Haverty Furniture Companies Inc (HVT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Haverty's Q3 2010 financial results conference call on the fourth of November 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, operator. 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.

Thank you, Dennis. Thank you for joining our third-quarter conference call. As has been reported earlier and by other industry players, we have seen a definite softening of sales in recent months which was a disappointing trend following the stronger comparative store sales this spring.

With total net sales up 3.5% and comparable store sales up 4.3%, Q3 sales increases were half of what we experienced for the full nine months. However, this is the fourth consecutive quarter of positive comparative store sales. The third quarter showed an improved closing rate on flat total written store traffic with a slightly lower average ticket.

The fourth quarter has begun with flat sales and we expect that this will be a difficult quarterly comparison to the positive performance in last year's Q4. For the third-quarter, we produced a pretax profit of $1.2 million compared to $696,000 last year. We did have an 80 basis point decrease in our gross margins to 51.3% from 52.1%. This was mostly due to a LIFO charge versus a credit last year.

We believe that we can maintain our gross margins but it will be challenging with the tougher business conditions which require promotional pricing as well as some cost of goods increases which we have passed through.

Our CapEx for this year is heavily weighted to a planned fourth-quarter major upgrade of our computer systems for faster response and enhanced service for our customers and to our associates in the field. We believe these types of infrastructure investments continue to build operational and service advantages over our competitors.

This quarter we will complete a major expansion and remodeling of our North Charleston store as well as a total makeover of our Louisville, Kentucky store.

We have continued our planned interior improvements of our existing stores with the rollout of our Bright Inspirations project which we began earlier in the year. These feature brighter, lighter colors and displays which help enhance the furniture with easier to shop layouts and sightlines. We've greatly improved our store signage and graphics consistent with the look and feel of our website.

After we have now rolled out 13 stores this year, we plan to look at the rollout for next year and to make sure that we are going to our biggest and best stores in 2011.

Our merchandising team has developed several important new collections which are hitting our floors in the next few weeks which we feel will continue to help separate our merchandise program from our competitors by emphasizing stylish product with better quality, beautiful finishes and exclusive designs. We are developing more of our product and sourcing directly with the main best Asian factories and we will continue to build our team and expertise to develop the product quicker and at lower final cost.

We continue to evaluate possible opportunities for adding and relocating stores into existing boxes throughout our distribution footprint. We believe we can acquire very good locations at near market bottom pricing which would allow us to better leverage our operational and advertising costs and to continue to profitably grow our market share.

Over the past three years, we have worked to bring down our cost structure reacting to the precipitous drop in business due to the housing debacle and the great recession. Our focus now is to drive our top line by making sure we have been best displayed stores, feature the finest values of quality furniture and providing the highest service levels in the industry.

We are investing heavily in our stores in our current stores, our systems, our infrastructure and highly targeted high-quality advertising and most importantly, in our people. This is to make sure that we are recognized as the best furniture store in every market that we serve.

I would now like to turn it over to Dennis Fink.

Thank you. First few comments on the P&L line items. 2010 SG&A costs decreased 1.1% as a percent of sales in Q3 compared to last year's period and was 3.6% of sales lower for the nine months.

Depreciation expense included in occupancy cost was approximately $0.5 million and $1.8 million lower in the third quarter and nine months ended September 30, 2010, respectively, compared to the prior years. Our advertising and marketing expenses were up 7/10 as a percent of net sales in the third quarter of 2010 and relatively flat for the first nine months of 2010 compared to the prior year nine months.

We expect our fourth-quarter total dollar spend will be modestly above the third-quarter level. Our administrative costs were down $0.8 million for the third quarter of 2010 compared to 2009 and down $2.1 million for the nine months ended September 30, 2010, due in large part to reductions in compensation and related expenses.

The majority of the overhead cost reduction plans we have implemented were substantially complete by the second half 2009. We expect the dollar level of SG&A expense for the last quarter of 2010 will increase over the same period last year. This increase is primarily related to the cost of a new store, the expense portion of remodelings and spending on advertising.

The balance sheet as of September 30 remains in very good shape with cash increasing by $22.6 million during the nine months to $67.1 million. Inventory levels were well-controlled down $5.1 million from year-end 2009 levels.

The net availability under our revolving credit facility at June 30 was $34.1 million -- pardon me -- that is September 30 -- is $34.1 million. There have been no borrowings outstanding under this line for the last year and a half.

Planned capital expenditures for 2010 are estimated to be $13.5 million which is about $3.5 million lower than total depreciation expense is expected to be for the full year of 2010. These expenditures include a new store, one store expansion, four store remodels and improvements to several other stores as well as improvements in information technology, as Clarence mentioned.

