Haverty Furniture Companies Inc (HVT) 2016 Q3 法說會逐字稿

Good day, and welcome to the Havertys third-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 Chief Financial Officer. Please go ahead, sir.

Thank you and good morning everybody. During this 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 and CEO and Chairman, Clarence Smith, will now give you an update on our results and our progress. Clarence?

Good morning. Thanks for joining our call. Third-quarter earnings were flat with last year, with a slightly positive sales increase. Our net sales were up 0.8%, with comparable stores up 1.2% and written comparable store sales up 3%. Earnings per share for the quarter were $0.34, equal to last year.

As other retailers have reported, sales increases have been challenging the summer and fall. We did see good balance in our sales performance, with positive sales across most of our product categories. The increases were led by accessories, occasional furniture, and casual dining.

As we've been saying for several years, our average ticket was the most important driver of sales, with a 3.2% increase for the quarter. We saw lower traffic in our stores, which was offset by an equally improved closing rate.

For the fourth quarter, we were impacted by Hurricane Matthew, which threatened all of our stores up the East Coast of Florida, as well as Georgia, South Carolina, and some North Carolina stores. We had 23 of our stores close for one or more days over the important Columbus Day holiday weekend, but we were fortunate that none of our stores suffered significant physical damage.

We have struggled to gain back lost sales in several of those areas, but we are gaining ground in new written business and delivering out a larger backlog of sales. We expect to make up a lot of that business in the first few weeks of November.

We are pleased with the stores in new markets that we opened recently. Charlottesville, Virginia, and College Station, Texas, are both beautiful stores, featuring all the newest store presentation and designs that we've refined over the past few years. These feature a visually open-store arrangement, a more contemporary approach to flooring, and a combination of carpet and hard floor surfaces and cleaner, brighter LED lighting.

Regional college towns have historically been very strong and profitable markets for us, and we are very excited about the opportunities in these new markets. We are in the process of several major remodeling and relocation programs in key cities, which we'll complete in the first half of next year. These include a relocation in Columbia, South Carolina, and major store remodeling projects in Tuscaloosa, Alabama, and Amarillo, Texas. We will enter a new market in Greensboro, North Carolina, with a new store, complementing our relocated store in Winston-Salem.

Our new Lubbock, Texas, store will also open, replacing the temporary location we have operated in since the original store was destroyed in late 2015. Later in 2017, we expect to add a store in a key market area in Atlanta. We will begin a major expansion of our Western distribution center in Coppell, Texas, just outside of Dallas, which we'll complete in the first half of 2018.

Our store strategy is focused on strengthening our position in our regions, with beautiful stores located in key markets within reach of our major distribution centers. Our overall strategy is to increase our sales back over $200 per square foot that we had before the Great Recession, and we are closing in on that number.

We constantly evaluate and review our ability to reach and serve our customers by having the right physical store presence along with the right mix of marketing to best serve our changing customers' taste and shopping desires. Our Internet sales continue to grow by over 50% and is now producing at the rate of our top store in the Company.

We still are selling less than 2% online, but it's clearly used by our customers. We have an excellent website, which is easy to shop and transparent to our inventory and delivery information. Well over 80% of our customers use havertys.com during the selling process.

We've recently returned from the High Point furniture market, which is important not only for reviewing new products and styles, but also for working through strategy with our important partners. Highest priorities include quicker deliveries on special order upholstery and higher quality standards and improved packaging for our import as well as domestic suppliers.

We are investing a great deal in our own quality control organization, both in the US and on the ground in Asia. Our QC teams work in both our direct suppliers' factories and in our sourcing partners' factories. With the heightened collaboration with our factories, we recognize the importance of having Havertys dedicated personnel on the ground, assuring the quality we expect for our customers.

We're excited about the innovation conversions that we are seeing with new technology and comfort in the market, especially in motion upholstery. These feature Triple Power with adjustable recline, head, and lumbar functions with Bluetooth enhancements -- very similar to what we are seeing in high-end auto seat function. We believe that these new innovations will add real excitement to today's home.

The fashion end of the business features glitz and glam on one end and rustic reclaimed close-to-the-wood finishes on the other end. Both categories are exciting and important. It's a very interesting time for our merchandising team and for our stores.

We are working very closely with our suppliers, with a heightened awareness to make operations and supply chain more efficient. We've established a vendor management program, which gives us more visibility into production and specific, detailed information on the status of all of our goods on order and in production.

We're standardizing processes with all of our vendors and consolidating freight handling procedures. We've already seen some real positive impact on our increased two-way visibility for Havertys and our partners, with less overstock and quicker response to adjusting best-seller orders.

The summer and early fall have been challenging, with an uneven economy, ocean freight problems, hurricane threats, along with the distraction of the national elections. However, we are well prepared for a stronger finish to the year. We're excited about the beautiful product and excellent values that we've already brought on our floors for the important holiday selling season ahead. We believe that our stores are in an excellent position to best engage the fashion-oriented customer in our markets and to gain share by providing the best value and service in the coming weeks and months ahead.

I'll now turn it back over to Dennis.

Thank you. I will recap and expand on some of the financial highlights we mentioned in last night's earnings press release, and after that we'll take your questions.

