Haverty Furniture Companies Inc (HVT) 2015 Q2 法說會逐字稿

Good day and welcome to Haverty's second-quarter 2015 financial results conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you and good morning, everyone. During this conference, we will 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, CEO, and Chairman, Clarence Smith, will now give us some perspective on our progress. Clarence?

Good morning. Thank you for joining us second-quarter conference call. We reported earlier this month sales for the second quarter increased 7.2% to $197.7 million compared with $175.1 million for the second quarter of 2014. Comparable store sales increased 4.8%.

Earnings per share for the second quarter and for the first half of 2015 were flat at $0.21 and $0.48, respectively. Our average ticket continued to increase up 3.3% to over $2,000.

Delivered sales for Q3 to date are up 8.9% with comp store sales up 7%; written sales are up 4.4% with comp store sales up 2.1% to date for Q3. Our deliveries were stronger than our written business as we began to bring down the high backlog caused by imported products delayed from the West Coast ports slowdown and backordered production from Asian suppliers since Chinese New Year. The month of July will be our best delivered sales month since December of 2014.

Last month, I traveled to Asia with our Executive Vice President of Merchandise, Richard Gallagher, and Matt Scout, VP of Import Services, to visit our main factories in China and Vietnam. We were joined by our dedicated Asian quality's leadership team and met with the owners and leadership of our key suppliers.

The major transition to new factories in Asia that began in midyear 2014 is more complete. And we're seeing continued improvement in our case goods flow of product and sales.

This was my first visit in five years but I felt it was important for us to visit in person the main players as we consolidate production and strengthen ties in this ever-changing supplier region. I'm confident that we have some of the strongest relationships with the top producers of furniture in Asia and that we will receive excellent service for the foreseeable future.

I returned very excited about the collections and products we've developed and expect to arrive for the fall selling season.

Custom upholsteries continue to show strong performance as we improve our product lineup and have faster delivery from our domestic upholstery suppliers. We continue to offer the latest fashion features and new easy cleaning fabrics to appeal to young mothers and millennials. We have also seen an increase in our wooden case goods sales, particularly in dining and bedroom, with improved fulfillment times on some of our best sellers and new product collections. Our accessory program is growing nicely and is a major factor in helping to complete the whole home for our H Design program and our customers.

We now have 110 in-home designers on staff in our stores and they've been a significant factor in generating new business, increasing our average sale, and satisfying our customers. We are continuing to improve the designer and decorator experience and expect that there will be a lot of opportunity in the coming months as we gain traction in more of our stores and raise the level of sales and design services offered. Our designers are actively using our enhanced 3D Room Planner in their presentations which gives our team a professionalism and experience unavailable elsewhere in our markets.

Because we've been aggressively bringing on trained designers who are primary on salary, our selling expenses have risen for the year.

Our store operations team has spent the past year focusing on hiring, training, and developing sales associates and managers. We have named the program Selling By Design: Engaging every customer, customizing every experience.

This professionally developed program has just been rolled out in a series of consolidated multi-day meetings here in Atlanta, for all of our sales and store managers to better prepare and coach our sales associates. This program was built on energized and collaborative coaching techniques and standardized for every market.

We feel that Selling By Design is an excellent complement to our H Designers and helps bring our entire selling team together on engaging and serving our customers better than any of our competitors. We have already seen a positive response to our sales training initiatives, and expect we will see improved customer engagement, higher closing rates, and average ticket in the coming months.

Much of our home office team is focused on the final stages of rolling out our new updated website. We believe that the major enhancements will make Havertys.com the most engaging and easy-to-use furniture website anywhere.

The new site will adapt to any size format with a particular focus on mobile presentations. We expect to have the rollout next month in time for the important fall selling season.

