Haverty Furniture Companies Inc (HVT) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Haverty's Third Quarter 2012 Financial Results Conference Call. Following today's presentation, there will be a question and answer session with instructions provided. (Operator Instructions)

I would like to remind everyone this conference is being recorded today November 1, 2012 at 10 a.m. Eastern time. And I would now like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. Good morning everyone and welcome to our conference. We really appreciate those of you who have gone through the difficult weather over the last few days and have been able to join us and we hope business is back to normal for you as quickly as possible.

During this conference we will be making 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, Chairman and CEO, Clarence Smith, will now give you an update.

Clarence?

Thank you, Dennis. Thank you for joining our third quarter conference call. We're pleased to report our third quarter earnings of $0.15 versus $0.01 for the Q3 last year. We are experiencing an improving top line trend with four consecutive quarters of positive, same-store sales and increased momentum with double-digit written growth for the most recent four months.

Fourth quarter comparable written stores' sales are up 14.5%, which exceeds our expectations. We believe that the improvement in housing has had a positive impact on our sales while the upgrading of our stores and merchandising has helped us better appeal to our target customer.

Together, they're driving the top line for the first time since the first half of 2010 and moving us to consistent profitability. Our upgraded merchandise product and store presentation have helped grow our average sale, which is a key driver of our sales increases.

A main emphasis of our marketing program and in-store signage has been special order upholstery. All of our special order and custom choice products account for over 20% of our sales in the category, which is 31% higher than last year.

We believe that our trained sales associates, our greatly enhanced point of sale platform, our logistics and operating systems give us a distinct competitive advantage in assisting our customers select special order goods with a more timely delivery than our competitors.

Last weekend we had the soft opening of our new store in McDonough, Georgia, south of Atlanta, replacing a leased store at South Lake Mall. Initial soft opening traffic and results have been excellent with an official opening tomorrow morning.

Next weekend we open our 122nd store in Allen, Texas, a 46,000 square foot location northeast of Dallas. This will feature all of our western style product mix. And we expect this location to draw heavily from that fast growing market.

We will end the year with 4,350,000 square feet of retail selling space, up 2.5%.

We continue to strengthen our balance sheet, have no funded debt. We own over a third of our stores and have $75 million in cash at the end of the quarter. We expect to have CapEx for 2012 of approximately $25 million, and about $20 million for 2013. This is primarily related to remodeling existing stores and opening new and relocated stores.

In 2013 we plan to complete four major remodeling and expansion projects, while continuing our Bright Inspirations upgrades to 20 stores. We're very pleased with this brighter and easier to shop format, which has had positive customer reaction and has helped drive sales.

Our continued priority is to move same-store sales back to average over $200 per square foot by improving our product quality and exclusive designs and engaging our customer better with timely information and making the shopping experience easier.

We want our customer to discover something new; more quickly fulfilling her vision of style for her home. All of our team understands the mission and we believe that more target customers are coming to Haverty's as the trusted home furnishings choice.

Recent sales trends are encouraging and we are highly motivated to continue to improve all of our stores and our service levels. With the improvement of the housing market in many of the cities we service, we believe that Haverty's is especially well positioned to capitalize on our customers' renewed interest in furnishing their home.

Operator, I now would like to open the call up for questions.

(Operator Instructions). Budd Bugatch, Raymond James.

Good morning, Dennis. Congratulations on the quarter and the improved performance. Talk a little bit -- Clarence, you were talking a little bit about your, I think, competitive positioning. I realize it's hard to get market share data, but can you talk about how you think you're gaining share or losing share relative to their performance in your specific markets, Atlanta, and, obviously, Texas and some of the other markets as well?

Well, Budd, you knew that the independents in our industry were primarily at the upper end of the business. And a lot of them have gone out of business, gone away. It's one of the reasons that we've tried to target the special order customer and be able to execute on that better.

I think that -- well, for instance, the Beverly Hall here in Atlanta was a major player; they're gone. I think we're doing a better job there. We are pleased with our sales increases recently, particularly. And it is primarily in the better end of our lineup.

So, we try to separate ourselves from the promotional players in the markets, Ashley's and the Rooms to Go's, a little bit. And I think that we're starting to see some traction there. The fact that our average ticket is up is another indicator that I think we're appealing to that better customer

Can you quantify that for us on the average ticket?

