Haverty Furniture Companies Inc (HVT) 2012 Q1 法說會逐字稿

Welcome to Haverty's Q1 2012 financial results conference call on the 3rd of May, 2012. 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 would now like to hand the conference over to Dennis Fink.

Thank you, Operator. Good morning, everybody. During this call, we'll 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 an update.

Good morning. Thank you for joining our first quarter conference call. We're pleased to report first quarter pretax profits of $4 million versus a loss of $500,000 in 2011. We previously announced net sales increased 6.1% to $163.6 million, with comparable store sales up 5.7%.

We made significant investments in the past several years to improve our presentation in our stores, upgrade our technology to better serve our customer, and add higher quality exclusive merchandise to our selection. Our focus has been on improving our customers' experience from website use to the showroom interaction and ultimately, to the final delivery. We believe that we've made real strides in raising the bar on the full experience and that our customers are responding positively with better closing percentages, higher average ticket and higher sales. We think that we will be steadily gaining market share due to the combination of all of these improvements.

Next week, we will complete the rollout of all of our stores, a new feature-rich point of sales system which is much easier to learn and use, and allows for faster transactions as well as much more product detail for the sales associate to use when assisting the customer.

We will also introduce a special-order configurator which will create unique SKUs based on various attributes selected to make special ordering much more intuitive. This process utilizes images and is faster and more accurate. We think that these features, along with working closer with our suppliers, will help us be a stronger player in the special order upholstery business.

Next week, we will also offer a new mobile version of our website and the [reskinning] of Havertys.com, which will be more attractive, engaging and useful to our online visitors. The enhancements will refresh the color palette and allow photography and other images to be more dominant. The new site will highlight coordinate furniture and accessories to complete the look of selected products. It will also include more structure and content to improve search engine optimization as well as incorporate more social media opportunities. The new design elements are more iPad-friendly, which will allow our associates and customers to quickly access product information in-store as well as online.

We're making a strong effort to better engage our customer, making sure she knows that she can rely on Havertys to help realize her vision of how her home should look. We recently began our new campaign "Discover Something You," which is consistent with our broadcast -- throughout our broadcast, print and in-store graphics, to emphasize that Havertys has the ideas and the expertise to make your vision a reality.

The recent International Furniture Market in High Point was more upbeat than we remember in recent history. I was impressed by the emphasis on color and more exciting designs than have been shown for years.

We have a strong program of new products coming in in the next few months, which we feel will continue to separate us from the promotional players in the marketplace and help distinguish Havertys as the inspiring furniture store.

We're in the final stages of our complete revamping of our full accessory program which is already having a positive impact on our store presentation and sales. We're reaching out to our customers to assist them in decorating ideas through our monthly inspiration sessions where we engage our experts at each store to give decorating guidance and tips to help customers plan and decorate.

The upgrading of our merchandise has helped us to improve our gross margins to 52.2%, up 100 basis points over Q1 2011. We now expect to be able to maintain gross margins of 52% for the full year, a 30-basis point improvement from 2011.

Written sales for the second quarter to date are flat, with delivered sales up 6.2%. Because of an earlier Easter this year, it might be more appropriate to look at March and April together to see the in-store trend. For those two months, written business was up 5.4% consistent with the first two months of Q1. April is one of the two seasonally weakest months of the year and our advertising spend is appropriately lower.

As we announced last quarter, we expect to add a net of three stores this year or approximately 2.5% square footage growth. Our main focus this year is improving and updating our existing stores with our Bright Inspirations project. We will be investing approximately $17.6 million in our stores in 2012. This includes $8.1 million in new stores and $9.5 million in existing stores, which includes remodeling, LED lighting upgrades and other energy projects. We will also continue to evaluate possible real estate opportunities in our distribution footprint.

