Haverty Furniture Companies Inc (HVT) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Haverty's second-quarter 2013 results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded today, August 1, 2013. I will now turn the conference over to our host, Dennis Fink, Executive Vice President and CFO. Please go ahead.

Thank you, operator. Good morning, everybody. During this conference 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 as detailed in the Company's reports filed with the SEC.

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

Thank you, Dennis. Good morning. We appreciate your joining our second-quarter conference call. We are pleased to report our 2013 second-quarter earnings per share of $0.21 versus $0.11 for the same period last year.

As we released earlier, net sales increased 12.9% and comparable store sales were up 11.2%, the seventh consecutive quarter of positive same-store sales. For the first half of 2013, comparable stores were up 11.3%.

During the second quarter, our average ticket continued to grow up 7.7% on top of a double-digit increase last year and we experienced an increase in our store traffic for the first time in seven quarters.

The successful execution of a multiyear strategy of upgrading our merchandise and stores aligned with a more electronic and digitally focused creative marketing program has helped us reach our target customer more effectively and gain market share. We believe that with the combined synergies of these efforts, we are just beginning to realize the returns on these investments.

The sustained increases in home sales and prices in our markets are also an important driver of retail home furnishings in this year. We expect this trend will continue to help us increase our sales.

We are continuing to invest in our best stores and in our strongest markets. We are actively investigating and negotiating for locations and opportunities to relocate a few stores and enter new markets that we can serve from our distribution footprint.

In the first half of this year we closed three stores with expiring leases in Roanoke, Virginia; Jackson, Mississippi; and Clearwater, Florida. Because of these closings, we expect to end the year with retail square footage to be down about 2%. We do expect to see a more normal increase in the low single digits in 2014 and new retail square footage growth.

We currently have plans to relocate three stores and open three new stores later next year. We will announce more details as the locations are finalized. We currently own 38% of our stores in our portfolio, but expect to see more lease opportunities in the next several years.

CapEx for 2013 is expected to be about $22 million, including $15.6 million for stores and store improvements and $2.8 million for IT. We expect CapEx for 2014 to be closer to $25 million, due to new and relocated store opportunities and additional IT and potential DC investments.

Our merchandise team has been systematically strengthening our product line by each category. We continue to invest most of our energy in designing and sourcing Haverty's branded product. We are working with many of the top designers in the industry and have built a more efficient team to bring new designs to the market quicker than in the past years.

We have strengthened our relationships with top Asian and domestic manufacturers in the past couple of years and we believe that we are developing, sourcing, introducing and delivering new groups to our customers faster and more efficiently than our competitors. Our fully integrated and consolidated supply chain and distribution systems give us a distinct competitive advantage.

A significant focus of our new merchandise and marketing strategy is the planned increase in special order and custom order merchandise with emphasis on upholstery. The faster delivery times our suppliers are providing, we think, are outperforming many of our competitors in this arena.

We currently have professional designers on staff serving 32 stores and have plans to expand our free in-home design service to 50 stores by year end. While these additional designers do add to our store costs, they had been a boost to our sales and average tickets in those stores.

We have developed training programs for all of our sales associates to have them better prepared to service this more design-oriented customer. A recent major enhancement to our in-store iPad app allows our sales associates to fully service our customers on the iPad without leaving her side.

This will allow our associates to show how custom choice fabric changes look, the setting delivery and finalizing the sale. This is one more step in providing service levels that reach a more fashion-oriented customer and to assist her in making her vision of her home a reality. Our expanded and significantly improved accessory program is growing at a higher pace than any other category.

We recognized that we were not a real player in these areas and we are starting from a very low base. However, the new coordinated and centralized accessory program with most items carried in our distribution system and centers aligns beautifully with our focus on the Discover Something New marketing theme in our special [oral-fashioned] story.

Our stores look beautiful and are very tightly coordinated with our new accessory reprogram. The stronger operating performance for the first half is due to the fine efforts of all of our teams in the stores and our distribution service, credit and home offices. It is gratifying to see that the dedication of our associates to serving our customers better than anyone is coming through with double-digit sales increases and improved profits. We believe that we have excellent opportunities to continue the sales trends of the past few quarters and we are dedicated to keeping our focus on serving our customer better to earn their continued business.

Now I would like to turn the call over to Dennis.

Thank you Clarence. The financial highlights were covered pretty well in our earnings release last night.

I will only repeat one of the points made there in the expectation section of the press release. We did mention that our fixed and discretionary type expenses within SG&A usually grow between 3% to 5% a year. So looking forward into 2014 and beyond, it is important to understand and expect that there will be some increases in that category related to expansion, inflation, advertising -- which is, of course, discretionary -- and other expense items. So as you are modeling out you need to take that into account.

