Haverty Furniture Companies, Inc. (HVT) Q3 2017 Earnings Report, Transcript and Summary

Excuse me everyone, we now have all of our speakers in conference. Please be aware that each of your line is in a listen-only mode. At the conclusion of today’s presentation we will open the floor for question. [Operator Instructions] I would now like to turn the conference over to Richard B. Hare, Executive Vice President and Chief Financial Officer. Mr. Hare, you may begin.

Thank you operator and good morning. 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 Securities and Exchange Commission. Our President, CEO and Chairman, Clarence Smith, will now give you an update on our results and provide commentary about our business.

Good morning. Thank you for joining our 2017 Third Quarter Conference Call. We had a challenging third quarter. However, we believe that our team had a solid performance despite the disruptions primarily due to hurricanes during the month of September. Hurricane Irma directly affected all our Florida stores along with many of our Atlantic co-stores. 55 stores were closed for one or more days during the hurricane. Not only were our stores down in important coastal regionals and our largest concentration of stores but we experience disruptions to our supply chain from close ports causing major delays in shipments of important containers along with the disruptions to domestic shipments. These cause delivery cancelations and delayed, new product introductions to move to the fourth quarter. Our teams produced improved profit margins due to the pricing discipline and improved product quality and handling, which shall produce damages and markdowns. As expected, the lower sales volume did not allow for us to leverage our fixed cost, but we did have good control over much of our cost. Both our average ticket and closing rate improved slightly for the quarter, but did not offset the mid-single-digit reduction in store traffic, which was affected by hurricane-related store closings. Our H Design business is growing in importance and continues to be a driving factor in our average ticket increases. For the third quarter, our H Design business was 21% of sales, customer upholstery is up 2.6% and we continue to see significant improvement in our expanded accessory program, which is also closely tied to the H Design of our success. We are currently taking a deep dive into all our marketing efforts to review how to reach and adjust to our best customer model. This is a continual evaluation process utilizing several different research methods. We move this year to drop almost all our print advertising in vessels, dollars and television, digital and social media platforms. This is supported by stronger direct mail to our best customers. The advertising and marketing area is changing dramatically, and we’re dedicated to making sure we appeal and reach our best customers, while attracting younger millennial customers with direct messaging and focus-creative content. We brought in a significant number of new collections in our case goods and in our important leather categories in the past months, which quickly had a positive impact. We expect that several of these collections will rapidly move to bestsellers, and they continue to build our brand and reputation for fashion and value. We’re very well positioned to have a strong finish to 2017, with a stronger product lineup, several exciting new collections and a better in-stock condition than last year. Earlier this month, we opened a spectacular new store in Columbia, South Carolina, which replaced a store close midyear. This major remodel and expansion of a former retail location is beautifully positioned in the Columbiana mall area of Columbia. This relocation has been a priority for us for quite a long time, and we’re very pleased with the new presentation in a market that we’ve been in for over 100 years. We will slightly increase our retail square footage this year with a CapEx of approximately $28 million. Our CapEx plan for 2018 is $18 million. We expect to open two stores in 2018. We recently stand a lease on a new store in Newnan, Georgia in a fast-growing area of South Atlanta, which will open in the third quarter of 2018. We also have plans for another store in a city in our geographic footprint that we expect to open late next year. Our current major project for next year is the 150,000 square-foot expansion of our Western Distribution Center in Dallas, Texas, which should open in spring of 2018. In the past several years, we’ve undertaken an important effort to reduce our energy cost. And this program has had a major impact on our total energy usage and a significant reduction in our energy expenses. We have seen a 43% reduction in kilowatt hour usage from our base year of 2008, by installing energy management systems, LED lighting and more efficient HVAC systems. Additionally, we now have systems in all of our warehouses to recycle 100% of cardboard, foam and plastic from our distribution centers, delivery trucks and our stores. We’ve named the program HV Terra, and we’re pleased with the team’s enthusiastic embrace of the program and the commitment – continual improvement in energy efficiency and reducing our environmental impact in our communities. We’ve had very strong cash flow this year and expect to continue that trend into 2018. We increased our dividend by 25% in the third quarter. Our board continues to review how to best utilize our excess cash while recognizing that we are in an industry that is historically cyclical and very closely tied to housing. We’re very encouraged by customer acceptance of our newest product hitting our stores by the recent increase in the searches through our website and by the recent strong consumer confidence numbers and encouraging housing figures. We built a strong relationship with our customers, with our store presentation, our quality service levels and high-value products. Our team is energized and passionate and helping our customers bring the vision of their home to life. We expect to see a strong Q4 finish in the coming months and positive momentum going into 2018. I would now like to turn the call back over to Richard.