We're expanding our store portfolio and expect to increase selling square footage by about 3.2% this year, increasing our store count to 122 from 119 at the end of 2014. We're also building a consistent presentation in every market. Our five-year multiyear Bright Inspirations program is near completion, with major store innovations completing in the third quarter in Greenville, South Carolina, Lakeland, Florida, and Palm Harbor, Florida.

We are very excited about the opening of our new 40,000 square foot store in Fort Lauderdale which we expect to open in late August. It was formerly a furniture store and has been extensively remodeled.

We expect CapEx for 2015 to be in the $32 million to $33 million range for these and other projects which will be completed in 2016.

We're very encouraged about the recent trend of improved deliveries and are excited about the energy of our team and the prospects for improved performance for the rest of the year and into 2016. I would now like to turn the call back over to Dennis.

Thank you, Clarence. The earnings press release for the second quarter last night covered the financial highlights and I will expand on a few of those points now before we open up the call to your questions.

Our practice is to give updated guidance for expected gross margins and SG&A and expenses for the current year within each of our earnings releases. We don't publicize any sales forecasts but we do announce our actual sales within a few days after each quarter and disclose how sales for the new quarter to date are trending when we announce quarterly earnings like we did last night.

The second-quarter 2015 SG&A expenses were up 0.001% of sales and a little better than our overall expectations. Overhead costs driven by four additional stores opened this year versus last year's second quarter were part of the reason.

The fixed and discretionary type expenses within SG&A came in at $58.6 million for the quarter, a little lower than we had expected but $3 million higher than the prior year, mainly due to the depreciation in occupancy from expansion and partly due to additional management, administrative operations staff in the new locations.

Also worthy of mention is that we do have three stores that were relocated last year to more expensive and productive locations in existing markets. Within this fixed and discretionary type expenses, advertising spend was up about $0.6 million over the second quarter a year ago as we got our message out in two new markets, increased our awareness as we grew our store base in southeast Florida.

Mostly offsetting these less than planned expenses were higher variable costs at 18.2% sales, partly from additional sales and designer associates coming on board, commissions earned less than initial minimums in the first few months for new locations, and a slight shift in the mix of credit promotions.

We do expect these variable expenses to be lower in the second half of 2015 than in the first half as a percent of sales; and the full year is expected to be at the higher end of the 17.5% to 17.7% range in our previous guidance.

2015 full-year fixed and discretionary SG&A are still estimated to be $239 million to $241 million as we said in the press release, with each of these remaining -- of the remaining two quarters in 2015 likely to be around $62 million. We planned to have four store openings for the full year in 2015. There's one opening left to go next month and one closing of an old store in November.

The 2015 weighted average retail square footage increase is expected to be about 3.3%. The first half, it's 2.6%, and the second half, it's about 3.9% increase over the same second-half period last year.

Our inventory increased during the first half by $5.2 million or 4.9%. Compared to a year ago, we were significantly understocked at that time and not fulfilling customer demand as promptly as we desired. We want to have faster and more predictable delivery times for shoppers. Also want to be a little less susceptible to lead time fluctuation caused by availability of slots on container ships, labor issues in ports, and other events in the supply chain that are just out of our control.

Our product assortment is wider now, but we do expect to contain the inventory level the rest of the year, even as sales increase seasonally over the next six months. We also will be increasing closeout activity to have the most room in our distribution centers for our bestsellers.

The weighted average diluted common stock for the second quarter of 2015 is 22,955,000.

Operator, I think at this time we will go ahead and open up for questions.

(Operator Instructions) Brad Thomas.

First, with respect to sales, any color that you all could provide in terms of geographically how things have played out would be very helpful.

We have been impacted somewhat in Texas but we've had really nice balance throughout the region and we think that will continue. We are pleased to see the balance and I think that some of the region that has been hit, out in Dallas and Texas, will start to come back.

But I think it's been a very good balance frankly. We have seen growth and continue to see growth in Florida as we've talked about, but we've also seen the other regions do well.

And besides some of the competitive challenges in the Dallas area, is there anything else that you're seeing in the more oil-related regions of the country?