We're enthusiastic about our upgraded stores, our distinctive marketing, the new exclusive designs with interesting features and the greater emphasis on special order and custom choice in our lineup. We believe that we are generating renewed excitement in our communities about Havertys and ultimately, that will translate into continued positive sales trends for the rest of 2012.

I'll now turn the call over to Dennis Fink, CFO.

Thank you. Several points were made about the quarter's results and the outlook for 2012 in last night's press release. I'll just add a few brief comments. On gross margins, we had expected first quarter gross margins to be a little higher than the rest of 2012. The [rate] we have right now on pricing trends and merchandise mix suggests that we move our expectations for the full year up 30 basis points from our previous outlook to a 52.0% figure. That would be a record annual level for Havertys.

That's really the only change in the simple operating model we had given back in our late February earnings press release call for gauging Haverty's performance in 2012. Variable and non-variable SG&A costs are running in line with the prior guidance.

As we explained in our previous conference call, the fixed and discretionary costs will be skewed somewhat to the back half of the year, as advertising spend is usually higher for the second half and all of the three additional stores we are opening this year will begin operation in the second half.

The first quarter cash flow was strong, with cash increasing $7.1 million during the quarter. The pace of capital expenditures will pick up for the rest of 2012 with a total of $23 million cap ex expected for the year. That's about $4 million more than depreciation is expected to be for the year.

Our book value at the end of 2011 and now the first quarter of 2012 is $266 million, approximately $12 per share. We look at this figure as conservative since our life of inventory reserve is a little over $18 million and we have no intangible assets, such as goodwill reported, and we own 45 of 119 retail locations free and clear.

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

Thank you, sir. (Operator Instructions) The first question comes from Budd Bugatch. Please go ahead with your question, sir.

(Inaudible) filling in for Budd. Thanks for taking my question and congratulations on the performance in the quarter.

Oh, thank you.

First, on the gross margin, if we could dig in a little, either Clarence or Dennis, on maybe where -- I know, Dennis, you said you expected the first quarter to be a little higher than the rest of the year, but it was still a little bit above your expectation. Can we dig into where you think the drivers were to the upside to your expectations? Was it less promotion, was it just mix or -- any color there would be appreciated.

You're referring to the margins, correct?

Yes, sir.

I think that the new product coming in is selling well and this is a higher price point goods and it's just -- it's been successful and we're getting some traction there. So I think it was probably a little stronger than we anticipated --

Okay, got it.

-- at the better end of the market.

That's heartening after several years of not being at that better end of the market, right?

Right, yes.

On the new advertising, the new commercial's entertaining. The two things that we take away -- decidedly younger and decidedly focused on the special order. So on those two points, is there one, a change at all in the demographic of the customer that's in the store now? And two, can you quantify for us maybe just how much of the business is now special order and where that figure might go over time?

Well, let me talk about the customer. We've done a great deal of research on our customer and where she is and what type of media she likes to see and pay attention to, and that's been a process now, nine months into that. So we're utilizing that to, I think, better reach the customer and some of this -- the creative is to be a little more entertaining to get their attention, to get across the point with our theme of "Discover Something New," that we can help the customer realize her vision in our store.

Now, the upholstery business has been good for us. It is growing faster than other categories and the special order part of that is growing and we're getting better at it, not only because we understand how to do it, but because we've got the technology to execute it better. So I would say that upholstery and that special order is more important and I think we're also understanding that the younger customer is more contemporary and more interested in changing the product versus something that's on everybody's floor. So I think we're appealing to a younger customer and we're understanding who she is and where she is and we're giving her the kind of product that she's looking for.

Your second question -- I don't think we have exact numbers on that. I would say special order is in the teens to the high-teen percentage, which I would include in that what we call custom choice, which is a different color fabric of the same design on a product, which we can execute in about 30 days. So the special order and custom choice, I would say, is in the high to mid-teens percentage of our total upholstery business.

Okay. That's very helpful, Clarence. Thank you.

Okay.