We haven't given a number of the dollar amount. But, it is up about 6% to 7%. And we're seeing our closing rates are improving too. Now, traffic has been flat. So, most of the increases has been in our closing rate and our average ticket.

And is there much variation geography by geography? Or is it pretty much consistent throughout the chain?

We've seen good increases in what we call our five regions of the 17 states we're in. And just like in October, every region was double-digit and no region was more than twice the average. I mean, it was all in the teens, one slightly over that. So, there's been a general bounce back. It's not every city, but it is every region.

I see. And just to finish the thoughts, you talked merchandise-wise about bedding being the best performer, I think, over most of the period. Now, with getting [at] better end, can you kind of go through the merchandise performance?

Well, upholstery and bedding have been the strongest performers. And I think everybody's firing with all guns in the bedding business. And it is in the better end of the program. And that's helped drive our average ticket also. The alternative bedding, the foam bedding, is really important and growing and we continue to see increases there.

Okay. And, finally for me, in terms of SG&A, are there any issues with bonuses that might crop up in the fourth quarter? Are you accrued properly for the year, given the better performance?

We're accrued ratably for the year and I believe it's proper. You pick a target and accrue to that. And we're capable of beating the target.

I don't think you'll see any surprises, Budd.

No, I don't think there will be any big adjustments for it.

Okay, terrific. Congratulations and I'll cede the floor to others.

Todd Schwartzman, Sidoti & Company.

Thanks for that color, Dennis, on the regions. That was helpful. Did any of your stores suffer any structural damage from Sandy?

No. we were very lucky. We go as far as Baltimore north, but every store was open the next day. We did have some leaks, but no structural damage. So, we were very, very lucky compared to those north of us.

Good. Wonder if you could talk a little bit about the merchandise mix by market. I know that you've got targeted products, a limited number of SKUs that are unique to that market. I wonder if you could maybe just put some numbers to that, maybe talk about how you typically see churn within a market, now as far as what's targeted to that market specifically in a given calendar year, let's say, (technical difficulty) in the Dallas or the Texas markets is Texas products, quote, unquote and how frequently you turn over that portion of the product portfolio? And which markets are doing best in terms of the unique sales?

Well, the two areas with unique product are what we call coastal merchandise, which applies to the East Coast normal coastal markets, as well as mostly Florida. And then we have a Texas mix which is primarily for Dallas and for that-- the western stores out there.

We have always had a significant Florida coastal mix. We've increased that as we moved into Southeast Florida. I would say it's about 20% of the product down there that's unique to those markets in that area. We're adding to that. I think we're strengthening that program. I think it's helped us grow in Florida. And I'd say it's a little less that unique mix in Texas, probably around 15%. And it is very southwestern, heavier fabrics, darker colors, more rustic furniture. And we've increased that this year. And I think that's helped us reach that customer, particularly throughout those regions.

The turnover is certainly higher in upholstery. We turn upholstery pretty fast; turn it over, because fashion changes quickly there. Case goods is much slower. And I'd say in upholstery we change probably 30% to 40% of our line over every year. And case goods would be less than half of that I would guess.

Okay, thanks. And as far as the inventory reduction over the quarter, Q2 to Q3 sequentially, about $9 million, how much of that was seasonal? Just kind of give some color if you could what's going on there.

I think we're too low in our inventories right now. We're actually building them up for this quarter and have plans to bring in product before Chinese New Year to make sure we're inventoried there. So, it's a little lower than we'd like it to be. I don't think that it was something -- we didn't want to be this low going into the fourth quarter. So, we're receiving very heavily now. Hopefully we'll be turning the right product and shipping it right back out. But, it's, frankly, lower than we would like it to be.

Okay. Lastly, what should we expect as far as ad spending for the balance of the year for Q4 and into 2013?

Q4 is similar to Q3. And 2013 will have some increase. I don't think we'll have an increase as a percent of sales in advertising because the increase we do have will generate more business. As you're looking at 2013, just remember that, historically, and likely next year, the lowest quarter for spending and advertising is the second quarter. It's the weakest quarter of the year. And there is fewer holiday events in that quarter. And in our latitudes people buy less furniture in the springtime. They're thinking more outdoors than they are indoors.

But, we're real pleased with our advertising and feel like it's helping build our brand and identifying us to shoppers as a place they need to be, need to come to.

Got it. Thank you, gentlemen.