Well, yes; that's affected the Western -- Far West in Texas where we are somewhat for sure. But Texas is a strong state and I think it's going to handle that downturn pretty well.

Great. And then just turning to gross margin, it's been trending down a little bit and we will start to lap some closeout activity that you had at the end of last year. Clarence, as you think about the gross margin over the next couple of years, do you think there's an opportunity to get it moving back up in an upward direction?

Yes, I do. Dennis has mentioned about we've had some closeout activity and I do see particularly as we are bringing in our improved case goods program, which we've designed and had designed for us by professionals, we are very excited about a number of the collections coming. That's where we can gain margin because of its exclusivity and the fact that we are sourcing it and bringing it in direct. And as that part improves and grows, I think there is where we have the most margin opportunity.

We also have significant margin opportunities in special order as you would guess and we are doing more of that. So yes, I think beyond what Dennis has given you here, I think there are some opportunities for margin to increase.

Great. And on the new collections within case goods, have those started to hit the P&L yet or when would they start to flow through the P&L in terms of booked sales?

They have started now. More of it coming in the fall, it's actually helped us in our overall margin already. So it's coming now, product that has come in since Chinese New Year and then we have a number of collections coming in in the next several months.

Brad, all of that is included in the guidance for the year, but next year -- Clarence mentions -- and beyond, there is some upside possibility.

Great, great. And then just one last question about ownership of land and other property, it's a topic that's been coming up in the industry from an investor standpoint, could you maybe just talk about the importance to you all of owning property rather than leasing it?

Let me give you a perspective and then I'll let Dennis jump in, too. I think owning the property gives us the most flexibility to do what we need to in the market and we own almost 35% to 40% of our stores, somewhere in that range. And I would not want to tie us up to sell those at the top of the market and then have to pay those kind of rents back. That's a burden that I don't think our industry can handle.

We have been through a downturn as you know several years ago, came out of it. We were able to pick up some leases, which I think was positive for us. But the fact that you own the properties does give you the most flexibility to do what you need to do. Dennis, your -- ?

I will add to that -- agree with that completely. First thing you do when you sell, if you do sale-leasebacks, is whatever gain there is over book value, you pay income tax on. And so you dilute the amount that you get out. Of course, the cash then is less than that marked-up value.

We have a little under $100 million of owned properties net book value. It's not of the size that is something that a separate entity could stand alone and be sufficiently, I guess just in a efficient way, to be standalone entity that would sustain itself.

We've done sale-leaseback packages in the past and we found them very restrictive and -- whereas if you own a building with some appreciated value, but you've got a better location that you want to go to, you can move it at your exact timetable. And you don't have to batch up or replace properties or get into the four-wall return on some group of stores that you're trying to convince some lender or owner about the swapability of it.

Also then, we've had properties that are in sale-leaseback packages and they are on their -- some we've had for 10, 15 years, and they are on their fourth owner. And every time you go through that, the new owner who pays more for the buildings want to go through their own due diligence and we owe that to them. We put something out on the sale-leaseback market, and so we have to respond to that.

It's a lot of -- it's time-consuming and it's really just better from a flexibility standpoint to own the real estate.

When we look at new opportunities, almost always look at leasing. But we have the cash to sustain ourselves and if we need to, to buy a property and develop it ourselves. So we think we've got the best set-up and plan to continue on that basis.

Very helpful. Thank you so much, guys.

Budd Bugatch.

Good morning, Clarence and Dennis. This is David on for Budd. How are you?

Good morning, David.

So first, a question on sales. You mentioned that the higher written comps were coming from -- as you work through backlog. Can you give us an idea of about how far you are working through that backlog and when you see getting down to more normalized levels?

Well, that was actually the higher delivered.

Yes, the delivered, sorry.

