Haverty Furniture Companies Inc (HVT) 2016 Q1 法說會逐字稿

Good day and welcome to Haverty's first-quarter 2016 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 CFO. Please go ahead, sir

Thank you, George. Good morning, everybody. During this first-quarter conference call, 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, CEO, and Chairman Clarence Smith will now give you an update on our results and our direction. Clarence?

Thanks for joining our 2016 first-quarter conference call. As we previously reported, net sales increased 1.7% to $194.5 million with comparable store sales up 0.9%. Our written sales were down 1.3% and written comparable sales down 2.2%.

Our net earnings were $4.67 million compared to $6.1 million last year or $0.21 per share versus $0.27. SG&A dollars for the first quarter increased $4.1 million compared to the same period last year. These were related to additional advertising, particularly in digital and direct mail, and selling expenses related to our H Design program and increased occupancy and depreciation related to our upgrades and new stores over the past 20-plus months.

We are pleased with the recent sales increase so far in the second quarter, with April comparable delivery sales up 4.5% and written sales up 4.1% after adjusting for the Easter holiday. We feel that many of the investments we've made in our H Design program, our store upgrades, and higher-quality merchandise aligned with our target marketing is getting traction.

For the second quarter to date, we've seen a higher closing rate on flat traffic. We are very encouraged by the recent performance and hope the trends continue in the months ahead.

We are investing approximately $33 million this year in CapEx, with almost half related to IT systems and hardware upgrades and a major expansion of our Lakeland, Florida, distribution center opening this summer. The distribution center expansion will allow us to import more product directly to Florida, bypassing our North Georgia distribution center, which has been the main storage facility for that state. This will help us reduce incoming freight costs, especially from Asia, and allow us to serve our 25 stores in the growing Florida markets with specific coastal style merchandise much faster.

We are excited about the major improvements in our operations, with particular focus on the state-of-the-art warehouse and delivery scanners, a new supply chain import support system, and the rollout of the Company to the Company of a new cloud-based collaborative system.

We made major improvements in our website presentation and the ease-of-use across mobile devices. Mobile is now 65% of our web activity and growing. With the new website, we are seeing our customers utilize haverty's.com a great deal more. This year's Internet sales increased almost 50% and are now running at 1.6% of our total sales.

We have an easy-to-use site, which features a transparent process which our customers are using for research, information, inspiration, and ordering. We want to allow her to interact with us in any manner she wants. We believe that almost all of our customers research our website before, during, and after visiting our stores.

Gross profit was 53.7%, flat compared to last year's Q1 and slightly better than our plan. Our margins were negatively impacted by discontinued products, which we are moving through our system. This may have some continued impact for several quarters.

We are having recent improvement in the reduction of these categories as our team is focused on improving the product quality and handling through the product lifecycle back to the actual root cause. We've done a deep dive into the area and expect to see further improvement in the months ahead.

We're continuing to see growth in upholstery, driven by increases in special order, which is influenced by our designers. We are seeing a nice increase in our dining program with the addition of new, more casual designs that are hitting our showroom floors.

Our H Design program is maturing and increasing the impact in our stores. We're most recently doing 20% of our sales in the design program, which is providing an important service to our customers and continuing to separate us from the commercial players.

Approximately 60% of these sales are from designer visits to the customer home, something we were not doing in the past. These designers are a catalyst in helping us make accessories our fastest-growing category. Accessories are 11% of sales for the H Designers compared to 4.4% overall. We have a goal to hit a run rate of 25% of our sales in the H Design program by the end of 2016.

Our supply chain team is doing a better job of bringing in merchandise and having best sellers in stock, which allows us to more quickly serve our customers and have a smaller backlog. Our out-of-stock position is 1/5 that of the same time last year, while warehouse inventories are lower than last year at the end of April.

We have just installed Phase 1 of the GT Nexus platform and have all of our direct import factories in the program. This allows us to have much better visibility of our orders with the ultimate goal later this year of having full visibility all the way to the factory floor.

