3.5 million.

Do you have the exact numbers or is that something you can give out?

I will come back to you on that if I could. Do you have another question?

Yes, yes, sure. I mean, I guess just more generally speaking, I'm trying to figure out how much of the pretty impressive $18 million decline in SG&A was more of a structural cost takeout and how much of it was just pretty aggressive expense control on what you could --.

The biggest part was the headcount cut. That is where most of our cost reductions have come from is our own personnel, which has been pretty drastic. Our advertising expense is down in the second quarter and it is down as low -- a slightly lower percentage. Going forward, I think it is going to come back closer to the normal percentage we have been running, which is what, Dennis, close to about 7%?

7% I think, yes.

And in kind of more of a fixed cost retail model, you know, how are you able to take out so much in personnel costs? Where are the --?

You know, I talked about it our last call. It is pretty balanced across most of our departments. I will say that we cut the deepest in distribution by eliminating some routes, eliminating trucks and drivers and that type of thing, just based directly on the sales performance by the individual market.

So the fact that we are centralized and consolidated there has allowed us to cut very quickly, react very quickly, and still maintain the service levels. We also have put in a number of significant upgrades to our systems where we can track things a lot closer and tighter, and not have to have as many people running our business as we did in the past.

So I frankly credit our management team, our operations team, for being on top of it, but also the upgraded technologies that we have put in place to be able to manage this.

Right. Okay, that's helpful. Just one quick last question. How do you guys think about the different media outlets that you are using for your advertising expenditure? I mean, I assume you guys still do a lot of print and television. I mean, how do you guys think about just the mix going forward and where you're going to be seeing your ad dollars going forward?

Well, we have mentioned that we have cut our newspaper run of the paper significantly, and that will continue to be less important to us. Television is important to us, and we are doing more interactive and Internet advertising as a percent. So we will see less print and more other media come into play.

Okay. So you guys don't see you migrating back towards the print advertising; you think you'll just continue to migrate away from it?

We are following the way the customer reacts and the way the market reacts, and newspaper is becoming less important.

Okay. All right. Thanks so much, guys.

Thank you.

(Operator Instructions). There appear to be no more questions at this time.

Well, thank you very much for joining us on our call. We appreciate your interest in Haverty's.