Capital spending for the first nine months of 2010 was $6.9 million so the fourth-quarter expenditures will be approximately $6.6 million.

Operator, that is all I have for the moment and we will take questions at this time from the audience.

(Operator Instructions) Budd Bugatch, Raymond James.

Good morning, Clarence. Good morning, Dennis. I guess my first question would have to go to just talking about the conversion rate which you said has improved, close rates improved. Can you kind of give us a little bit of color on that and maybe what you are seeing in terms of the consumer's appetite and how you are closing those sales?

Well, I don't think the consumer appetite is better, I mentioned that up front. I think we are doing a better job of presenting the product and I think our salespeople are doing a better job of making those transactions happen. It is a slight improvement. I gave you three different metrics there because they all kind of together come up with flat sales.

So I think our closing rate is up, the traffic is flat and our average ticket is slightly lower. Overall, it comes out pretty flat and I think that is really what we are seeing. Our people are doing a better job and I think our merchandising presentation is better.

From what I am seeing in the current environment, that is a win quite frankly, a flat overall sales. And when you look at the average ticket down, we have heard some indication that perhaps the high-end is actually doing somewhat better than the opening price point or promotional end. Are you seeing any of that as well?

We are beefing up our better product. We have got a lot of product coming in now on the upper end of our normal mix that we have been developing for a good while. We are excited about and I think that there is some opportunities for us to get the better customer with some new designs and better value. So I can't say we have seen it as a major factor but we are counting on that to help our sales going forward.

Okay. When you look at costs, we have always obviously had in parts of the Far East increases in some of the vendor's operating costs. And earlier this year, we saw freight rates go up as surcharges were put on containers. What is the current status of that with the industry demand moderating as much as it looks like it is?

I met this morning with Richard Gallagher, our Chief Merchant, and he was saying that he is starting to see some easing of material prices. And I think because of the demand fall off we are seeing factories be a little bit more aggressive and pricing coming back to us, agreeing to meet prices we have asked them to meet. So we are hoping for some opportunities there and expect to see that.

As far as the freight, we had a peak season surcharge implemented in the summer in June and August of somewhere in the 450 range, sometimes higher. That is impacting our freight what we are receiving today and that is part of the LIFO that we are taking charges on. But that is going away as of November 1 reports this morning told us.

And so we are expecting lower cost for freight beginning with shipments that we receive next month and into the first quarter. So we hope that will be positive for us in a number of areas.

We are seeing some shipping capacities loosening up and some of these carriers are scrambling for volume because the overall sales of everybody is off now. And so we think we can see some easing in the freight rates in the next couple of quarters.

And what does that mean for LIFO, Dennis, for next year? What do we see that as the indication?

Deflation would give positive LIFO results. It has been real difficult to look very far out for the last couple of years and even know how it is going to end up for the year. So I'm not going to give any guesses. But if there was deflation, there would be a credit.

And for the fourth quarter do you still have a LIFO charge? You do have one, right?

We do. It would probably be a little larger than the third quarter and last year there was a credit also. So the swing is similar, a little bit bigger, we are expecting just like we had in the third quarter.

Well good luck in pursuing the rest of the year and with the new merchandising opportunity that you see, Clarence.

Thank you, Budd.

Todd Schwartzman, Sidoti & Co.

Good morning, guys. With potential for some moving parts in the store base, it looks like you may be -- correct me if I'm wrong -- looking a little more critically in terms remodels, expansion plans as well. Has there been any change in your internal view, goal if you will of sales per square foot for 2011?

We still have an overall goal, Todd, of getting back to $200 a foot. We're not going to do that this year or next year but that is still our target and any new stores we need to expect to be getting over those kind of numbers. So that is an overall goal.

We haven't given a goal for next year specifically but we know we have to get back to those numbers to really hit the profitability levels we showed in 2006 and early 2000. So that is still our objective.

Could you walk us through any releases that are up in 2011?

We have a number of leases that we are still negotiating and renegotiating on. I don't know specifically, Dennis -- I don't think we have a count for you right now. We have done a very good job in negotiating our leases particularly as the terms come due and we feel good about that. And there is a number of store opportunities that we are looking at. We are not going to be specific but they are existing buildings and we are looking at in key markets throughout our distribution network that we think there will be some opportunities for us to fill in at very good rates.

With that being the case, do you care to take a stab at year-end next year total store count?

Not really at this time.

Okay. I am curious about the advertising environment and this is really more of a current quarter Q4 issue, but have you guys been bumped at all due to political ads getting priority at the networks?