I believe we have the best supply chain organization in the industry, which along with our state-of-the-art distribution team will continue to help us serve our customers faster and more efficiently than our competition. We are encouraged by the recent second-quarter sales results and we expect to build on the strength of the Haverty's brand in the heart of many of the best markets in the country.

I will now turn it back over to Dennis.

Thank you, Clarence. We covered our financial highlights in last night's earnings press release. I'll touch on a few of those points now before we open up the call to your questions.

We customarily give guidance for expected gross margin and SG&A 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 end and then disclose how sales for the new quarter to date are trending when we announce our quarterly earnings.

Our total SG&A expenses for the first quarter of 2016 increased $4.1 million compared to the prior year. Selling costs increased $800,000 in 2016 over last year due mainly to greater sales commissions and salaries. Occupancy expenses rose $800,000, primarily due to increases in depreciation and other costs associated with the three new stores versus last year. Advertising and market expenses, as Clarence mentioned, were up $1.2 million.

Our admin costs are $600,000 higher than a year ago, primarily from higher insurance -- health insurance expenses and inflation. And there was some partial offset by a lower nonequity incentive comp. More employees have group medical coverage this year and the newer prescription drugs are more expensive. The Company does have stoploss insurance coverage on our self-funded health plans, both on an individual claimant basis and on an aggregate basis.

Fixed and discretionary expenses for Q1 were $61.1 million compared to $57.9 million in first quarter of 2015. The increases the rest of the year will be the largest in the second quarter and should be smaller increases in the third and fourth quarter.

And the guidance for the year is remaining the same, as previously announced in February. And that is the $251 million for the year of these fixed and discretionary type expenses. And that's versus $240.9 million for the same categories in 2015 for the full year.

Q2 sales are normally a little lower than Q1. So profitability will be impacted by the higher fixed and discretionary costs until we reach the usual higher sales volumes seasonally in the third and fourth quarter. The variable type costs within SG&A for the first quarter of 2016 were 18.1% of sales compared to 18.0% in 2015 and for the full year are anticipated to be about 17.9%.

We are having three stores that were opened this year. One is already open. It's a temporary replacement store in Lubbock, Texas. And then in the third quarter, we'll be opening in new markets: one in College Station, Texas, one in Charlottesville, Virginia. And there will be one closure in the third quarter that's to be announced.

These changes combined with other activities should increase net selling square footage in 2016 by approximately 1.4%. Capital expenditures for the year are estimated to be a little over $33 million, depending on the timing of spending on new projects.

I wanted to mention the weighted average square footage changes by quarter. And for the first quarter, weighted average square footage of selling space increased 1.1%. In the second quarter, it's expected to increase 0.5%. The third quarter year over year will be flat, and selling square footage in the fourth quarter finally will be up 0.7% year over year. For the full year, that will be about a 0.6% increase in the weighted average square footage.

The reason I like to point this out is that it is somewhat of a proxy for the difference between total sales increases and comp store sales increases. So as you can understand, the rest of the year comp store sales increases will be closer to the total sales percent increases for the year.

Our cash flows for the first quarter used in operating activities were $4.8 million compared to cash flows provided by operating activities in the first quarter last year of $13.6 million. The decrease was primarily due to larger increase in inventories and decreases in accounts payable and accrued liabilities. The decrease in accrued liabilities of $11.5 million is due to typical payments made in the first quarter of this year for year-end accruals such as incentive pay and also due to the timing of income tax payments and estimated tax payments.

I wanted to call out that our Lubbock store was severely damaged by a blizzard at the end of December of last year. It is a better location than average for Haverty's. The negative impact from not having the store open and some continuing expenses was about $500,000 swing from last year to this year. In the first quarter, that is.

As I mentioned, we opened a temporary store in April, so we are hoping to offset some of that negative going forward, and we hope to have the replacement store open in December of this year. We have very good insurance coverage at replacement value and we also have business (technical difficulty)

One moment, ladies and gentlemen. Please go ahead.

Sorry about that. We had some technical difficulties. Let me start back again commenting on our Lubbock store. I apologize if I'm repeating myself, but the Lubbock store was damaged in a blizzard at the end of 2015. It was a better-than-average location for Haverty's. And the first-quarter impact versus the prior year on our profitability was about $500,000 profitable last year and was not profitable this year.