A couple of other points to bring up that wasn't in the press release. The actual six months sales in total, the written and delivered sales were approximately equal in terms of percentage increase. They were both up approximately 13.5% for the first half in total. So there were some differences in those percentage increases by quarter, but for the six months they are both up around 13.5% on a written basis and a delivery basis. And that is in total.

The other thing to mention is that there will be square footage decreases for the third and fourth quarter this year. We will have square footage decrease, weighted average square footage decrease of about 1% in the third quarter and about 2% in the fourth quarter. And what that means really is that it is likely that our total sales will be lower than our comp store sales percent increase. So you would project a comp store increase and would have to add a percentage, for instance, in the third quarter to get to the expected total sales.

And in the fourth quarter you would have expectation of 2% lower average square footage. So the total sales would be lower than comps by about 2%. For the full year it is roughly flat weighted average square footage. And so all things being equal, comps and total sales percentage increases would be about the same.

Next year we have, as Clarence mentioned, several stores, three replacement stores and possibly three new stores. The new stores would be back end weighted. Maybe one at midyear and the other two would be very late in the year such that our expectations for weighted average square footage increase next year would be about 7/10 of 1%.

In the first quarter we would be lower square footage about 1.5% and by the third and fourth quarter we would be closer to up 2% each of those quarters. So, again, if you just look at comps versus total sales you should take that into account.

Finally, just mentioning is the share count is looked at going forward typically we grow about 1.5% a year in share count. And that also should be factored in as people are making projections for multiple years in the future.

That is my only comments. At this point, operator, we would be glad to take questions from the audience.

(Operator Instructions). Todd Schwartzman, Sidoti.

Good morning. How much --? I wonder if you could talk about the average ticket increase. How much pricing was there? What was the growth in units, how much in product mix contributed to that? And also maybe if you could discuss within that context the attachment rates of accessories. So to accompany a furniture purchase.

A couple of things there. First of all I think the average ticket has been driven as much as anything by the upholstery, special order upholstery. That is a big part of our growth there.

The accessory attachment is higher than it was, but I think where we are really gaining there is when we get into the customer's home. And we have been pushing that. I mentioned it in 32 stores where we are getting in the customer's home. We are adding more of the accessory items, the total look and accessories as a category is still around 3% of our business. So it is not a major part of our business.

We think there's some great opportunities there, but I let Dennis answer some of those other questions that you had on the technical part.

Yes. As Clarence said, it's a combination of a number of items and the price points of those items. We are -- I would say more often than not, it is more items on the ticket. But there is also the trade up in -- certainly in price point that we have made. But, I think -- does that answer your question, or —?

Yes. Yes it does. So, the increase in the use of designers for in-home design service, is that the biggest factor in the increase in custom upholstery or where does that stand in the (multiple speakers)?

It is a part of it. It's a part of it. And we are only serving 32 stores now, so it is a new program. It is accessible. We are happy with it. We are going to expand it. So it is not the biggest part of it.

I think the main thing is we are offering a better product. It is at a better higher price point. We are offering more custom choice special order capabilities for our customer, the average customer that comes in. And they are taking advantage of it.

So, the decorators are a factor, will be more of a factor going forward, but are not the primary factor right now.

And with the decorators, Clarence, have you given any thought to perhaps increase the number per store in some of your better performing stores rather than rolling it out to one per store per market?

Right. Absolutely. And we have started in our biggest stores and our best stores and we are expanding it to new markets right now. So yes. We are adding certainly, let's just say Atlanta, Dallas, we are adding more people in those markets and DC than we would be in Anniston, Alabama.

So we are going where the customer and where the opportunity is the most. And those are our best markets.

So for a 12,000 or 15,000 square-foot store in one of those top markets what do you think is the optimal number?

Well, we don't have stores that small. So, our stores average about 30,000. I mean, and right now in a good market you would have one in every store. But we don't have that now. So and if it is a bigger store like one of our top stores, we may have a couple.

Again, it is a new program we started about a year ago and it is moving as rapidly as it makes sense for us to roll that out now.

Dennis, I know you spoke to the comps earlier. I'm not sure if you discussed the difference between Q1 and Q2 with regard to the increase in average ticket. So forgive me if I missed that. But the implied growth year over year in average tickets seems to be greater, have been greater in Q1 than in Q2.

Is there anything going on there that we should know about?

