Haverty Furniture Companies Inc (HVT) 2011 Q2 法說會逐字稿

Welcome to the Havertys Q2 2011 financial results conference call on August 4, 2011.

Throughout today's 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, Executive Vice President and CFO. Please ahead, sir.

Thank you, Guy.

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 positions and other uncertainties detailed in the Company's reports filed with the SEC.

Our President and CEO, Clarence Smith, will now give you an update.

Thanks, Dennis. Sales for the second quarter were $143.1 million, with both total and comparative store sales decreases of 1.4%. We found it difficult to match last year's top line, with the housing sector in an apparent double dip, and continued weak consumer spending in that category.

Sales by merchandise category were similar to last year with modest increases in recliners and bedding and small declines in bedroom and upholstery.

We are encouraged by the increase in business from the beginning of Q3, with written orders up 4.4% so far. This recent increase has come across the majority of our market areas and in all of the merchandise categories.

We've been able to keep our gross profit margins fairly steady for the last five consecutive quarters, and expect that we can continue near these levels for the remainder of the year.

We have challenges in holding the line on wholesale prices due to commodity pressures and labor costs in Asia, but for the most part we've been able to minimize increases and plan to price our products to maintain our margins.

Total SG&A expenses were reduced from Q2 last year. Occupancy expenses were less than last year with lower store rent, property taxes and maintenance. Higher fuel prices continued to negatively impact delivery expense.

The incoming product that our merchandising team has developed continues to be higher quality, with unique designs, and these introductions have resonated well with our customers. We've seen a rise in our average ticket, which we think is directly related to the sales of our better new product.

We believe that there are opportunities to gain marketshare and to grow our top line with these better end products in several of our markets, due to the fallout of many regional retailers, as well as suppliers in the better case goods categories.

We are very enthusiastic about our new accessory and rug program which is taking shape. The full implementation later this fall will be an important improvement to our store presentation, and will help drive traffic and sales.

We've completed the majority of our Bright Inspirations store remodeling program in Atlanta and Dallas, and are currently working on key locations in our other larger markets for the remainder of 2011. Comments from our staff and customers continue to be positive, and we are excited about highlighting our best new presentations to our customers in the coming months.

We continue to have strong, positive cash flow with cash at the end of the quarter of $62 million. We have no funded debt and do not expect to use our credit facility in the foreseeable future.

We will be opening in a former furniture store in Boca Raton in September, strengthening our position in Southeast Florida and attempting to capture more of the upscale business available from weaker retailers who exited the market. We will be relocating our Asheville store to a remodeled former Circuit City in December.

In Q3 we expect to purchase four stores that we currently lease for $4.8 million, which will reduce our occupancy expenses and give us control over these profitable locations. We will own approximately 38% of our stores after these transactions.

We are evaluating additional store opportunities in our footprint that will strengthen our position in our largest markets in 2012. We expect to have a slight increase in selling square footage this year, and to see growth in the low single digit percentage in 2012 for both store count and show room square footage.

This year we've made significant investments in our sales associates' training, focusing on team selling and a stronger engagement with our customers. We've implemented an extensive video product training program for all of our delivery and service personnel, and have instituted a re-energized management training program.

We know that the most important distinguishing characteristics of our Company are the strength of our organization and the dedication of individuals who serve Havertys customers for years. We believe that we have the strongest team in the retail home furnishings business, and that they are equipped with the finest operating tools to serve our customers better than any of our competitors.

We are very well-positioned, and focused on gaining marketshare in all of our regions.

Now I will turn the call back over to Dennis Fink.

Thank you, Clarence. Our cash increased $4 million during the first half, as Clarence mentioned. Inventory was reduced by $7.2 million. This is partly a seasonal pattern with the inventory, and partially due to reducing showroom inventory to improve sightlines and displays in several of our stores.

As shown in the cash flow statement, the $9 million of first-half depreciation expense compares to only $4 million in first-half capital expenditures.

The $6.8 million of restricted cash on the balance sheet rose when we chose to change from a Letter of Credit to an escrow account for our insurance carrier in supporting worker's comp obligations. The change was made to reduce our expenses, and was practical because of the Company's strong cash position. And this shows up as a use of cash for the second quarter.

For the full year of 2011 we expect depreciation expense to be approximately $18 million, and capital expenditures are planned to total $19.5 million.

Clarence mentioned the $4.8 million for the purchase of four stores we are presently leasing. That will save us over $0.5 million in rent expense for the full year, starting late in the fourth quarter.

And in looking ahead to our second-half performance there are three expense categories that will be increasing over last year's second half.

First, the cost of fuel used in moving merchandise from our distribution centers and making deliveries to customers' homes. It's been running about 30 basis points higher than last year so far this year, and that is expected to continue for the balance of the year compared to last year.

Second, we will be increasing the spend on advertising and marketing by about 40 basis points, as we push to increase customer awareness and build traffic and sales. First-half spending this year had been flat with 2010 for advertising and marketing.

Third, I've already mentioned, but I will say again, depreciation expense is expected to be higher. It's about $400,000 per quarter increase over the same periods last year.

Our book value at the end of the first quarter -- or second quarter was approximately $11.57 per share. We regard this figure as conservative since our LIFO inventory reserve is $18.2 million. We have no intangible assets, such as goodwill reported, and we own 41 of our 118 retail locations free and clear. That number of owned stores is soon to be 45.

