Haverty Furniture Companies Inc (HVT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Haverty's Q4 and year end 2011 financial results conference. During today's presentation, all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, the 28th of February 2012. I would now like to turn the conference over to Dennis Fink, Chief Financial Officer.

Good morning, everyone. During this conference, we'll 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 an update.

Thank you for joining us on our 2011 fourth quarter and full-year earnings call. We're pleased to report that we finished the year with a strong fourth quarter, which pushed us positive in sales for the full year and produced fourth quarter pre-tax profits of $6.1 million. Earnings per share for the full year were $0.70 versus $0.38 for 2010. These results include a favorable one-time non-cash special item of $14.1 million for the release of almost all of the valuation allowance against the Company's net deferred tax assets.

2012 quarter to date written sales are up about 5% over last year's comparable period due in part to a better in-stock position, a higher closing rate and a higher average ticket. Our traffic is slightly lower quarter to date. The ongoing investments in our stores and technology infrastructure, along with the upgrading of our design and products, has been an important combination which helped us grow our average ticket and our overall sales this past quarter. This year, we will continue to improve our stores with 20 planned store remodeling and upgrades in addition to 4 new stores. We're investing heavily in the latest technologies for better service, which include upgrading our website and our online access for our customers and our sales team. Additionally, we're making significant enhancements to our Wi-Fi access in our stores and DCs through major bandwidth improvements.

Our merchandising, new marketing, store presentation and all of our operating systems are focused on our goal of moving back to over $200 per square foot sales productivity. We believe that we can reach that productivity figure by as early as 2015. We ended 2011 right at $148 per square foot, exactly flat with 2010. We grew our square footage in 2011 for the first time in three years. We have plans to grow square footage over 2% in 2012 with four new stores, net of three.

The new stores are planned to open in the last half of 2012 and are focused on strengthening our position in our three largest markets of Atlanta, metro DC/Baltimore, Dallas/Fort Worth, as well as one additional Texas market. These include the relocation of our major south Atlanta store to a new building in McDonough, Georgia, a leading suburb serving our customers in south metro. We're expanding our reach in the DC/Baltimore metro market by adding a store in Towson, Maryland, the major shopping district of Baltimore. Late this year, we plan to open a major new store in Allen, Texas, a fast-growing northeast Dallas suburb. This will be our 12th store in the Dallas/Fort Worth metro.

And in the third quarter, we're opening a store in west Texas oil country, in Midland, Texas in the former Circuit City building. We're in the final stages of implementing our greatly improved accessory program, which includes lamps, table top accessories, rugs, botanicals, and top of bed categories. In the past, these classes were handled, for the most part, at the store level. Our new program is tightly coordinated with the product displays and standards established by our merchandising team. The majority of the products will be flowed through our distribution centers and will be shown and advertised on our website. And while we're starting from a very low level, we expect to be able to double our sales within two years of these accessories categories. These sales will not only be new profitable business, but we strongly believe that our coordinated program consisted from web photos to the store presentation throughout the Company will help inspire our customers and drive our overall business. We will be a player in accessories this year in our markets.

For the past decade, we've been building the Haverty's brand as the better furniture store. We've set a new goal for all of our stores that the Haverty's customer experience warrants our being the inspiring furniture store. We're raising the bar on everything we do to better reach and engage our customers and to live up to those inspiring standards. We've seen some real traction with recent increases in sales, average ticket and in our closing rates. We're encouraged by the recent trends, enthusiastic about the many improvements planned and underway, and we're excited about our future. I'll now turn the call over to Dennis Fink, CFO.

Thanks, Clarence. Several points were made about the quarter's results and the outlook for 2012 in last night's press release. We will respond to any questions about those in a few minutes after I comment on three specific items. First one is our 2011 income taxes.

Actual 2011 tax expense includes a reduction in our valuation allowance on deferred tax assets of $14.1 million. There is a table on page 6 of the press release that summarizes the impact of various items on our tax expense. It indicates that the income tax expense for the full year of 2011 would have been $1.741 million if computed at statutory rates applied to the $4.6 million pre-tax income. That equates to an effective tax rate of 38%. It may be more straightforward to use this figure in your models when coming up with a normalized way to view 2011's after-tax operating earnings. There are approximately $1.5 million of discreet tax expense items listed in that table that offset part of the $14.1 million deferred tax asset valuation release. For the year of 2011, the total tax benefit was $10.9 million.

