Haverty Furniture Companies Inc (HVT) 2009 Q4 法說會逐字稿

Welcome to the Havertys Q4 and year-end 2009 financial results conference call on the March 2, 2010. 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 Dennis Fink. Please go ahead, sir.

Good morning, everybody. During this conference call, 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 other uncertainties detailed in the Company's reports filed with the SEC. Our President and CEO, Clarence Smith, will now give you his update.

Thank you, Dennis. Good morning. Thank you for joining us on our 2009 fourth-quarter and year-end conference call. We had a very strong December, which gave us an excellent fourth quarter, our first positive comparative store sales quarter in three years with a pretax profit of $7.6 million and after-tax benefit, $9.2 million net income. Our balance sheet remains very strong and our cash position at $44 million at year-end with no funded debt compared to $3.7 million cash at the end of 2008. February sales were better than January with written sales up 8% quarter to date, even considering the brutal winter conditions across many of our major markets. We will be working to catch up on our delivered sales in March. Due to the usual production slowdown related to Chinese New Year and the potential delays some of the factories might have related to labor issues, our supply chain team was aggressive late last year in backing up most of our bestsellers. We believe that we are relatively well-positioned to serve our customer the next few months; although we may be challenged with some products until the factories and shipments flow at a steadier rate . We have just signed a lease for a new Havertys in a former Circuit City store in Columbus, Georgia. This is a new market for us, a great fit for our distribution footprint and it is one of the markets in the region, which is expected to grow in the coming years. We closed two stores in the first quarter -- Fredericksburg, Virginia and Albany, Georgia. Both stores had leases expiring that we chose not to renew. We expect that sales square footage will decline by about 2% in 2010. Our current focus for our stores is to drive our sales per square foot back to peak 2006 levels over the next few years. I am very pleased with our management team and our balance of strength across every department and in the field. We are working together to take advantage of our stronger position. We have put in a great deal of enhancements to our systems and merchandising planning, which we feel are showing clear evidence that our overall expertise is helping us to gain marketshare. We believe that we have gained not only on the weaker players who have fallen out of the game, but also on the stronger, more promotional players because of our commitment to better quality at a value and our dedication to serving our customer. Everything we are undertaking is to give more control to our customer. The new systems that we have put in place such as enhancements in our delivery and service centers gives the customer control over the process to set the times of our delivery and even to be a part of the service process after the sale. We feel this will make our service quicker for the customer and more efficient on the Company side. Full transparency of the processes of how we deliver and service is handled will give us real advantage over our competitors who don't have our fully integrated interactive systems. Our website continues to attract a larger audience and gives the customer a full understanding of Havertys' product offerings and our services. The customer ratings on our site present a full and unbiased picture of what other customers are saying about specific products and gives our merchants instant feedback to what will be the next hot sellers, as well as what needs to be improved. Our entire Company understands that the key to growing and sustaining a profitable business is making sure that the customer is first in everything we do. This year, we are committed to improving our brand. We want to ensure that we deliver a consistent service level and presentation in every market. In addition to delivery and after the sale service standards, this includes our advertising presence, as well as our merchandise presentation. We have remained committed to our thorough training programs for every associate and we continue to set performance standards for every associate and every showroom presentation to ensure that the Havertys brand continues to outperform our customers' expectations. As we have done for 125 years and over four generations, Havertys has been committed to providing a better product at a better value with a dedication to serving the home furnishing customer. These values have allowed us to survive and thrive through many difficult times, including the Great Depression of the 1929, and now the Great Recession of 2009. We have always gained the most share during the toughest times because of our commitments to these historic values and the refusal to compromise for short-term gain. We are now focused on ensuring that our efforts will return for our stockholders in 2010 and in the years ahead. We are dedicated to improve on our processes while developing the finest furniture values in the business. We think that our customers do return to real value and the known and uncompromising service traditions of Havertys. While we continue to face uncertain times and a changing landscape for the furniture business on many fronts, we are very encouraged by our recent return to profitability the past two quarters and we are excited about our opportunities for real growth in sales and profits in the next several years . I want to thank you for your interest in Havertys. I'd like to now turn it over

Thank you, Clarence. We are pleased with the operational and financial performance for 2009 in spite of the very difficult conditions to generate sales of home furnishings . In our last quarterly conference call, we had mentioned that Q3 was a good benchmark for future quarterly performances since most of our cost-cutting initiatives were in place. Gross profit margin in Q3 was 52.1% followed by gross profit margin of 53.0% for Q4. The gross profit margin in each of these quarters was positively impacted by approximately 0.4% with the effects of a slight information under our LIFO inventory valuation method. We expect that there will be modest inflation in 2010, which could make the LIFO impact a similar amount, but in the opposite direction . So if the only change in our gross margin going forward to the second half of 2009 levels is that there is modest inflation instead of the modest deflation that we experienced in the second half of 2009, future gross margins would run at the rate of 51.5% to 52%. Cost of goods sold for Havertys is almost all variable with sales . Assuming this level of gross margin, we expect 2010 quarterly breakeven sales levels would be in the $150 million to $152 million range. Fixed type costs together with discretionary type expenses within our SG&A is currently running approximately $54.5 million per quarter. Variable SG&A is currently about 16% of sales, similar to what we had announced in the third quarter. So the sales in excess of $151 million for the average quarter in 2010 would contribute about 36% to pretax profit. This contribution margin is computed as 52% gross margin, less the 16% of sales variable costs within SG&A. 52% minus 16% equals 36%. Using this simple model, an example of an extra $10 million of sales above the breakeven level, would generate an additional $3.6 million of pretax profit . We don't make projections or give specific guidance, but hope investors find this info useful as they make their own assumptions about our future sales levels. Operator, at this time, we'll take

