Haverty Furniture Companies Inc (HVT) 2010 Q2 法說會逐字稿

Welcome to the Havertys Q2 2010 financial results conference call on August 5, 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.

Thank you and good morning, everyone. During this conference, we will make forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied by 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, including 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.

Good morning. Thank you for joining our second-quarter conference call. As we reported earlier, our comparable store sales increased for the second quarter 13.2%, or $16.8 million. We are beginning to show some momentum following weaker sales in the past few years. Total sales for the first six months were up right at 10% with comparable store sales up 11.6%, or $31 million.

The double-digit percent increase for the second quarter was our third consecutive quarter of positive comparable store sales. However, we have begun to see smaller increases in our sales since the strong performance in early spring. We believe that is related to the fall-off of housing starts and home sales, as well as a general concern for the overall strength of the economy.

The recent good news about the end of the oil spill in the Gulf is an important positive for our Gulf Coast stores, which were significantly impacted in the three months.

We have many good promotions and excellent furniture values in our stores and in our marketing, which continue to have traction and produce sales. Even though the current sales environment is a tougher climate than earlier this year, we still expect the second half will be seasonally stronger than the first half.

We are committed to making sure that we have the absolute best values in front of our customer at all times and staying true to our long-term tradition of outstanding service levels. We are focused on providing a better, more stylish product and making sure that we get credit for our value and service.

Our net loss for the second quarter was $606,000 versus a $6.6 million loss last year. A significant factor this year was an increase in our LIFO reserve of $600,000, which reduced gross profit versus no change in the reserve for the same period last year. This was primarily due to a significant increase in our inbound container freight in the quarter.

We are working to maintain our gross margins for the full year near our Q2 level, which, under the current inflationary circumstances, will be an ongoing challenge. Earlier this year, we began a test of a new visual merchandising program to update and energize our interior store displays. We engaged a national firm to assist us in developing this new presentation focusing on enhanced graphics, better sight lines, point-of-sale signage and a look and feel more consistent with our well-organized Internet site presentation. Our research shows that over 80% of our customers use our website at some time during the sale process.

After extensive testing with in-person and Internet surveys and reviewing sales results and one prototype store, we moved to the next phase of rolling out the new presentation in an additional eight stores in our regions. These are just now being completed. We believe that the new interiors are easier to shop, brighter and more conducive to longer shopping times in the store.

Our research confirms that this is a better shopping experience for our customers and that customer satisfaction with the sales people is significantly higher. We will refine the new interior store presentation as we learn more about the different nuances during this phase. We will continue evaluating this program and update you later this year on our further rollout plans for 2011.

This is part of our priority focus on driving our existing store sales and sales per square foot back to our former levels, which peaked in 2006. We are encouraged and excited about this new store experience we called Bright Inspirations because it helps unify our stores with our marketing and Internet look while appealing to a younger consumer, as well as the traditional Havertys customer. We believe that it will continue to separate us from our competition and drive our sales.

In addition to the rollout of our new visual merchandising program, we have several major remodeling projects underway. We have a complete makeover of our Louisville, Kentucky store and a major expansion and remodeling of our North Charleston store, both of which will be completed in the fourth quarter this year. We previously announced our entering the Columbus, Georgia market. This is a former Circuit City store in the Columbus Park Crossing Center.

We are pleased to enter this city, which is in our backyard and it is the most vibrant market in Georgia. Columbus is the home of Fort Benning, which is undergoing a $3.5 billion expansion as part of the U.S. Army base's realignment and closure initiative and is expected to create 11,000 jobs. Columbus is also the largest city serving the recently opened Kia plant. It is the home of the new major division of NCR and also home of Synovus and AFLAC. As you can tell, we are excited to become a new player in Columbus, Georgia.

We have announced to our teams the closing of two smaller stores later this year in Abilene, Texas and Bowling Green, Kentucky, which leases will not be renewed. We expect to end the year with sales square footage down 1% to 2%.

A significant part of our CapEx budget for this year and next is dedicated to information systems upgrades throughout our store and distribution network. We have made major strides in giving our associates tools to be more efficient and to improve our service levels without requiring additional personnel. We strongly believe that our investments in enhanced systems and upgraded technologies will add to our competitive future, competitive position now and into the future.

Our recent brand awareness research shows that we are gaining marketshare from many of our competitors, particularly the smaller players, some of whom are losing marketshare at double-digit rates. We will continue to push our brand with more television, newspaper inserts, direct mail and Internet marketing.

As we have demonstrated for several generations, these tougher conditions play to our strengths of Havertys reputation with our customers, as well as with our suppliers and are key factors in gaining share from our competition. Our customers look to us for better quality and our suppliers prioritize orders for faster service levels in these uncertain times.