The second topic I will touch on is a simple operating model for gauging Haverty's performance in 2012. We expanded our store base by one in the fourth quarter and will add three additional stores in the second half of 2012 by relocating another store to a newly constructed site. Our expanded retail footprint will require increases in several categories of fixed and discretionary type costs. Together with additional store remodelings and other budget expense increases, we expect our fixed and discretionary SG&A costs for 2012 will be approximately $213 million to $214 million. That's a 3% increase over those same kind of costs actually incurred in 2011.

Variable SG&A expenses should continue to be in the 17% to 17.5% of sales range for 2012, very close to the actual 2011 rate. Our gross margin was $51.7% for 2011, almost all of which is variable with sales and we have mentioned a similar result is expected this year. Using an average SG&A variable cost of 17.2% and deducting that from the gross margin results in a contribution margin on sales of about 34.5%. For each additional $100 of sales, $34.50 is contributed towards fixed and discretionary costs and then towards pre-tax profits. The approximated break-even sales level for 2012, the $213.5 million in expected non-variable costs, can be divided by the 34.5% contribution margin to produce an annual figure in sales required of $619 million. That's a break-even level. Proving out that same figure, $619 million of sales times the 34% contribution margin equals the $213.5 million of contribution dollars, which should completely cover the fixed and discretionary SG&A costs that are expected and result in a break-even performance.

We do not give sales guidance, but I will go through an example to demonstrate using the model in preparing your forecast. If you project annual sales to be $31 million higher than the anticipated break-even sales level, that's 5% more than $619 million, the pre-tax profits of $10.7 million would be expected. We derive that by saying the $31 million over the break-even level of sales times the 34.5% equals the $10.7 million expected pre-tax. As a further example, each additional 2% sales growth, that's $12.4 million in sales growth, beyond that should increase pre-tax by increments of $4.2 million. Likewise, each 2% sales reduction would reduce pre-tax earnings by the same amount.

The fixed and discretionary costs will be skewed somewhat to the back half of the year as the advertising spend is usually higher than and all of the additional stores will have begun operations. The quarterly average of these fixed and discretionary costs are expected to be $53.4 million. The fist two quarters should each run about $1 million below that average and the third and fourth quarter should each be about $1 million higher than that $53.4 million average.

The third area I'll cover is cash flow. 2012 cash flow is expected to be neutral to modestly positive for the year. Higher planned capital expenditures of $21 million with some additional growth now, are expected to be about $1.5 million more than depreciation. We anticipate earnings should generate enough cash to offset increases in working capital required, together with the minor balance sheet lease obligation payments due and any dividends declared.

In closing, I want to remind you that our book value at the end of 2011 is approximately $263 million, or $12.10 a share. We regard this figure as conservative since our LIFO inventory reserve is $18.1 million and we have no intangible assets such as goodwill recorded and also we own 45 of 119 retail locations free and clear. Operator, at this time, we'll take questions from the audience.

(Operator Instructions). Budd Bugatch, Raymond James.

This is actually TJ McConville filling in for Budd. Congratulations on the strong performance in the fourth quarter. A couple of items from the release, if I might. First on the gross margin. Dennis, you mentioned that, or I think Clarence, you mentioned, that the pricing and mix were the primary contributors to the benefit in the fourth quarter. Any way you can break out the contribution of each of those buckets? And then on the mix side, was that mix within categories or the mix of categories during the quarter?

TJ, I'm not sure I can give you a lot of clarity on that. Just in general, we had pricing discipline. There wasn't as much category mix as it was just the product or [hoot] mix and we had some better sellers that had a little bitter margin. There's nothing major. It was more of a small and across the board improvement.

Then in 2012, we're aware now that you're going to be a player in accessories. How does that factor into your thinking on the flat gross margin?

Accessories is not a big part of our overall business. We would like to make it more significant, and that's our plan. We're in the process of making that happen, but last year, I think it was around 2.5% of our business. Now, we were in the process of closing out a lot of our product on the floor to get out of the old program and so we had very low margins in the category. We strongly believe it's going to be a lot better margins in addition to sales this year. That should help us. Even if it doubles to 5%, it's still not a huge part of our business. It will help, though.

On the remodels, Clarence, any metrics that you care to share on some of the impacts you've seen early on, on some of the stores that you've touched already versus a test group and what you might expect from the 20 that you're planning on doing in 2012?

Well, when we started this program several years ago, we tested it, and we showed some nice improvement. Where we have spent most of our money and where the first remodelings were in our best stores, our biggest stores, and our biggest markets. We've had very nice reaction to that. We're fully on board with this remodeling program. We're rolling it out as fast as we can. We know our stores look better. We know it's helping us engage our customers, and help us with our business. We feel very strongly about it. Some of our biggest increases are from stores that we have recently remodeled.