No. You're correct. It was greater. I tell you one thing, looking back the growth in the average ticket in the first quarter of 2012 was very modest and the average tickets started growing double-digit in the second quarter last year. So I guess you could say technically there was a harder comparison in the second quarter if you want to look at it that way.

That makes sense. And lastly, with advertising spend going forward can you give some color there on your plans or maybe if not quantify give us a sense of where you go from here with the Company having gone upstream a little bit with respect to the consumer?

I think we will be a little more efficient with our advertising. I don't see us increasing our percentage. In fact, it may come down. When we go into new markets you certainly have to spend a little bit more.

But I mentioned our focus on television and on Internet interactive advertising. That is more of a focus today than it was six months ago and will continue to be because that's how we reach our customer, we think, the best.

So print is going to be less a factor next year than it is this year. And but as far as a percent I think we will be pretty steady with that. I don't think that will be a significant change as far as the total percent of advertising dollars as a percent.

As a percent of sales?

Right.

Great. Thanks a lot.

Brad Thomas, KeyBanc Capital Markets.

This is actually Jason on for Brad. Congratulations on a good quarter.

Thank you, Jason.

You had mentioned that your sales quarter to date are running up, I think it is just shy of 10%. What are the comparisons like as you move through the rest of the third quarter?

Good question. I will first mention the comparison to last year, and last year we had had 11% increase in the first 30 days on a delivered basis and about a 10% increase in written sales in that period. So as you compare what we announced to last year those are the two numbers which are, frankly, pretty much in line with what we just announced.

And for the other two months of the quarter let me refer back -- excuse me, for the other two, the full quarter of -- third and fourth quarter, we had -- looks like the increase was a little stronger last year. Written was probably about, looks like as an average probably 15% and delivered was probably 13% or something like that. So it is a little harder comparison in August and September, so, for the rest of the quarter.

All right. And it seems like your -- you mentioned that written and delivered should be about equal. Looks like it flipped in the first two quarters. How do you look at that comparison between the written and the delivered in the second half?

Well, it is dependent, of course, on the kind of orders. The more custom orders we get the bigger the -- or the longer the lead time is to fill it. We hit our targets, but if we are six to eight weeks on some custom order and the custom order grows, a lot of times then the product with it ships at the same time and delivers at the same time. So the whole backlog grows.

The other thing is that obviously as sales are accelerating, you first write it and then deliver it to the backlog grows and when your sales are not accelerating it kind of flattens out. And then if it is decelerating, of course you would have the delivered percentage increase is higher than the written. So we hope you don't run into any of that.

But I think in the second half for total, in total, that we would probably be up a similar amount, maybe slightly more delivered than we are written. It just remains to be seen. I don't -- it is hard to predict the actual mix until you go through it and then understand what happened.

And what was the mix of custom in the second quarter versus last year?

Custom was -- I think we actually just typically disclosed the increase, the custom was about for the second quarter about 22% ahead of last year. And I will go ahead and tell you as a percent of total, upholstery, that is about 21% for the second quarter. Last year for the full year, that was about 19% of total upholstery sales in the custom and special order category.

And then, you had mentioned accessories was your fastest-growing. I assume that got a bump from the in home design. You know what accessories would have been up roughly without the in home design? Was it pretty broad-based or was that the main driver?

Well, we have a new program. So I think it was certainly a factor, but I don't have the actual number there. But I think it was a factor. It's not a big part of it right now.

All right. Thank you very much.

(Operator Instructions). Budd Bugatch, Raymond James.

Good morning, Clarence, good morning, Dennis. It is TJ McConville filling in for Budd. Congratulations on the quarter.

Thank you.

Thanks for taking the questions. A bunch of them have been answered, but on that custom choice penetration answer there, Dennis, thank you for that. And, Clarence, your .2 to still targeting an increase. So let's talk about maybe where that penetration goes ideally in your eyes and what that means potentially for a gross margin here that we have seen some pretty consistent and nice increases over the last several quarters. So how far do you have to go and what does it mean to that (multiple speakers)?

We don't see gross margins increasing significantly from where they are. They are pretty strong and we are pleased with them, but we do see an opportunity for growth in this area and we think it is attracting -- we are attracting a better customer or a higher ticket customer than the one we have in the past not only with the displays in the product, but our marketing.

And I think that we do want to grow this area. We work with our vendors aggressively to get quicker delivery and we are doing a better job there. They are doing a fine job for us.

And so we think that it is an opportunity to reach this more fashion-design customer who has not been served well in the past. And we think there's some opportunities because of players who have fallen out of the market.

And it is also part of an overall strategy of making sure that we are separated from the promotional players in the markets that we serve.