(Operator Instructions) David Berman, Berman Capital.

Good job on the earnings there. I'd just like to ask a question related -- a follow-up question related to the inventories which you just mentioned. Your operating margins have been kind of in the -- pretty low for the last number of years and they're starting to come up, 3% and so forth, going forward. Obviously, they're way too low for what you'd like. To get the operating margins higher one way, obviously, you must obviously ask first would be to increase your gross margins, correct?

Well, I would say it would be to grow sales, number one.

Yes.

Well, yes, you'd grow sales and get the leverage, but that's going to be an awfully long time before you get to higher margins. So, one way would be to increase the gross margins. And I realize in a tough environment that's difficult to do. But, given that your inventories are so low, you have to make decisions, right? I mean, you know, you can get 15%, 16%, 20% sales growth or you can aim for 10% sales growth [with a] higher gross margin, right?

The question I guess you have to ask yourselves and I'm curious how you would look at this is, you know, to what extent do you sort of cut back on promotions a little bit to get the 10% sales and get stronger gross margins? And how do you make that decision because obviously you want to get your operating margins up as high as you can as well.

Good questions. The last few years we've moved up margin over 100 basis points. And we actually, in the worst year, 2008, we actually moved up margins 100 basis points. So, all of our costs in cost of goods [sold], or almost all of them, are variable. You know, we don't manufacture anything. We buy and (inaudible) [designs] a lot of times, our spec, and then we warehouse and deliver.

So working with vendors you need to get a volume per item in order for that -- it's economical for them to run. And we've kind of -- as you recall, we dropped considerably, as the rest of the industry did, from the peak in 2006 to the trough in 2009. And we cut fixed costs during that time period. And actually our margin, our gross margin, again, which is almost all variable, went up quite a bit.

So, we're real pleased with where our margins are. But we're not pleased with where our sales are. We understand it and don't -- we think there's valid reasons for that drop and as housing was shut down and the recession, you know, moved forward. But we think that the play now is to get more volume. And the leverage is pretty substantial. There's -- as we pointed out in the release, in the SG&A side we've got about 17.5%, 17.8% variable costs in SG&A. And at a margin of 52%, just using for an example, that's all variable. So you end up with 52 , say 18, it's 34% contribution margin. And if you keep that fixed cost the same, a $10 million sales increase would increase operating income $3.4 million, as an example.

So, there is -- we're trying to stay competitive, have better looks and have good values. But, we're used to running more through our facilities. Our warehouse structure that we have right now, our peak year was 860 million and this year just quoting some analysts' number, so just adding to the third -- fourth quarter the same as the third quarter, we're running at over a 700 million rate. We're still 150 million or more short of where we were five years ago.

So, you know, we're really built for that kind of volume. And without adding a lot of fixed costs, unless new stores are involved, we can get that 34% contribution on most of the dollars that go forward if we just stick to the same level of promoting or -- which is not a high level. We feature products and have some promotions, but we're really not running the -- which sale is running this week, price, price, price type of advertising and marketing plan. And it's really lucrative if we can just take the margins we have and get more business.

And more people are finding out about us and identifying with us with our new advertising. And we think it's a great play just to continue. Understanding that, yes, some people might have a higher margin, but they -- we really think we need the volume in --

So you need to continue to offer this good value. And you feel that you can have the inventories in time? You know, I mean --

Yes. The play is that there's a lead time, three or four months for the imported product, the domestic product is not as much. Bedding is very quick. So, there's not the lead time with that. But, it requires that you have a good planning, good supply chain grip on things. And you have to be good at it. And you have to -- somebody asked a question earlier about product line turnover. It's just got to be managed well and timed well and all the many things involved with a new product introduction have to come together efficiently. And you have to do projecting that's pretty sensible.

You also have to get out of products that aren't selling well. So, it's a tougher model than it was 10 years ago before there was as much importing, just because of the longer lead time. You cannot get around lead time. So, you know, we moved our margins up. We'd love to see more. But I think the play is just going to be more volume and the strain is going to be on our supply chain and merchandising and planning. But, I think they're up to it.

Right, right, right. All right. Well, good luck in that. And keep on squeezing the suppliers as well to get better costing.

We'll keep that in mind.

Mr. Smith, there are no further questions at this time. Please continue.

Well, thank you for your interest in Havertys. We appreciate you joining our call.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. And you may now disconnect your lines.