You have to get the customer in there to see that it's different. That sometimes takes a little time. We're very encouraged by it.

Finally from me, a little bit bigger picture question here. We've gotten a few reports from some of the other furniture and now you today and other home goods retailers that indicate that customers are at least spending a little more on the home. We may not have gotten any great data this morning, but how do you see the consumer's behavior out there, Clarence, in terms of willingness to invest in homes and what the outlook is for that going forward?

I think what we're focusing on is the replacement market. We like to use the term rejuvenation. I think that the data that just came out today said Atlanta was one of the worst markets in the country. We have been leaning historically on new housings and new starts, but we're now focused more on the replacement market, and I think that, that customer is more willing to finally spend some money. We are seeing a little bit of traction there. It's not as much housing driven as it is we've got an old looking bedroom or living room, and we're in the mood to replace it. We've got some new product, which is exciting and they're reacting to it.

Todd Schwartzman, Sidoti and Company.

I wonder if you could elaborate a little bit on the replacement market and talk about what you're doing on the merchandising marketing perspective, product styling and such to proactively court the replacement consumer?

Well, one of the ways we're trying to reach that customer is, as you've known, we hired a new agency. We have a new creative out there. We've realigned some of our mix to better reach that customer and we're spending more, not only on television but on electronics, to reach that customer. As far as the product is concerned, that replacement has been heavily focused on the family room, the television room, the entertainment area, the public room of the house, and a lot of the product we're selling and some of our best-sellers are focused around that include motion and leather sectionals, all of the categories that the whole industry's doing pretty well there. I think that's where she focuses first.

Then also on bedding which has been a good category for us, and as you well know the industry, and that's helped our average ticket. These are beds that, 20 years old and they're in the mood to replace it. That's part of that rejuvenation. I think that has been a driver of our business, and I think, for the industry.

Yes, you did call out the family room as a source of strength. I'm just wondering, you really cited a lot of upholstered products in addition to that? Are you seeing relative strength in entertainment center? Are there other case goods for that same room or is it mostly centered on upholstery right now?

As far as the growth, it's been mostly upholstery. We're doing a better job with product that we developed and had designed and sourcing at the higher price points. We had that come in late last year on the fourth quarter last year and we've done well with that, which includes some formal dining room, includes bedroom, casual dining, and that's been good, particularly casual dining, which is part of that family room function. We've had some good reaction to the new product that we have brought in.

Can I get you to quantify some of those metrics, ticket, traffic, close ratio and such?

I think I mentioned our traffic has been down slightly. Our business has been up because of the average ticket and because of the close rate, which is a few percentage points higher in our closing rate and our average ticket is up several percent, too. We're a big ticket. Average sale is in the $1,600 range, and it has been moving up.

We continue to have that be a goal, and in some markets, it's over $2,000. That will continue to be something we're focused on and we're getting pretty good reaction to the new product. We're doing more special order product, more custom choice. I mentioned that in the press release. That's focused mostly around upholstery.

The closing rate you said was up several percentage points?

Yes.

On a year-over-year basis?

No, I'm talking most recently -- the most recent quarter actually, this quarter. Last year it was up slightly, but the recent trend of the 5% up is related to those two categories of average sale and closing rate.

On the improvement in average ticket, can you speak in terms of a pecking order to what you attribute that to, number of items per purchase, how much of that is accessories kicking in?

No, it's not accessories because that would bring down the average ticket. I think it's just average price per SKU. We're selling items that are more expensive, which may include leather sectionals. It would be a larger dining room price point, less promotional bedroom, more of the better goods there, so it's all the way down to the higher price per SKU.

And that $1,600 number is relative to what at the end of Q4 2010?

We're not giving those exact percentages there. It's up slightly.

Lastly, to what extent does your better results, your better metrics stem from you proactively seeking a potential -- I don't want to put words in your mouth -- maybe a slightly higher income consumer? Have you changed your target demo or is it simply a function of the price points of some of the newer products that you've launched that some wealthier consumers have migrated to?

I think it's a matter of focus. We're focused very closely on this customer. We know who she is. We deliver to her. We've done a lot of analysis in the last six to seven months as to where she lives, how she listens to advertising, what kind of advertising. We're focusing on serving her better. We have brought in the product that I think is appealing to her better. It's really a matter of focus as opposed to trying to be a promotional house which we do some of that, but we're trying to separate from the real promotional players and focus on serving that customer better.

Is all of this a direct early result of your new advertising consulting relationship?