The delivered, yes. It's balanced now; our backlog is still higher than last year but it's down significantly from what it was last quarter because we've been getting in those shipments and fulfilling those deliveries. So I think it's basically more normalized now. I think the written and delivery going out is going to be more consistent for the next several quarters.

Got it, okay, that's helpful. And then on the variable SG&A, it sounds like a lot of that was hiring in advance of some of the new store openings.

Dennis, can you comment on the cadence of that number going forward in Qs 3 and 4? Will we see it decline as some of those new stores start to ramp up in production?

Yes, I believe we will. In the neighborhood, I would say, of 17.5%, something like that for the next few quarters. Maybe a little lower.

Okay, all right, perfect. That's about the number I was getting too.

And then outside of the strong growth in upholstery, can you comment on some of the year-over-year growth you saw in the quarter and third quarter to date in case goods and mattresses and any other categories that stick out?

Well, the dining has been good for us. We have a program that we've developed and continue to develop particularly in the casual area, that's been a driver.

I mentioned that accessories was very good and it continues to grow and I think will be a larger a factor in our overall sales as our H Design program builds.

Bedding has stayed pretty steady. It's in the double-digit -- low double-digit range as a percentage of sales, as it has been and that's been pretty steady.

So overall a good balance. But growth in cases for the first time in a while so that's good to see and bedroom is good.

Okay, great, thanks a lot and good luck.

Kristine Koerber.

First, can you talk about what you are seeing in the competitive arena? Has it become less promotional at this point or are you still seeing pretty aggressive discounting?

Well, that depends on the particular retail. I think it's pretty steady, Kristine. I haven't seen any significant change in the promotions. Other than the big competitor we keep mentioning in Dallas, I think it's pretty steady; I don't see any real significant change.

Okay. And then, I know it's still early with the launch of the outdoor furniture in Florida. But can you comment on how that's doing and then also trends around the Memorial Day holiday?

Well, the outdoor program is now in. It was delayed as we had the problems with the West Coast ports slowdown and that impacted the start of that. It's a program we're going to stay with and continue to grow and build.

It's primarily in Florida and then we roll it up to some of the coastal stores in East. And it's had good reception. Our teams are very excited about it.

I don't really have a good enough track record to say how well it's doing compared to what we expected, because the delivery times were impacted for us on that. So that's a program we will continue to work on and build. We are starting primarily in Florida.

And Kristine, the other part of your question, I'm sorry --

Trends throughout the quarter, in particular Memorial Day, what you saw during that holiday?

Well, Memorial Day was very strong for us.

Yes. We have been up more during heavy advertised promotion periods. And July 4th was the same thing. We had real strong results; and so it's when people are shopping the most and when we are doing our most advertising that we've had the biggest percent increases over the last year.

I think that's pretty consistent with the industry and I don't see that really changing. Some of that's self-fulfilled expectations because all of us tend to put most of our guns around those promotional holiday periods, but I also think that the customers are out and think about it at those times. It's a natural part of the selling program in big-ticket. So I don't really see that changing much.

Okay, great, that's helpful. And just lastly, can you remind me how long it takes for the designers to ramp up in these new stores?

Well, it really depends on the experience of the designer. Some of that is also part of getting the local organization to embrace the design program and understand how it helps them.

So, as you move into these smaller markets -- the secondary markets, it would probably take three or four months for people to embrace it, feel comfortable with it, and then you have to let the local customer know that you offer that service. So, it varies.

I would say that we are now more mature in our better markets, we are known for it, we've got a team that's experienced in it, and that decorator who might have been working for an independent firm before has to learn how to adjust to our system and the fact that we can complete sales quicker and that they are more involved in helping to close the transaction. So it varies. It certainly would take several months for it to kick in.

Okay, great, thank you.

(Operator Instructions) And it appears we have no further questions at this time.

I want to thank you all for joining us on our call and for your interest in Haverty's.

This does conclude your teleconference for today. Thank you for your participation. You may disconnect at any time.