Thank you, Clarence. In the first quarter, sales were $207.6 million, a 1.9% decrease from last year. Our comparable store sales were down 2.9% for the quarter. As we disclosed earlier this month, 55 of our stores were closed for one or more days in the quarter due to Hurricane Irma. The negative impact on the third quarter total written sales and written comparable store sales because of these closures is estimated at 1.2%. Our gross profit margin increased 20 basis points to 53.9%. During the quarter, we continued to see favorable pricing and product mix as well as a reduction in product markdowns, which were partially offset by $0.5 million increase in our LIFO reserve. Selling, general and administrative expenses were $102.1 million or 49.2% of sales, which is essentially flat with the prior year quarter. We experienced increases in occupancy costs due to new store openings and renovations, and advertising and marketing expenses, since our advertising plan shifted more spending to the third quarter. These expenses were partially offset by reductions in administrative costs as well as warehouse and delivery expenses. Other income in the third quarter of 2017 included the recognition of a gain on the insurance recovery, related to our Wichita, Kansas and Lubbock, Texas locations. Early in the third quarter this year, we temporarily closed our Wichita location due to flooding caused by rupture of a water pipe. In the third quarter of last year, we recognized a gain upon the receipt of a partial insurance claim related to the storm damage at our Lubbock, Texas location. We received our final insurance installment on the Lubbock location in the third quarter of this year. Our interest expense was essentially flat at $0.5 million, and pretax income decreased $2.5 million to $9.7 million during the quarter. As expected, our effective tax rate declined 80 basis points to 38.4% in the third quarter of 2017. For the year, we expect our effective tax rate to be approximately 38.4% before the benefit from vested stock awards. If you recall in the second quarter of 2017, we had a reduction in our effective tax rate that was driven largely by $200,000 benefit from a new FASB stock compensation accounting standard that we adopted at the beginning of this year. Our net income for the third quarter of 2017 totaled $5,983 million, and our diluted earnings per share was $0.28. Now turning to the balance sheet. At the end of the quarter, our inventories were $99.7 million, which was down $2.4 million from our balance at the end of the 2016 calendar year. Our inventory turns improved slightly to 3.8 times on a trailing 12 month basis. We ended the quarter with $86.9 million of cash and cash equivalents, and our $60 million revolving credit facility remains untapped. And as a reminder, we have no funded debt. Looking at some of our uses of cash flow, capital expenditures were $15.4 million for the first nine months of this year. We anticipate spending a total of approximately $28 million of CapEx for the calendar year ending December 2017. Also, during the first nine months of this year, the company paid a total of $8.2 million of cash dividends to the holders of its common stock and Class A common stock. In terms of store count, we ended the quarter with 124 locations. In October of this year, we opened our new Columbia, South Carolina showroom, which brings our location total to 125. Later this quarter, we will close a location in Birmingham, Alabama. Our earnings release lists out several additional forward-looking statements, indicating our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. We continue to expect our gross profit margins for the full 2017 calendar year to be 54.2%, and we continue to forecast the second half 2017 gross margins to be below the full year average. Our estimate for fixed and discretionary-type SG&A expenses for 2017 is $257 million. This is a slight change from our previous estimate of $259 million, primarily from reductions in group medical costs and incentive compensation. And variable-type costs within SG&A are expected to be approximately 18.2%. This completes our commentary on the third quarter financial results. Thank you for your participation in today’s call. And operator, now we’d like to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from Brad Thomas of KeyBanc Capital Markets.