(Operator Instructions). Budd Bugatch.

Good morning, Dennis; good morning, Clarence. Congrats

Good morning, Budd.

Hello.

Congratulations on a better quarter. I know you'd like to have sales higher, so I will reserve that congratulations for a later time I hope.

Okay.

Dennis, I think you said 40 basis points of the improvement over the 51.86% gross margin from last year was due to the LIFO credit. That would leave about 70 basis points or so of change year-over-year for other factors. Can you talk about what might have driven that?

It's mostly the inventory management type issues, a generation of closeouts, seconds and the efficiency of selling them off.

So really not a lot of leakage, if you would, from extra discounts or obsolete inventory?

That is correct.

The inventory is in good shape?

It is.

Okay. As you look forward, Clarence, to sales per square foot, I calculate sales per square foot this year at about $139 a square foot.

That's right.

And peak was around $206 or something like that?

That is correct.

What is kind of -- what is the appropriate glide path to get you back to the peak sales per square foot?

What do you mean appropriate?

Where do you think you can get to this year? If you had about 4.2 million square feet --.

We are not giving guidance, Budd and that would give you specific guidance to what we would expect, but I think that this dropped over three years pretty radically and we have looked back over the past recessions and we have always come back nicely following a recession. It will take us several years. I have a goal of getting back there in several years, but it is going to be a tough climb back, but that is what we're focusing on. We are not focusing on adding square footage particularly. We are making sure that what we have is efficient, making sure that our promotions are driving our current comp sales. And that is our main focus right now is get back because we really can't justify new stores until we get up over $200 a square foot.

I see. So the Columbus market store then, you are taking advantage of a real estate opportunity that has presented itself to you in a market that you find attractive, is that the way --?

That is correct and we are looking at those all the time. It is just there are not many that come across as real steals unless you are doing in the $250 range and those are things that we are going to have to continue to watch . So I am not interested in growing square footage; I am interested in growing our profitability and our comps right

I understand. And so when you look at the stratification of the stores doing more than $200 a square foot, can you kind of give us a breakdown of what the stratification looks like?

Well, those are certainly in the bigger markets. Back when we were doing those kind of numbers -- the Dallas, Atlantas -- were in the $200 -- well into the $200s, some in the $300s. We are now in DC and we would expect that to get to those kind of levels at some point. So the smaller markets obviously don't usually do the better numbers. So the average comes out in that $200 range. Well, you will have some in the $150s and you will have some in the $270s to even $300s.

Dennis, just to be clear, you ended the year with 119 stores?

That's right.

And for next year, you think then minus two, plus one, is that the kind of way -- so 118, is that --?

Well, we said 2% square footage drop. So we might have fewer stores, but they might be larger or that type of thing . We are looking at some markets where we have multiple stores. We might replace that with one larger store to replace two smaller stores. So we are always having to look at those types of relocations . But I do think we will have a slight drop in our square footage this year as we did in 2009. We were slightly down I think about 1%

And our guess on square footage is about 4.19 million square feet at the end of 2009?

That is right, yes.

All right. Good that our calculator is working okay. Thank you very much.

Todd Schwartzman.

Hi, good morning, folks. Once you get to that $200 per square foot level, do you plan to grow your presence in the Columbus, Georgia market?

Well, we are going to Columbus. We are definitely going there. We signed a lease to go to Columbus.

But additional stores, is that in the cards or is it purely --?

Oh, no.

-- too early to say.

I don't see that as a multiple store market. I think that is a one-store market.

Okay, great.

We would just be looking at other markets within our distribution footprint that make sense or relocations in markets to better sites as we have historically done. But none of the numbers really make any sense until you can at least get over $200 a foot.

Got it. I want to also get a sense for the effect of the Presidents week, Presidents weekend in particular based on the weather. In both credit promotions and price promotions, did you extend any Presidents week offers due to the weather?

We did in some markets, yes, we did. Particularly in the DC area, we were hit two straight weekends pretty hard, specifically on Presidents' Day. So yes, we did extend it into the next week in some markets and it was good for us to do that. So we had a good February, even with the weather, it was better than January. But in total, the average came out to 8 %. But Washington's birthday was important for us -- I keep calling it that -- Presidents' Day, it was important for us and up, it wasn't dramatically up, but it was up . We were hit pretty hard, as you know, with weather conditions that

Clarence, how much better do you think it could have been or would have been? I know DC, of course, got the brunt of it and there were other markets, as well, that had some unprecedented snowfall.