And then lastly from me, if we take a step back, ended this quarter at about $150 a square foot in sales on a trailing-four-quarter basis, and I know that you folks have talked about $200 maybe into the 2015 period. With the improved margin profile, is there -- can you talk about where you think operating margins might be at a $200-a-square-foot level, Dennis? Is it (inaudible) --

(Inaudible) --

-- that store (inaudible)?

I would prefer you do the math (inaudible).

Okay.

It depends really on how fast we would get there because the faster you get there, the higher the operating margin would be and I say that because you've got to factor in inflation to the so-called fixed or at least the non-variable costs, which are fixed and discretionary items. And there's just -- the more years it takes you to get there, you've kind of got to adjust that fixed cost, non-variable cost number. It creates along just with lease renewals and increases in rents and a variety of things that normally just go up over time.

So if you hit it in one year, some kind of a giant leap back to (inaudible) sales levels we had enjoyed before, you would -- you can run that model that we've kind of outlined and it will generate a percent of free cash for you that would be a reasonable percent. It's pretty high.

That's fair enough, guys. If you want to give me some more color about how fast I should get the math there, I'll leave that to you, but otherwise, thanks for taking the questions and best of luck for the rest of the year.

Thanks so much.

Yes. The answer to that is not nearly soon enough, but we'll hope it gets here. All right. Thank you.

Thank you. The next question comes from Todd Schwartzman. Please go ahead with your question, sir.

Hi, good morning, gentlemen.

Good morning, Todd.

Do you -- when you enter a new market or just open a store in an existing market, do you necessarily and customarily step up local market ad spend in that particular market?

I'd say we spend more than we would normally spend as a percent of sales planned on the front end for a period of time, but we do expect to get profitable in a fairly short period of time. So we recognize that you have to invest significantly on the front end. We haven't opened up in a lot of new markets recently, so most of them have been in existing markets and in that case, we don't usually have to step it up. We just move some of the advertising to where that store is or to the customers or to the grand opening itself. So it's not a huge deal and we don't way overspend like some of our competition do. We invest a little heavier on broadcast media so people know us on the front end.

Okay. Regarding President's Day, I wonder if you could just walk us through the level, the relative level, of promotional activity for the quarter, obviously centered around the holiday? And also, the demand trends that you saw post-holiday, did you build on that momentum? Did you sustain it for the bulk of the quarter both in terms of written business and delivered?

Now, you're interested in President's Day back in February, right?

Correct.

It was almost exactly the same plan we had the previous year. We didn't step it up any stronger. We had basically the same message, the same media mix. We're changing over our media mix, as I've said, to heavier television, but it wasn't anything stronger than the previous year really.

And in terms of geography, you're in warm climates, so I'm guessing that a benefit from weather is really a non-issue for Q1. Would you say that's a fair assessment?

I don't know if it is a fair assessment. I think weather was good. I think weather probably did help us in Q1. Atlanta, for instance, last year was blasted and so was the East Coast. Atlanta was down for a whole week in, I think, February of last year. So I think we were blessed with good weather, as well as the rest of the country, and I think that helped the overall industry in the first quarter, and now, we're back to the normal.

In that case, Clarence, is there any way to quantify the benefit in deliveries for Haverty?

Well, I'd say -- Dennis, do you want to (inaudible)?

Yes. It's just hard to do. The -- it certainly disrupted, particularly in January and early February last year. We were further behind in deliveries and we ended up getting caught up by the end of the quarter, so I think that probably hurt expense a little bit and it just hurt the pace and the kind of consistency, but it's not a huge factor, but it's probably a positive factor is what Clarence is saying.

Well, then you had one extra day in February.

Yes. And this year we had an extra day in February with the leap year, that's true.

Right, right, right. Also, could you maybe discuss some of the puts and takes and just talk about the relative strength among the product categories, upholstery versus case goods versus bedding? I think maybe even if you would, throw in accessories into the mix.