The combination will move more customers to look to Havertys for their home furnishings needs. We feel very good about the strength of our position in our markets and our potential for future growth. I would like to now turn it over to Dennis Fink.

Thank you. In our Q2 earnings press release, we stated that gross profit margins for the full year of 2010 are expected to approximate the Q2 actual level of 51.2%. This would be about 70 basis points lower than the margin reported for the full year of 2009 and is primarily due to the impact of our using the LIFO method of inventory valuation.

For 2009, we had a LIFO credit of 20 basis points versus a projected 40 basis point charge for the 2010 year. We have to estimate this impact during the quarterly periods and won't know the actual charge until our year-end closing.

Our second-quarter 2010 SG&A costs as a percent of sales decreased 4.6% to 51.6% from 56.2% in the prior year. SG&A costs for the six months were 5% lower at 51.1% compared to 56.1% in the prior period. Selling expenses generally vary with sales volume and were relatively flat as a percent of net sales for the second quarter and first six months of 2010 as compared to the prior period.

Occupancy costs are a significant portion of our SG&A and are generally fixed. Depreciation expense included in occupancy was approximately $700,000 and $1.4 million lower in the second quarter and six months compared to the prior period.

Delivery and warehousing expenses included in SG&A for the second quarter of 2010 were relatively flat as a percentage of net sales. In response to the lower sales levels experienced during the prior years, we adjusted routes and reduced total headcount, equipment and related delivery expenses. Delivery and warehouse expenses for the first six months of 2010 as a percent of net sales were down compared to the prior period by 42 basis points due to cost control efficiencies, which were partly offset by higher fuel costs.

Our advertising and marketing expenses as a percent of net sales in the second quarter of 2010 were relatively flat with the prior-year period and for the six months was down 45 basis points. We expect to increase our total dollar spend in the seasonally stronger second half of the year.

Our administrative costs were relatively flat in the second quarter of 2010 compared to 2009. These costs were down $1.3 million for the six months ended June 30, 2010 as compared to the prior year, due in large part to reductions in compensation.

Most of the overhead cost-cutting initiatives we undertook were in place for the second half of last year. We do expect the dollar level of SG&A expenses to increase for this year's second half as compared to last year. These include the costs of one new store, the expense portion of store remodelings and spending on advertising.

The balance sheet as of June 30 remains in very good shape with cash increasing by $17.7 million during the first half of the year and by $39.8 million compared to a year ago. Inventories were well-controlled, down $4.3 million from both mid-year 2009 and year-end 2009 levels. The net availability under our revolving credit facility at June 30, 2010 was $34.5 million. There were no borrowed amounts outstanding under this revolving line.

Planned capital expenditures for 2010 are $13.5 million. This includes $7.2 million for a new store, one store expansion and improvements to several stores, as well as $6.3 million for information technology.

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

(Operator Instructions). Budd Bugatch.

Good morning, Clarence.

Good morning.

Yes, the first one is obviously the concern with the cost of sales line and the freight. Can you kind of maybe flesh out a little bit about what you're seeing in both increases in freight costs and the container availability and how that is playing through?

Well, the main -- I mentioned in the call the main costs were directly related to freight, inbound freight on those containers and we were, in many cases, forced to pay some premiums to get those containers. We did that; most people were. We think that is going to level out, but it is going to be at a higher level than it was this time last year.

I think we have taken most of those charges -- we have a new contract that we are negotiating now, but you know that there are surcharges involved in dealing with containers. So we think that will level out and I think eventually they will start bringing more container capacity online, more ships online and that should stabilize. But it will stabilize at a higher level.

As far as the other cost increases, we were hearing in the spring a lot of people came out with proposed increases, particularly in steel, you have seen that, in foam and others. But we are seeing that also come back down now that sales are softening. We don't think a lot of those increases will stick and we are hoping that we can hold the line there. But there have been some real pressures in a lot of the commodity products that go into making furniture.

And do you think you're going to see this continue to wind its way through your inventory and through the LIFO accounting for each quarter for the rest of the year, the third and fourth quarters?

Yes, sir, I do.

And for next year then, does that reverse? How does that look?

I will let Dennis answer that.

Budd, it won't reverse unless costs go back the other direction. So we would expect there to be a flattening out as Clarence said and the inflation in total this year is unusually high, so we would expect a small charge in LIFO on an ongoing basis, but not nearly as high as this year is turning out to be.

And last year, we had a credit.

Last year, we had a credit, as we mentioned, yes.

But if costs flatten next year, then you will have no additional LIFO charge?

That is correct. If costs are flat, and there is no charge unless there is some big inventory liquidation or something like that.

And ultimately doesn't LIFO go away? I thought with international accounting rules, LIFO will go away as an allowed accounting method for US companies?

That is exactly right.

Do we have a timetable on that yet? Has that been pushed back?