First, on the third-quarter results versus last year, gross profit margins increased 50 basis points to 53.7%. There was a $0.7 million decrease in LIFO reserve in 2016 versus a $0.2 million increase in 2015's third-quarter. That's a positive change of $0.9 million or 41 basis points of margin. This resulted from modestly lower costs versus a year ago the items making up our ending inventory, partly from inbound shipping cost fluctuations.

Other income for the quarter includes $2.5 million in gains from the insurance recovery related to the destruction of our Lubbock, Texas, location that happened at the end of 2015. Looking at the nine months' results, our gross margins were 53.6% versus 53.4% last year. The LIFO year-over-year positive change, again, was $0.9 million, which is 15 basis points and accounted for most of the improvement.

Looking at nine-month SG&A costs, the SG&A dollars were up $11 million. That was partly driven by $2.9 million higher health benefit costs and also due to a full nine months of cost for the four new stores added during 2015, and also the third-quarter costs of two stores opening this year. Also, we expanded our Florida distribution center in midyear.

The total depreciation expense is up for the nine months $2.5 million over last year and is spread across the various SG&A subcategories outlined in the earnings release. Other income includes the $2.5 million gain from the insurance recovery for inventory, building reconstruction, and business interruption claims from the loss of our Lubbock, Texas, store location.

We expect approximately $0.8 million of additional gains will be recognized from this recovery in the fourth quarter, with the final amounts being settled and recorded during 2017. Construction of our new replacement store on the same site should be completed in time for an opening late in the first quarter of 2017. For the nine months, the operating loss on the Lubbock store versus a profit in 2015 is a negative impact of about $1.2 million.

Looking at more recent comments and expectations, for the 30 days in the fourth quarter to date, excluding those 23 locations closed a day or more during Hurricane Matthew, comparable delivered sales increased 1.3%, and written comparable sales were up 3.3% over the same day of the week period last year. For all of our locations combined, undelivered written sales are approximately $3.5 million higher at the end of October this year than a year ago. This should give us a modest tailwind for delivered sales in November and December.

We expect that gross profit margins for the full-year 2016 will be approximately 53.7%. That's an increase from the 53.5% prior guidance we've given, due to the positive LIFO reserve adjustments in the third quarter and anticipated for the fourth quarter. We don't expect the positive LIFO reserve adjustment to reoccur in 2017, since slight inflation has been more the norm over the years.

Our estimate for fixed and discretionary type SG&A expenses for 2016 are now $251 million, a $1 million reduction from our previous estimate and compared to the $240.9 million for those same fixed and discretionary costs in 2015. The variable-type costs within SG&A for the full year of 2016 are now expected to be 18% of sales compared to 17.9% in 2015. Within this large variable category, sales compensation has been running somewhat higher with more designers on staff, but should be leveling off as a percent of sales.

Also, in the last few years our extensive home delivery functions have dealt with tighter labor scheduling and other regulations, as well as daytime traffic congestion creeping higher in the bigger cities we serve.

Operator, I'll entertain, along with Mr. Smith, questions at this time.

(Operator Instructions) Brad Thomas, KeyBanc Capital.

I wanted to first ask about the consumer environment, and if you could just offer a little bit more color in terms of what you think you're seeing from your customers? It's been a pretty tough time across the furniture furnishings landscape, more broadly, and it feels like your results are holding up pretty well, particularly if you make the adjustment for Hurricane Matthew.

Well, I would agree with that. It is a fuzzy time. People aren't sure about what's going to happen with the election. We do think that's some of it.

It also is difficult to advertise in a number of our markets because of the political advertising, particularly on TV. So in many cases we have had to back off until after that's over.

So I think the unknown is a real issue. Obviously, we went into detail about how the storm affected us in the beginning of this month -- or beginning of October. I just think it's a time when people are unsure about where they are. Housing is still pretty good in our markets. We like the mix there, and we're pretty positive about how it's going to come out late this year. So I think the unknown is the main issue.

And to your point on advertising, how much do you think -- could you quantify, or do you know, how much maybe your impressions are down in September and October? And will you end up spending more, then, in November and December, once we are past the election?

I think, actually, for the quarter you've seen the advertising percentage there; it's about the same. Really, we're backing off or have backed off in October to come back heavier in November. So I'd say for the overall quarter, it's going to be about the same. But the mix has moved heavier into November.

And so -- it just makes sense with what's happening with the political situation. I don't have the stats on the impressions, but where you put the dollars is where you're going to get the impressions.

Great. And then it may be a little bit early, but as we look out to 2017, maybe could one of you give us some thoughts on where you think maybe CapEx and store growth and some of those higher-level data points might come in?

I mentioned the detail on which stores [were going to be opened]. And the CapEx for this year is about $34 million, $32 million. And it will be down, I would say, in the mid-20s -- at $24 million, $25 million. And a big portion of that will be the start on the expansion of the Dallas facility -- the distribution center out there.

So it's going to be down, and then after that would probably continue to be down in those kind of numbers, or even less. We have spent well over $100 million in the last five or six years on redoing our stores and repositioning our stores, and we are focusing now on getting the production out of them.