Operator, that's our prepared remarks. We would be glad to take questions from the audience.

Thank you, sir. (Operator Instructions). Todd Schwartzman, Sidoti & Co.

How about -- how is SG&A to sales looking for the back half of the year? What are the puts and takes? Specifically, how should we best model occupancy costs?

Well, occupancy costs will be lower, just as they have been in the first half. We called out those three items in my comment that that would be increasing. But we are opening one new store in the fourth quarter, and we are moving one store to a new location. And so those would offset some of the savings we've seen in the first half of the year.

And the other puts and takes that you haven't already mentioned, if any?

There are several, but they seem to kind of net out. So there's really only those that I mentioned that are worth calling out as far as I'm concerned.

Okay. And what are the second-half tax rate considerations?

Well, at the moment with the status quo we really just have a tax for Texas income, or actually gross profit. And on top of that we had that one adjustment we have mentioned in the first quarter; it was about $150,000. And other than that, the tax rate will be basically neutral since we have this deferred tax asset allowance that was set aside a couple years ago.

Depending on the profitability and several other factors, we will be bringing that into income at some point, and that is expected to occur when the right level of profitability is met -- perhaps at the end of this year, perhaps later.

But at that time you'll have a one-time credit to taxes, a little over $13 million. And then going forward you are in the 38.5% range, probably.

Okay, so credit is $13 million?

Approximately.

Okay. And can you speak to, during the quarter, Q2, the conversion rate, the traffic, unit sales, ASPs -- the whole metrics, if you could maybe just aggregate them and just talk about demand and what the trend has been?

Well, demand has been pretty soft, obviously, Todd.

We did mention that our average ticket is up. It is an encouraging number for us, and we think that that will continue to move up as we bring in and are flowing in with this better product, which is doing well.

The closing rate has been flat to basically flat. Traffic I would say also flat, to slightly down in some areas. So no major metric moves there, other than what we consider to be significant, and that is the average ticket being up.

I missed your initial reference to that a couple of minutes ago, Clarence, Did you put any numbers to that [figure]?

No, no, that's the first time I just gave you numbers. I just talked about that we are selling better product; it's been very well received. We are flowing it back in here. We are trying to appeal to the better end customer and -- with better quality. It's doing well, so we are encouraged by that. We've been known as the better furniture store, and I think we are now developing the products and looks that people expect from us. And we are doing well with it. So we are encouraged by that.

And you had called out the bedding category -- no surprise there -- as doing particularly well. Ex-bedding, what was the delta?

Well, there's nothing major there. And I did mention that our current sales are up across most all categories. But what I mentioned earlier was we had increases in recliners and bedding and small declines in bedroom and upholstery. But the current business is up across all categories right now -- all major categories.

Got it. And lastly, did you mention the timing of the purchase of the four stores?

Oh, that's in this quarter. We've purchased one already and we have three set to close probably late this quarter.

And how many markets do those four span?

They are in four separate markets, and I can tell you where they are -- Tallahassee; Lakeland; Anniston, Alabama; and Lubbock, Texas. And they are all very good markets, good stores for us.

Perfect; thanks, guys.

Budd Bugatch from Raymond James.

It's actually TJ McConville filling in for Budd. Congratulations on the return to positive written business.

Thank you.

On that plus 4 for Clarence or for Dennis, is it a safe assumption to assume that is continued increases in the ASP, or traffic thus far in the quarter, is it still flat to slightly down?

I think the quarter is up a little bit. The numbers I was quoting earlier were last quarter. This quarter is up a little bit -- better than that, obviously. And I think the average ticket is a more important component of that. But we did have a pretty good start with the Fourth of July event, and it has continued fairly steady.

Okay. And on the sort of trade up effect that we are seeing here, is that more pronounced in some of the markets where you've had a bigger destruction, if you will, of the competitive environment? Is that how we can sort of frame that (multiple speakers).

I don't think -- well, I think there has been a lot of fallout everywhere. But if you are specifically referring to the Robb & Stucky, Carl's issues, we are moving into one of the Carl's stores -- I think you knew that -- in Boca. So we think that we will be repositioning better down there to help gain that customer.

But frankly, most of that drive has been in our major markets, and those would be Dallas, Atlanta, DC, where the better end customer tends to be. However, it has been a pretty good balance this quarter across all of our regions, which we are encouraged by.

That's very good to hear. And lastly for me, on the bump in ad spending, any key drivers behind that? I think on the last call you told us you thought ad spend would be about flat this year. I know it's not up materially. Is that just the media channels you are going through or is there a concerted effort here on your part to drive some further traffic?

I think it's just adjustments. We are investing a little bit more in broadcast and Internet, interactive advertising. We are engaging a firm to help us that's going to cost us a little bit in the next several months. But I would say it's investing in the better markets to expand our exposure, and primarily in electronic media.

Very helpful, gentlemen. Thank you and good luck on the remainder of the year.

(Operator Instructions). There appear to be no further questions, gentlemen.

Thank you, Guy. And thank you for joining us on our call, and for your interest in Hagerty's.

This concludes the Havertys conference call. Thank you for participating. You may now disconnect.