Good morning, Clarence. Good morning Richard.

Good morning.

I wanted to first ask about some of the new merchandise that you’ve been rolling out. Maybe you could just give us an update on where you are in the process of changing out floors here for this year? And how some of the new merchandise is performing?

Well, we had a complete changeover in our youth program, which we’re excited about. It came in later than we’d like, but it’s in place now, and we are very pleased with it. It’s a category that we’ve been underperforming in because it was a complete change. That’s one part of our case goods program. We’ve got a number of new collections that have just hit, that had been in process and planned to get in earlier. But we have them now, and we are excited about that. And then I mentioned in my comments about our leather program; that’s been an important new addition and a transition that is really hitting well. It’s more in the motion leather category that you’ve seen out there, but that’s in place and doing quite well. So we’re very pleased with the new the introductions and their initial impact.

Great. And then the guidance for gross margin for the full year is very straightforward and explicit. Maybe Richard, could you talk a little bit about some of the puts and takes on gross margin in the fourth quarter that are implied based on your guidance?

Yes. If you look at where we are for the – 54.2% is the guidance for the year, and you kind of see how we did the first three quarters. You’re kind of back and in into the fourth quarter. We would expect to see a continuation of negative impact on LIFO. But other than that, it should be fairly straightforward, based on the prior year quarters. That’s what’s driving a lot of the decline in margins in the second half of the year versus the first half of the year.

Got you. And as we think out to 2018, I know it may be a little bit early, but how are you thinking about gross margins when you look at some of the product procurement costs and transportation and level of promotion that you have in place. How are you feeling about the gross margin outlook?

Yes, I think it’s a little premature for me to comment on that. Right now, we’re in the process of putting our plan together for next year. I will be able to share that with you at a future date.

Thanks so much and good luck.

Okay. Thanks Brad.

[Operator Instructions] Our next question comes from Anthony Lebiedzinski of Sidoti & Co.

Yes. Good morning. Thank you for taking the question. So just a kind of follow-up, little bit maybe on the gross margin. So you’ve done a very good job with your product mix having fewer markdowns. How much further improvement do you think realistically you can get from those initiatives?

I think there is a little upside still there. We want to make sure we’re competitive across our key categories, and it’s pretty competitive out there. I think we’re getting more credit for the fact that we’re developing this product and that its got looks and value that our customers want. There may be a little upside, but nothing really major on that.

Got it. Thanks for that color. And Clarence, also, in your press release, you mentioned strains from the competitive landscape. Just wondering if you could provide some more color. Are you seeing that across your entire store base? Or are there any pockets or regions that you see more pressure from competition?

I wouldn’t say there is one region that’s stronger than another. We’ve got some major competitors, as you know, there is pressure in some categories from the Internet. But it’s mostly the larger players that are in almost all of our markets that are very promotional and how the value of furniture is perceived. I mean, if you have a real promotional company that’s selling big discounts, I mean, that’s a perception that, that’s what you should be getting in our category, and we certainly don’t like to play that game, and we’re pretty straightforward with our pricing. But I think, if compared to what we sell, I think there is real value. But the space out there in our category is very promotional with a lot of extended terms, a lot of discounting, just the whole space does make it look like it’s a tougher area to get growth.

Got it. Okay. Thank you for that. And lastly for me, you mentioned that traffic overall was down mid-single digits. If you were to exclude the impact of Irma, can you share with us what that traffic decline would have been?

I think it still will be down. I think it still will be down not as much, but..

Maybe low-single digits?

I would think that’s a guess. You had a good guess.

Okay. Thank you.

Thank you.

[Operator Instructions] We currently have no further questions in queue.

Thank you, operator. We appreciate your participation in our call today. And we look forward to speaking with you next quarter. Thanks, again, guys.

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.