We said the temporary store opened in April. There is very good insurance coverage we have at replacement value, and our business interruption coverage is also included for that site.

Over the next four quarters, the other income gain is likely to be somewhere above $3.5 million, partially in second quarter and fourth quarter and then probably finishing up in early 2017. Rebuilding the new store on the same site will cost about $3.8 million in capital expenditures and that is included in our 2016 CapEx projection.

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

(Operator Instructions) Budd Bugatch, Raymond James.

I guess, Dennis, thank you for all of the color on the cost side of the equation and some on the interruptions in sales. I'm curious, though, to get a feel for how to think about sales and revenues going forward.

You've had to compare against some pretty substantial issues, including Texas, a couple of issues in Texas, and building some new stores that probably weren't at maturity when they started. Can you give us a feel as to how sales might progress from here? It seems like you -- well, I'll let you talk as opposed to mine.

Well, I think, Budd, we feel pretty good about things after what we've seen the start of this quarter. You know, Texas has been a drag on us with the oil issue as well as the competitor issue in Dallas.

I was telling Dennis earlier I think your predictions that you made with us a year and a half, two years ago are pretty true. We were down double digit in Dallas when the new competitor came in, but we are now positive. So we're now anniversarying that. I Think that Texas -- or Dallas, specifically -- is going to be a positive for us for the rest of the year and going forward.

Texas with the oil issue is another factor. I mean, that is definitely a drag, but it isn't going to be the drag that it was the last six to nine months, in my mind, because I think it will start to level off. But that was the main issue last year, as you know, it was Texas. That was the real headwind that we had to take on. And I think that's more behind us. We feel better about it.

And I've mentioned that we've got a number of things that we feel pretty good about: investments that we've made that haven't yet started to pay off, particularly South Florida. We are very pleased with our new position down there and it's just now starting to make sense for us as far as profitability. So we feel better about things right now.

That's what I was going to get to. The second question was on those new stores. They are coming along. Where are they on the maturity curve? When do they reach profitability? Have they all reached profitability yet?

No. We did a lot of investment, not only in new stores, but a significant investment in rebuilding and remodeling existing stores where we would spend up to $3 million to $3.5 million redoing some of those.

Those remodels, relocations, have been very good for us. Most of them are profitable immediately and kicking in immediately, like we rebuilt our Lakeland store. That's immediately accretive. So is our Greenville store and the Winston-Salem, the relocation there, has been immediately good.

The position down in South Florida, those were three relocation -- we took over a major player down there, as you know, and remodeled those. We are still gaining traction there; we are not yet where we want to be. But I think by the middle -- the end of this year, we'll be positioned where we are making the money we expected at this period of time. And we feel good about that.

Some of our other stores in Florida have been good that we opened. The Kissimmee store in Orlando was a really good store for us. The Texas store that we -- the Texas stores we opened have not done quite what we wanted, but I think, as we've talked, I think they will start to come back.

It usually takes two to three years for these to reach some kind of maturity. Some stores do faster than that. But it usually takes that kind of time.

Okay. Couple of other questions. Can you talk a little bit about the character of sales? What's selling? What's not? We've seen -- you did callout dining room and special order upholstery. I didn't hear anything about mattresses or bedding and maybe bedroom and other parts of that. And are you seeing anything like [them in juries]?

About mattresses -- we are in the middle, as most of the industry is, of carrying these name brands in the middle of a major bedding swapout which took place in March and April. We now have that -- those positions on our floor. Almost all of the vendors changed their lineup and it was a very disruptive for the stores.

And in the first quarter, we were down in bedding in mattress sales. There was no particular trends amongst the individual vendors. I'll say that the second quarter to date, we are up double digit. We feel good about it; we like the program. We like the lineup. Innerspring is strong this particular time. A little different than what we've seen the past, but innerspring is doing very well for us.

So we still good about our lineup. We've made some significant changes; a lot of them because the vendors made us do that. But we also have a new product mix and we are happy with it.