There is talk of 2014, and I don't know if that is going to stick or not. I don't think so. I think there is -- somebody said it was like converting to the metric system. We had a lot of attempts at it, but we didn't get there quite as quickly as we wanted. In fact, we haven't gotten there. So there is some question about how soon that will actually take effect.

Let's hope we are still talking on this call, Budd.

I will second that comment. And then we had delivered sales in the third quarter rising so far about 7% I think year over year. Our written business was up 1% so far. That has got to be a source of some concern to you for comps going forward. How do we read that?

Yes, the more forward-looking or recently occurring number is written and yes, I would say that, ultimately, you are right and deliver the same amount. So there is a couple of week lag in average delivery, so we were just bringing down the backlog a little bit in getting those deliveries out.

And finally, you talk about more IT spending. You all have a pretty good advanced IT system as I know it. Can you describe what your plans are?

Well, we put in some new equipment, which we are installing right now, which relates to scanners, which allow mobile technology and that is throughout all of our system, our stores, our warehouses. We have got a major systems upgrade planned, a hardware upgrade at the end of the year that will start this year and carry into next year and that is a major expense for us. But we are going to stay up on the technology edge here, not the leading edge, but we want to be as efficient as anybody in this industry. And I believe strongly in this and our team does and Ed Clary who heads this up has done a great job helping us come up with this plan and steering it. So we recognize that the technology is going to lead us to be the efficient company we need to be in the near term.

Thank you. Good luck in this challenging economy again.

Thank you. Thank you, Budd.

Todd Schwartzman. (technical difficulty)

Hi, good morning, everybody. First question on the gross margin, could you attribute, allocate if you will, the factors, maybe mix shift or how much is inputs, etc. that led to the narrowing year over year despite the bump in volume?

It's really, Todd -- the biggest impact is the LIFO charge this year. The first half last year, there was no credit, but the second half last year, there was a credit for LIFO and that accounts for most of the difference. There is really pretty slight differences otherwise in mix and pricing discipline.

And normalizing both years for the LIFO? What was the year-over-year delta?

Well, the LIFO charge this year in the quarter was I think 0.4% and it was -- that actually accounted for quarter to quarter more than all of the delta. I think the delta was 20 basis points, so 40 was the negative impact from LIFO. So we actually were a little better in gross profit without the impact of that.

Okay. And on average ticket, is traffic slowing or has traffic been slowing in the last month or so commensurate with the slowdown in orders that are up low single digits?

I think traffic has slowed down in the last several weeks and our average ticket is down slightly also. And I think that is related definitely to what the customers are looking at and what they are buying. Upholstery is stronger and those are lower price SKUs than a case good category would be. But we are seeing some premium beddings sell. So there are different offsets there, but I would say that the traffic is off and average sale is also slightly lower.

Okay. The CapEx guidance seems to represent an increase. How much of that is Columbus and what else is in there? Is that IT or how has your thinking changed over the last two or three months?

The IT number is a little higher. We decided to move the hardware Clarence was talking about, which is both competing power and storage capacity. We decided to move that into this year. Some of that had been originally planned for next year. And he said that was $6.3 million for the IT and then $7.2 million is the rest. The new store is a leased location, but we are doing renovation and leasehold improvements of about $1.5 million. The other part of the $7.2 million over and above the $1.5 million is for one big store expansion and several stores that we are improving. So it is a little more than half related to stores, a little less than half related to IT.

Got it. And finally, Clarence, you sounded really excited about the Columbus market. Was it just an absence of, A, locations over these years that have kept you out or is it just price or can you talk a little bit about that and also how many Havertys stores you think the market can support?

Well, I will start with that answer, one. This market isn't big enough for more than one store, but, yes, I was excited about it. One is it is a new store and we haven't had many new stores in awhile, but we believe it is a very good market. Columbus has -- a lot has happened recently. I outlined those issues and it is a market we have not been in. It is literally in our backyard. We drive by it every day. It historically had been looked at as kind of a military, blue-collar town. It is not that anymore and it is -- there are new jobs coming on. They are white-collar jobs. It is dynamic and it is a relatively small market, but we think could be exciting for us.

So it is exactly what we are looking for as we grow. And that means something in the heart of our current distribution network that we are not serving now. So we feel good about it. We did close a store last year, Albany, Georgia, which is south of Columbus, but did overlap somewhat with Columbus. We knew we would be going to Columbus when we did that and this is a much better market. So we just feel good about it.

Terrific. Thank you.

(Operator Instructions). There appear to be no further questions. Please continue with any other points you wish to raise.

We want to thank you for joining us on our call. We appreciate your interest in Havertys. Thank you.

This concludes the Havertys Q2 2010 financial results call. Thank you for participating. You may now disconnect.