Well, upholstery is the strongest category and I think it will continue to be. It's growing and as I mentioned, we're emphasizing it pretty heavily, particularly on the custom choice and special order. The bedroom business is holding. It's improving slightly. Dining room is moving more to occasional -- I mean, to casual versus formal and the casual side is going faster. Bedding is very competitive now. We're doing a lot of business in bedding, but it's extremely competitive and we're fighting to gain share there. It was a big growth category the previous year. It is not the growth category it was because we're all fighting for more share there.

Accessories is a growth category for us. We're putting a lot of emphasis. We've got a new product line. We're excited about it and we're adding to our inventory there and the way we stock it in our distribution centers and can now back it up. And so that is growing and we expect that to grow, but it's not been a big part of our business. It was down to about 2% of our business. It's now about 3% of our business. We want to get it to maybe 4% to 5% to 6% of our business. So it's a growth part, but not a major factor overall.

And on the bedding side, Clarence, there, there was a pretty high-profile merger announced particularly pertaining to a couple of your key markets. Any concern there from the competitive landscape?

As to -- you're talking about [Matt Firm] that was --

Yes.

Yes. They're a big player. They've merged with a couple of bedding stores in our markets and they have -- in Atlanta, I think they're advertising 60-something stores here, so -- and they're spending a lot of money advertising. We're trying to separate from them, let people know that we're in the bedding business and that we're the best place to buy, but they are very competitive as well as all the other players here in this marketplace. So we're in the game, we're in the fight, and we want to gain share, so we're not going to outspend them, but I think we're going to try to be smarter in our marketing and get our message across that we're the place to come for your bedding needs.

And what about price promotions there?

We'll be competitive. We're certainly not trying to go under them and try to be the cheapest guy in town. We're trying to sell the better product and the experience, but we'll be competitive in our pricing for sure.

Okay. Thank you, guys.

Okay. Thanks, Todd.

Thanks, Todd.

Thank you, sir. The next question comes from David Berman.

(Inaudible), guys.

(Inaudible).

How are you doing? I'm just wanting to ask you a quick question. Most of them have been answered. On the balance sheet, I noticed that your accounts payable have come down quite a lot. They're down, I think, 25% year-over-year down to 17 days of payables and in -- what I'm -- I'm just trying to understand why are they down so much, given that your inventories are only at 4%. And then relatedly, why not try and extend your payables? I mean, if you've got them to like 30 days, for example, it would be great for cash (inaudible) and you'd get an extra almost $0.50 a share on your stock in a sense.

Yes, the payables have come down as we've imported more. It's been a trend for several years. We've found that the manufacturers, the (inaudible) middlemen -- we're getting some breakup on the line. Anyway, excuse me, the middlemen have been in financial strain. The -- at Havertys, one of our advantages that we offer to our suppliers is that we do not ask for extended terms because we really have adequate financing. It's not to say that we wouldn't at some time, but just with the shift towards more imported goods and also, the fact that we like to get the priority of other items with our manufactures' price and service and help with styling and (inaudible) in our product is probably the main things. So it's just something we haven't pushed for. We feel as though a good relationship with the suppliers and that what we need the most, they will supply, so I mean, it could evolve over time, David.

Yes. I mean, do you think that you -- you don't think you can push more on this side? I mean, if you think cash, great terms and you're a big company, I mean, is there any way that you can try and do better on the buying side? Is the opportunity there?

Yes, there's an opportunity, but I think we're choosing the right things to emphasize. It -- we're -- here our payables would grow as our volume grew and I think these other factors were just more important recently and in the near future.

Right. All right. Thank you very much.

Thank you very much.

And good luck.

Thanks.

Thank you. (Operator Instructions) Thank you, sir. There seems to be no further questions. Please proceed with any other points you'd like to raise.

Okay. I want to thank you for joining us on our Q1 conference call. We appreciate your interest in Havertys.