So, it is starting to work. We want to continue to grow it. It is in the early 20s percentages and I think that that can be 30 percentage points. So we think there are real opportunities here. We are continuing to emphasize it and you'll see it in our marketing.

That's very helpful. Thank you. And so, the traffic increase was very welcome news. Congratulations on that one as well.

Can you put your finger on maybe what is driving some of that as far as maybe some of the ad spend is going? Is there a shift in channels that is helping? Is it looking at new ZIP Codes or MSAs that you maybe didn't look at before? What can you tell us there?

Let me just mention the channels. We brought on a new advertising agency, Bernstein-Rein, a little over a year ago. And they have helped us look at trying to reach this customer differently.

So we are. We are advertising differently. We are on different stations and different programs. We are using the digital format, Internet advertising differently. We cut back on ROP. I mean that is, frankly, a nonfactor anymore. And there is less print.

So I think we are just reaching this customer better. I think the quality of our advertising is better. I think our stores match our advertising and our Internet site better than they did in the past. And so it is all aligned to reach this customer a little better and she is targeted to be the right one for us. And it seems to be working.

Dennis, do you want to add?

I will just -- retailers in general as you listen to different conference calls and articles, read articles, the challenge is traffic. Because it is so much more omnichannel shopping; what happens is, I think store visits probably overall are just off. People are able to pre-shop and make their decision or have a leaning towards what they want and understand the variety of what is available without getting physically inside all of the stores.

So longer term, it is going to be hard to increase traffic. We are hoping that in targeting that people coming in are more predisposed to buy and we look for a higher average ticket and a higher closing rate on the people that do come in the store because they have already gone down part of the decision trail. So, I think keeping traffic from falling is the challenge for most retailers.

That's very helpful. And so, the customer demographics that you are seeing now with all the changes you have made to the merchandising and some of the channels and what we just talked about, how has that evolved and what is the average customer age or income? What is the difference in what they are looking at and buying?

We spend a lot of effort on studying the customer. We have got a number of projects underway to get more data on that. I can't give you much more detail than what we have done in the past. We are in the midst of several deep dives into understanding that customer and we will be investing more in research in the next year to find out more about her.

So, I think clearly she is inclined to spend more than the customer we were advertising for in the past. We are not as much price point-driven as we were in our past advertising. And we are trying to get across the message that she can make her vision of her home a reality through Haverty's.

So we are trying to emphasize that fashion message and I think that is what's attracting that type of customer.

Clearly that is working, Dennis. Last one for me is on credit penetration and availability, Dennis, if you don't mind what it was in the quarter? What are you seeing as far as approval or disapproval rates or turndowns, if you will?

Yes. I think to follow up on your other question, too, we are really not targeting based on income, but I think on average the income level of our customers and the creditworthiness has gone up. It is usually over the years has been very good and it has probably gone up a little. So, it is a little more than 1/3 of our business is credit and the turndown rates are really the lowest ever, frankly.

I mean, most of the people who choose to buy, we do have a little better product, a little more quality, little higher price in some respects, but very competitive. But we do -- and people choose to -- really the mindset being that they want the best that they can get and it fits them the most. Those people usually have a little better credit and we are just seeing real good results with both credit line availability and with the percentage of people that are approved.

That does it for me. Thanks for taking the questions. Again, best of luck on the remainder of the year.

Thank you.

Todd Schwartzman, Sidoti.

Just a quick one. What did web traffic look like, web visitors in the quarter?

It was actually off a little bit. And we are doing -- we are adjusting some things to make that a little stronger. We have done -- got several initiatives underway.

Going forward do you look at the relationship between physical foot traffic and web visits as an inverse one? Or is there too -- still too early to really discern that?

As I recall, Dennis, the web traffic for the first time is higher than our store traffic.

However it is a pretty good indicator. We know that for instance, going into a holiday weekend if the web traffic is up, then business will most likely be up. It is a very good indicator. Dennis referred to the fact that we were down some last -- for that quarter. We had some -- we had a few technical issues which I think we have corrected which have helped us and I think that will improve for this quarter.

Yes. I think web traffic is super-important. It will be going up more than store traffic; and that the idea is, again, the people coming into the store have a good idea of what they want and have already shopped around and the time in the store perhaps as well as the closing rate should be going up.

As far as its usefulness as a leading indicator, does it help you see out days or weeks or is the visibility something greater than that?

I would say it is days and weeks.

Yes. Good indicators for the weekend (technical difficulty).

There are no further questions at this time. Please continue.

Well, I want to thank everyone for joining our call and for your interest in Haverty's. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.