Good day, and welcome to the Haverty's Second Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Hare. Please go ahead, sir.

Thank you, operator. During this conference call, we'll 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 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 Q2 conference call. As we previously released, our stores and distribution teams were closed the entire month of April due to COVID-19 to comply with government and CDC requirements, to protect our team members and customers. Sales for the quarter were $110 million compared to $191 million in Q2 2019. We were pleased to open most of our stores May 1, operating with a limited staff. Our distribution and delivery teams began delivering later that week. We quickly realized a much stronger demand than we expected. May and June written sales were up 13.9%, with comparable store written sales up 7.5%. Our delivered sales were down 13.4% for that same period, because we were scrambling to build back our delivery and distribution staff and bring in oversold products from vendors who had closed also during the quarter. We now have a very strong backlog of orders. This dramatic reversal of direction was unprecedented for Haverty's in the entire industry. We found ourselves in the interesting position of not only playing defense, but now playing in aggressive offense. And we've been doing a lot over the last several months. Clearly, the importance of home is a major trend. A recent article from McKinsey used the term, the homebody economy. We are in a sweet spot for now. We're working very closely with our vendors to prioritize shipments, while we're having to pay increased pay for our distribution and delivery team members to handle the product. Ramping up our delivery and are receiving to match our written business is a difficult challenge, but we feel that we'll be able to service and supply our customers better than most of our competitors in the coming months. Most of our current key statistics look very good. We're…

Thank you, Clarence. In response to the COVID-19 pandemic, we closed all of our retail locations on March 19th and halted deliveries on March 21st in the first quarter. Our stores began to reopen on May 1st, with deliveries ramping back up beginning on May 5th with reduced capacity. The closures and subsequent reopening and delivery activities had a significant impact on our financial statements during the quarter. In the second quarter of 2020, sales were $110 million versus $42.7 million, with a 42.7% decrease over the prior year quarter. Our comparable store sales metrics are not meaningful since our stores were closed for a period of time during the second quarter of 2020. Our gross profit margins increased 20 basis points from 54.0% to 54.2% due to merchandise pricing and mix and fewer markdowns. Selling, general and administrative expenses decreased $23.1 million or 24.2% to $72.6 million. This decrease reflects the measures taken as a part of our business continuity plan. In general, we had less selling expenses as our stores were closed in April, reduced salary and benefit expenses, and reduced marketing and advertising costs. We furloughed over 3,000 team members on April 1st and covered the health care premiums for these individuals, which totaled $2.1 million. Effective April 30th, we instituted an approximate 35% headcount reduction and incurred $1.7 million of severance costs. During the quarter, we reduced marketing and advertising expenses $3.5 million over the prior year quarter as our operations were temporarily shut down in April. During the second quarter of 2020, we recorded a $31.6 million gain on our previously announced sales leaseback transaction on three of our warehouse distribution facilities. This transaction generated gross sales proceeds of $70 million and further solidifies our company's liquidity and positions us very well for the future.…

Thank you. [Operator Instructions] Our first question will come from Brad Thomas with KeyBanc Capital Markets.

Hey good morning Clarence and Richard. This is Andrew on for Brad.

Good morning.

I appreciate the detail you all gave on May and June. But I guess given the changing environment, could you give us any more color around what written trends have looked like in recent weeks and maybe in July?

The trends are consistent with what we released about Q2. The trends are continuing.

Okay, understood. And assuming the workforce-related supply constraints continue, I would expect there might be less promotional activity in the coming months and maybe higher gross margins as a result. Is that the right way to think about it? If inventory…

Well, we're not constrained. We're not going to give any margin estimates, as Richard said. But I will say that with the demand we have, we won't be more aggressive. We still promote, and we want to be strong in the market, particularly around Labor Day, which we always are, the most important holiday of the year. But we don't see the need to be more aggressive than what our historic plans have been. And I would say that's a philosophy we'll probably carry through for the rest of the year.

Okay, understood. And in regards to these workforce challenges, I just wanted to clarify. This is mostly – or if not all, on the supply chain level and the production level and not in – not within the stores?

I’m sorry, you’re saying this is mostly a supply chain issue. Is that the question?

Yes. So I'm just wondering if the workforce related challenges is also be – is also extended at the store level with employees.