Okay. And final for me: the Lakeland DC rebuild to improve freight. Any thought as to what that might do to the overall gross margin? Is there any way to characterize what that could be in basis points? Or how do we think about that, Clarence?

I don't think we know yet.

No, we are going to have higher operating expenses, and we believe the savings in freight will be more than enough to start generating a payback. But the exact numbers -- not able to share right now.

Well, and also, it comes in two different categories. One's in --

Yes, one is in gross profit and the operating expenses. That's part of our increase in operating expenses this year.

We think it's an important to move, as I commented on, for serving in our Florida customer and our growth down there. And it just doesn't make a lot of sense as much as we are importing today to bring everything through Braselton to Lakeland. Now we can bring it directly to Lakeland and serve the customer quicker.

I'm going to sneak one other. You talked about South Florida. We've heard others talk about South Florida being impacted by currency issues for South America. And that customer who may find it less attractive to make as many trips up to South Florida as they have been over the last three or four years. Are you seeing any of that impact? Or can you see that --?

We don't ship much to South America. However, I will say that there were and have been a lot of South Americans who come to, let's just say specifically, not South Florida, but Orlando. They like Orlando. They like Central Florida. And buy a condo and want to furnish it, and that has softened significantly.

So I would say that the devaluations and the currency issues has affected some of our clientele. We are not major exporters. But certainly I think it's affected that clientele who is the better customer.

Okay. Thank you very much. Good luck on the second quarter and the balance of the year.

Brad Thomas, KeyBanc.

Just to follow-up on some of the other earlier questions from Budd. Just as we think about the most recent April results here, how much of the improvement is coming from Texas and lapping some easier comparisons in Dallas versus what you're seeing across the balance of the chain?

Well, in order to get the increases we've been seeing, it's pretty balanced. Certainly, when we have a negative in Texas -- let's just specifically say Dallas, and now it's a positive -- that's a nice improvement. It was just such a drag that it's now a positive and that's major -- I don't know about the factor there, Dennis. Do you want to comment on that? About how much that impacted?

Well, it's a gradual. As you know, they soft opened in March and then a grand opening two months later. So we are kind of comparing against the soft opening right now. But the -- in May, it will -- well, starting this month, May, we'll gauge whether or not we can get back and gain some back from the market. But it's to be seen. I mean, it's a competitive environment and we'll see how we do.

Got you. And maybe can you talk a little bit about your level of promotional activity? And maybe what's working and what's not and your likelihood to get more promotional or less promotional going forward?

I don't see us changing any significantly from what we've done in the past, Brad. We are not going to be known as a discounter. We are talking about our brand. We are more specific in our pricing of what we put out there. Not only in print but on television. We are letting people know about our values a little bit more.

But I don't think you are going to see that we would be more promotional. Our advertising mix is a little different. We are doing more digital advertising now; more direct mail. We are still a major television advertiser, but I don't see us changing significantly from the last couple of years.

Great. And then just on the topic of backlogs and out-of-stocks, it sounds like you've made real progress in delivering merchandise faster to the customer. Where does the backlog standard today? And how are you thinking about how the delivered comps or sales end up tracking relative to your written sales over the next couple of quarters?

The backlog is roughly $3 million lower than it was a year ago. And we are able to deliver faster. I hope that continues. We intend for it to. We've got an inventory that's in good stock and the best sellers and we are responding faster. And also, we're moving special orders through.

So you'd like to keep your backlog as small as you can and push through, but we have had better delivered sales the last five, six months, seven months than we have written. And finally in April, that looks like a percentage increase in written is a little better than delivery.

So it's -- if we were only relying on the backlog, we'd be going into the next couple of months a little weaker. But if we are able to continue to turn it and get the orders out, it won't be an issue. And in fact, it will be a positive for service and sales growth.

Very helpful. Good luck keeping up the strong momentum here through the second quarter.

(Operator Instructions) I'm showing no further questions. I'll turn the call back for any closing remarks.

Thank you so much for joining us on our call. We appreciate your support of Haverty's.

Ladies and gentlemen, thank you for your participation. You may now disconnect.