Well, that just started, frankly. The new creative just started in February. No, I think it's an overall focus of everything we're doing about the technology to servicer, the web presence, the way our stores look, the investment of our stores, our systems. Everything we're doing. I think that we're getting a little traction there, which is encouraging to see.

One more on real estate. Any comments on big box opportunities going forward?

We mentioned the four this year. They're tougher to find at the values we like them to be. We're really focusing now on making sure what we have is producing up to that $200 level or higher, and strengthening our position in our current markets. We don't have any plans to grow outside of our footprint for sure, and any new stores would probably be strengthening existing markets or relocations.

(Operator Instructions) David Berman, Berman Capital.

I was curious if you could comment on the competitive environment, please?

Well, it is a tough place to try to sell furniture, David. We compete against some very strong players who advertise very aggressively, including Ashley, Rooms to Go, American Signature, Ethan Allen in almost every one of our markets, and there are strong independents in almost every one of our markets. Some of the department stores have gotten aggressive, too, specifically Macy's, but it's a very competitive market. I don't think it's really changed significantly in the last year. There have been certainly players who have fallen out, but the players that are there now are investing heavily and advertising aggressively. It is certainly a tough environment.

Has there been a change at all?

No.

It's been tough for the last few years, but is there a change?

I don't see it being a change. I just think the players, there may be fewer of them but they're more aggressive. And everybody's trying to defend their turf and grow their business, and the people I mentioned are all strong and all going to be there. We're not expecting to have any major players fall out any time.

It seems -- based on your numbers, seems like things are fairly stable. Is that a fair statement?

I'm sorry, did you say you felt like it--?

It seems like it's a fairly stable environment just by looking at your numbers and your margins and inventories.

Well, it's been flat for a while. It was great to see a positive. We didn't get positive until the last day of the year in 2011. We've been down most of the last five or six quarters, down 1.5% to 2%. If you call that stable, I think that's stable. It's nice to see a positive here, and we were hoping to be able to hold that number.

Bob Fetch, Lord Abbett.

Can you elaborate and fill us in, in terms of how you determine where you are going to open your new stores in Towson and the one in Midland?

I mentioned we're strengthening our best markets. Dallas, Atlanta, and DC are our best markets, our biggest markets. These are opportunities to strengthen in areas that we are not serving now or that are growing faster and we want to reach more of those customers. We're just reinvesting in our best markets.

You feel the markets are under served as well?

Not under served. Just that we're not this those areas. We're not in the heart of Baltimore, for instance. Towson's the first real store in the actual city. We were in Columbia before, or in Columbia. Allen, Texas is the fastest growing part of Dallas, and we wanted to move there. South Atlanta is a relocation into a better location. It's strengthening us in our current markets. That's our main focus.

Was a lease up in Atlanta as well?

Yes, that's a store that the lease will be up when we leave it.

Can you comment on what you see as your labor costs going forward and what they were last year in terms of wage costs?

When you count everything, including commissions, you are over 20%. It's likely that's the level it's going to be at except to the extent there's the administrative level or the so called fixed cost level that we'd like to leverage by getting a lot more sales without increasing headcount and administrative functions.

Exuding commissions, what rate of increase might there be year-to-year in your wage and benefits?

Wage and benefits together, it is 2% to 3%.

Any commentary further on product costs? Where you're seeing pressure either on hard goods or upholstery side?

I think the biggest issue with everyone is really petroleum prices and it hits you in so many ways. Of course transportation and then other ingredients in different products. That would be the main one, I think, at this point. There are not a lot of significant pressures, but we're just on the lookout for them and certainly we have to price that in.

How about your container costs? Are they down this year with some of the excess capacity that's out there?

They were down earlier in the year and then they were back up a little with fuel very lately. The capacity issue's been equalized. That was a big deal back in 2009. We had a big drop in inbound container costs. I would say that is a little more stable situation too.

And lastly, if you could just talk about the variability of performance amongst your store base. Has it been narrowing, and to the degree to which -- what percent of your stores may not be profitable currently?

I'd say that's narrowing. We have closed, over the last several years, our weaker performers. We'll have some leases come up in the next couple of years that we'll be watching closely. There's some that are certainly being watched, but I think that the variability is tightening. I think since 2006, we've gone through a lot, closed some stores, eliminated weak ones, cut staff, put in systems. I think we're pretty comfortable with our current base, and if we could get that back to the average $200 number, we'd be making a lot of money.

There are no further questions in the queue.

I'd like to thank you for joining us on our conference call, and thank you for your interest in Haverty's.

Ladies and gentlemen this concludes Haverty's Q4 and year end 2011 financial results conference call. Thank you for your participation. You may now disconnect.