Okay. It is a supply chain issue, but also getting the deliveries out is a challenge. We're hired back. We've hired back to certain levels, but we cannot get enough drivers right now to keep up with the sales that we have right now. So we've increased that. We feel good about the position. We're still hiring. It is a challenge to get people to come back at – with some of the federal incentives out there, but we're working on that. We feel that we have a good plan. But I don't think that we'll catch up to what our written delivered – our written businesses with deliveries, not only because of the tough time and hire enough drivers, but in getting the product. So right now, it becomes a product issue. We're working very closely with our vendors. We've got over $100 million in orders out there. We feel good about our relationships with our vendors, but catching up is going to be a challenge over the next couple of months.

Okay, understood. Thanks for the detail. That’s all from me. Thank you.

Thank you, Andrew.

Thank you. Our next question will come from Anthony Lebiedzinski with Sidoti & Company.

Good morning and thank you for taking the questions. So as far as your delivery times to the customer, what are those on average? And how are you guys positioned versus your competition?

I think we're in a better position than most of our competition, frankly, as far as getting the product. We started very early with our order – ordering back right at the 1 of May. We realized quickly that the demand was stronger than we anticipated. We've got extremely strong vendor partnerships. We have terrific partners, particularly domestically that are dedicated a great deal to us. The Mississippi people have had issues with some labor for the same reasons I just talked about our drivers. But I think we're getting strong shipments. We feel good about our position in comparison to most of the industry. We've had long-term partnerships, and I think that we'll get the shipments as promised, but it will take us a little while to work through that. We're also having to place orders now for Chinese New Year and actually for orders beyond Chinese New Year, and those are in production or in placement now. And I think that we'll be able to get the shipments as well or better than most of our competition.

Got it, okay. And then in terms of the delivery times, I mean what are your typical customers expect?

Yes. We have historically wanted to be able to deliver within a couple of weeks. We've realized that people are willing to wait. They have to wait. And we're out a month. In some cases, we want to get back to a point where we can deliver within two weeks, but that's going to be into the fall before we get there. I mean we've got Labor Day coming up. We're backlog now. But we have not seen from our customers, their feeling of cancellation. They understand better than we expected. They know that there are issues in getting product, and they're willing to wait. So we feel pretty good about that. And I hope that we can continue to feel good about that through the fall.

Right. So you mentioned as far as the stimulus programs and the labor constraints. But as far as the government stimulus programs, do you think that has had much of an impact on the demand that you have seen? Or is your custom not really with the new [indiscernible] this money?

Yes, it has had an impact on us. It's definitely had an impact on our suppliers domestically, particularly, as I said in Mississippi, we hear it all the time that they're having trouble getting people to come back because the pay they're getting from the government, in many cases, is better than they would have before. So we're working through that. We're having to pay more in our warehouse and delivery to get the workers back. It is definitely a challenge, and I think it's going to be – continue to be a challenge, particularly as the government continues to pay out those cash payments.

Yes right. But as far as the end consumer demand, what do you think has been the impact of the stimulus money as people are getting that we…

Yes. I think the stimulus has helped. And people are sitting at home, watching what's going on in their own home, and they want to spend it there, and they're probably not being able to spend it elsewhere. So I think the cash stimulus has definitely helped and I think it will be a factor. Our customers are a little different than the ones who are living only on unemployment, but it's definitely been a factor. I mean there's a lot of cash out there.

Yes. And we've seen a slight decline in the use of credit, not much, but slight. So I'm not sure if that's a trend or not, but it seems to be a healthy consumer demand at the moment.

Got it, okay. Understood, okay, all right. And then just curious as far as which products or product categories have you seen the most uptick in demand? And you also talked about the possible inventory situations that you may have. So just curious as which – where are you seeing the most demand?

Upholstery has been the strongest category. People are in their family room, they want to have that upgraded and updated. And I think that's the strongest area. We've had some issues, supply issues in some of the mattress category because some of those materials are PPE-related materials and they're restricted. So some of our mattress and bedding suppliers have had issues getting production on a timely manner to us. But we've had a pretty good increase. Richard?

Yes, and if you look at the Note G in the 10-Q, you can see that occasional category, the percent of sales has gone from last year for the quarter was 7.6% up to 10.2%. That's a lot of the office furniture and – it's going in the opposite direction. Mattresses have come down from 11.5% of sales down to 9.4%. Accessories have kind of come down slightly in that same category. So the occasional category really has jumped up in the quarter. And then obviously, bedroom furniture, too, to a lesser degree.

Got it. All right well thank you and best of luck.

Great, thank you Anthony.

Thank you. I am not showing any further questions in the queue at this time. I would now like to hand the call back over to Richard Hare for any closing remarks.

Well, we appreciate everyone's participation in today's call, and we look forward to talking to you in the future when we release our third quarter results.