Well, could have, would have, should have.

What about closures? Can you maybe put some numbers to the number of stores closed what number of days?

I don't have specifics on that . We did have -- some would close early. It was pretty devastating across the central part and then up into the East . Washington was the one that was hurt the most. That market was hurt absolutely the most, but it came back and we ended up being up. So I am talking about for the month. It was really better than what we had expected considering how bad the

And how much longer do you expect the current promotions to last?

Oh, no. Those ended within the week after that.

Business is back to normal pretty much since --?

Yes.

Okay, perfect. Thank you very much.

Budd Bugatch.

Clarence, just your regulations changed earlier this week or last month, this month in terms of credit, the world changed as the new credit regulations went into force. What impact is that going to have on Havertys and what do you see the impact on the competition?

I will let Dennis get into that.

Well, we are waiting to see that. Obviously, it is a lot more complicated to run advertising and it's a little more awkward in some cases with the disclosure. I think that what has been enacted so far -- I don't expect it to have that dramatic of an impact. We are not big in the business as we once were. As you know, internally, we don't handle that much credit anymore and mostly outsource. But the one thing I have heard talked about in that industry is that there is legislation that changes the late charges, which has not been modified thus far. They have talked about delaying the time in which you can charge a higher effective interest rate or so-called penalty rate and giving farther out notice, but they haven't talked about mandating some sort of maximum late fee itself or bad check fee, the other type of fees that are charged. And if there is legislation or action on that, I hear that could have a pretty big impact on the revenue for those finance companies and that they would probably have to start charging both the merchant and the customer more to offset that somehow or another.

Well, I am thinking more strategically though. You have been at a disadvantage historically sometimes when some of the competition has really gone aggressively no, no, no and one of the nos is gone right now.

Yes, the no payment, yes.

I think anything that makes credit more realistic is probably going to be good for us. It did get crazy, five years is crazy and the no payments is not something that we have pushed very hard at all . In fact, our strongest credit promotions are the 12 months or the 18 months, which include payments. And I think the main change in the credit laws was going to requiring monthly payments, which we have done most of the time and we strongly support. So I think it is going to be tougher on the true credit houses on the lower-end

I suspect it's a benefit to you on a relative basis. I mean nobody likes to see credit impinged, but --.

But we don't like free credit and that is what we have been operating under for a long time. So in that regard, the aggressive offers out there going away probably would be better for us.

I understand. Okay. And Dennis, I am going to tread into an area where I am woefully ill-equipped, but that is the tax area. If you can bridge for us what happened in tax in the quarter, what is likely to happen in tax going forward, how should investors and how should we think about it and model it?

Yes, it's pretty complex and in any situation where you have this deferred tax asset allowance, which we are currently in, I think you ought to look at the taxes a year at a time instead of a quarter at a time. We are required to put out quarterly statements, but it makes a little more sense if you look at a longer time as tax returns are filed on that basis and all the information is available. But we had the credit, the benefit I should say, for the year, but we still have about $15 million of deferred tax asset allowance provided. That was put away in the fourth quarter last year and a little more added in the most recent quarter . Part of what was put away last year was against earnings, a little over $8 million and then another part was against this other comprehensive income . At some point, as we reach a three-year cumulative profitability for book purposes, reported figures, this deferred tax asset reserve will be released. So that would occur sometime -- I can't predict when. You can predict when if you make the projection about earnings, at least have an assumption about that and that will tend to -- it will be released -- it will be an increase in the benefit, a large benefit that would occur even if there was profit or assuming there is profit in the quarter when that happens, you would have a large, unusual item that you probably want to effectively average out because it is not really related to ongoing operations. So it is complicated and my best thoughts about taxes are trying to look at pretax at an average tax rate over a longer term and you will not distort the current operating income by swings in the

Now, in the quarter, you did benefit by the new tax law, right?

That is correct.

And the carryback extension?

That is correct. carried back 2008 full five years and it opened up more income for us to carry back again. That is correct.

So what was the benefit in the quarter?

The benefit from that alone is probably a little under $1 million and there were some other benefits we had for the full year that gave you the tax benefit for the full fiscal year.

And the offset of that, you have not yet received that cash, right? You have got to file your return to get the cash?

Yes, we can file some of it for -- we have already filed some of it for a quick refund on the carrybacks, but we have not received it yet.

So where does the receivable show?

It is in short-term other assets.

In the $15.2 million of other current assets?

That's it. Correct.

Okay, that's helpful. Thank you very much. Congratulation and good luck on 2010.

Thank you for your interest.

(Operator Instructions). There appears to be no further questions at the moment, sir. Please continue with any other points you wish to raise.

We appreciate your participation in our 2009 conference call and in your interest in Havertys. Thank you.