Yes, absolutely, yes.

Is there any way to quantify that? I assume that they made good on those spots (multiple speakers) already paid for --

Oh yes, yes. We don't pay for the spot and they do -- give you make goods. But if we get bumped over a holiday, that impacts what our message is and who we are trying to reach at important times. We are glad it is behind us I will tell you that. I think that it is a factor, it is always a factor at election times. And one of the things Tom Curran, our head of advertising, pointed out is that there was more advertising done for this campaign than there was for the presidential election which is incredible.

But we were definitely bumped in certain markets and we are just glad that is behind us.

And I am guessing it really wasn't much of an issue for Labor Day that was relatively early.

No, no it has been mostly in the last month.

So in October and November. Any way to quantify the decline if you will versus what you --?

I don't have anything on that. I will try to find out some more information but -- and sometimes you don't know until afterwards. You don't know until a couple of weeks later or a week later that you were bumped. So we don't have all that information frankly.

Okay, thanks a lot. That is all I have got.

(Operator Instructions) Budd Bugatch, Raymond James.

Dennis, this is maybe a little esoteric but I think you probably know that the FAS has issued a preliminary proposal on lease accounting and putting that on the books. Can you give us an idea of maybe have you looked at that? And do you have any thoughts about what that impact on the optics of the balance sheet might be?

It is going to have a major impact on all retailers that -- since we have so many leases and we have about a third of our stores are owned. So roughly two-thirds are leased and we have a couple of warehouses leased.

We have had to put the present value of lease payments in calculations as we borrowed money over the years. The bankers look at what they call adjusted debt and they have a simple method for doing that. I tell you what they normally do is take 8 times the annual rent expense or they do a present value of your non-cancelable lease payments, minimum lease payments, at something like a 10% number. They take a single discount rate.

In doing that, it can be a couple hundred million dollars, $160 million to $200 million in our footprint for the present value of that. And as I said, they adjust that, do an adjusted capitalization and test for leverage and have some limits about how far that can go.

We don't have anything like that presently in our bank line since we have an asset-based revolver. But from that experience, I can tell you that it is significant. It is optics as you said strictly.

It is the bright line right now is an operating lease is tested and it stays off the balance sheet. It is just rent expense and basically it is just presumed that it is like a debt and makes you look more leveraged.

It changes a few ratios. I think that is why we are glad we don't really have any debt except for we have a couple of leases that had been capitalized already that I think is $8 million or $9 million of total obligations on that.

So we are glad we don't have funded debt so that we will still look like a creditworthy company even if the debt comes on. But there is a lot of complexities with it. We wish they would have talked to the bankers before they figured out how they are going to set up these leases. There is a lot of things that are not easy and take a lot of interpretation.

So I think it is going to be probably a couple of years before that goes in but that is what I know about it at this time.

As we do the original calculation on the capitalizing, it is at eight times. I think we get to a $0.25 billion for Haverty's or thereabouts. But I didn't know with the PV10 number was which is $160 million -- that is I think the way that the FAS's proposal is written today at least as I read it.

You have to pick an incremental borrowing rate and you present value it but they also have you presume what renewals you have, lease renewals and that's what becomes -- that becomes very difficult.

I understand. They go through an esoteric calculation -- but about $160 million versus -- that is a good guess.

No, Budd, I will come back and just say that is back when we looked at it. We used to look at it a couple of years ago and that is the numbers the bankers came up with. It was in the $160 million, $200 million range. So we haven't looked at it specifically but that is kind of an order of magnitude about what that method would give.

I think the FASB's new pronouncement is going to give a higher number just by virtue of the way they come up with it.

Yes, because of the way they are valuing -- creating -- calculating the term, you are right.

Yes, the renewable terms.

Okay, thanks. Didn't mean to take up a lot of time on the call. Thank you.

Todd Schwartzman, Sidoti & Co.

Just a follow-up on the supply chain. Clarence, you spoke of the freight situation easing. What about labor?

You are talking about labor in Asia?

Labor costs in Asia, yes, moderating as well a bit there?

I think that is loosening up a little bit also. We are hearing again -- I mentioned that factors are coming back to us. I think their production capabilities are better and we haven't heard any new labor issues. I think that is abating some.

Thank you.

(Operator Instructions) Thank you, sir. We have no further questions.

I would like to thank you for joining us on our third-quarter call. We appreciate your interest in Haverty's. Thank you.

Ladies and gentlemen, this concludes the Haverty's Q3 2010 financial results conference call. Thank you for participating. You may now disconnect.