Great, thanks so much, and good luck to you.

(Operator Instructions) Budd Bugatch, Raymond James.

Dennis, you went through some nice detail on gross margin and talked about the fact that -- I guess LIFO was responsible for almost all of the change year-over-year in the gross margin. Did I get that right?

Yes, you're right.

So does that talk about the competitive environment? Or was it just coincidence that it's about flat year-over-year, and there's not a whole lot of increased promotional cadence? Is that the way to read that, or am I just trying to be too fine -- make too fine a point?

There are several positive factors and several challenges. I look at it as a little more promotional and competitive, just because of the increased online advertising that everyone is doing and the promotional offers around the holiday periods.

The people in the industry really don't necessarily agree with that. They say it's always extremely competitive. But we've had -- we've been able to hold our prices fairly well, and we do promotion, certainly during the holidays. And that is -- tends to be when we get more of the business.

So I think we have held our margins pretty steady. And then you're right; the LIFO increase was the benefactor for this quarter.

Budd, one of the ways I think we've been able to hold our margins is we're doing a bigger percentage of special order, and that's not quite as price-sensitive as the promotional goods. So it's a larger mix of our product as we get into the homes. And we're doing more in our H Design program, and that's helped us maintain those margins, also.

Realizing that you may not want to be too forthcoming for competitive reasons, can you give us some flavor on where the penetration of H Design is and special order?

Well, we really began this program about three years ago, and we started it in Florida, which makes sense. And we had success there and then have spread it out to the whole Company now.

I will say that we are doing a lot of special order and custom in Florida. It fits that customer base a little bit more, but we are stronger in the bigger cities now. We've developed our design teams in every market. We have basically at least one designer per store.

It's strongest in the major markets -- in Atlanta, in DC, and now in Dallas. So the bigger markets we do the best. And anytime we can get in a customer's home, our average ticket is over twice the store average.

And it's just something where we are providing a service that I think these customers wanted, and we didn't provide it in the past. And we've worked very closely with our special order upholstery providers to speed up delivery, to be more focused on custom, to give us better services. And I think we are gaining some share in that area.

Okay. Two of your geographies have been obviously in the news a bunch over last year or two, Texas and Southern Florida, for different reasons. Can you give us some flavor of what's happening in Texas? You've had some competitive intrusion there, and the oil patch has not been a pleasant experience over the last 18 months. So what are you seeing?

Yes, we're pretty well positioned in Texas. It's a very important state for us. West Texas and the oil patch is still an issue and is a drag on all of the stores out of that state.

We are recovering -- I'll just put it that way -- from the competitive issue that hit us in Dallas. We are now comping positive, which is great, and I think we are gaining back some of our share there. But Dallas is a great market. And the other stores south of Dallas -- Austin, San Antonio -- are good markets. Where you hurt the worst is any place is in the Permian shale or in the oil basin there. It is still a drag on us out there.

And Southern Florida -- you had a lot of immigration or [moving to Angeline].

I don't think that impacted us as much as the very high-end people. There were a lot of South Americans that were coming in and buying up real estate, buying up condos, and just investing in real estate in Florida. We got some of that business, and yes, that has weakened significantly. But I don't think it impacted us quite as much as the very high-end design houses.

Okay. And my last area is more of philosophy or philosophical -- you've opened up some new stores. Can you talk a little bit about what you're learning from them? Is it changing any of your thoughts about size of store and layout of store? You talked a little bit about the openness of some of the stores.

My history tells me that those things come and go in terms of almost kind of a Hawthorne effect. But maybe -- I'd love to hear what your thoughts are on that.

Budd, you saw what we did here in Buckhead. That was a real step out for us. It's a smaller format than we usually do, and it's in the 20 range -- 20,000 square foot. Our average stores are around 30,000 to 35,000 right now. And we are very comfortable with that. We have used a lot of the elements that we've developed over these years.

And I mentioned them: more interesting floor -- hard surface floor coverings, a more open -- LED lighting. It's brighter. It's much more open. It's more visible -- you can see the whole store when you come in. It's not as boxed in.

All of that we are using. And we've used that in these new stores and as we've upgraded. So we've learned that that's helped us appeal to a more contemporary customer, and I think it's also helped us grow this design business.

I would think the LED is a real positive factor for occupancy in terms of having to heat and air-condition less, and probably change your energy usage.

It's been a big deal over the last several years. Interesting that I didn't know is when you spec for new LED lighting, you can also spec for less air-conditioning, because the heat is not there.

Oh, yes.

So it has allowed us to reduce our energy consumption and lower our energy costs, even when the rates are going up. So it's been very important.

We began this about five years ago. We've rolled it out most everywhere. The payback is within a year -- a year and a half to two years. So it's well worth it.

Okay. Thank you, Clarence. Best of luck on the fourth quarter. I hope we all recover from the election sometime soon.

(Operator Instructions)

Operator, it sounds like we don't have any other calls.

Correct.

Okay, well, I'd like to thank you all for joining us on the call and for your interest in Havertys.

And that does conclude today's program. We would like to thank you for your participation. Have a wonderful day, and you may disconnect at any time.