Haverty Furniture Cos. (HVT) CEO Clarence Smith on Q2 2016 Results - Earnings Call Transcript

| About: Haverty Furniture (HVT)

Haverty Furniture Cos., Inc. (NYSE:HVT)

Q2 2016 Earnings Call

August 2, 2016 10:00 AM ET

Executives

Dennis Fink - Executive Vice President and Chief Financial Officer

Clarence Smith - Chief Executive Officer and Chairman

Analysts

David Feaster - Raymond James

Operator

Good day and welcome to the Haverty's Second Quarter 2016 Financial Results Conference Call. Today's conference is being recorded.

Now, 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.

Dennis Fink

Thank you, and good morning everyone. During this second 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 progress. Clarence?

Clarence Smith

Good morning. Thanks for joining us on our second quarter conference call. As previously reported, net sales and comparable store sales rose 3.8% for the quarter. Written total and comparable store sales both rose 6%. Our average ticket increase about 2.2%, traffic was slightly lower, but we were encouraged by our improved closing rate for the quarter and year-to-date.

Earnings for the second quarter were $0.24 compared to $0.21 for the same period last year. For the first half, earnings per share were $0.45 compared to $0.48 last year. We did see our SG&A increase as a percent of sales to 49.6% compared to 49.4% last year. These increases were largely due to high administrative cost related to increased healthcare cost, selling expense and occupancy related to new stores that have opened in the last year.

Both written and delivered sales for Q3 to date are up 3.8% with comparable store delivered sales up 3.9% and written comp sales up 3.6%. This year we’ve made heavy investments in the systems and the infrastructure to help provide a better experience for or customers. The major hardware computer additions that our CIO Head, Clairy and his dedicated team installed this spring with upgrade so the leading edge IBM Power8 has helped to cut the screen speed when placing orders on our stores by over half. The purpose of these upgrades is to help serve all of our customers in every phase of the shopping cycle, including the processing and handling of the product through delivery.

We’ve added new state-of-the-art scanners for all of our drivers and service technicians to provide a paperless system and to speed up every stage of handling merchandise through completion of our top drover delivery process.

We recently had over a 100 of our vendors and freight carriers into Atlanta for a supply chain partner summit to bring all of our partners up to speed on the installation of our new GT Mix of system and their expected committed to our mutual success. This program ties all of our partners involve in the manufacture movement of import merchandise from preproduction, manufacturing, Haverty’s dedicated quality teams, ocean, transport, shipping lines and domestic freight lines all in one single platform. Every partner will have an necessary visibility throughout the entire process so that our supply chain team will have a much tighter time table for product arrival and guarantee in the delivery time for our customers.

We’ve developed with our VP of Supply Chain of Abir Thakurta and his team what is recognized to be one of the finest supply chain organizations in our industry. We continue to invest in the systems to make sure that we can provide the top service that our customers expect and to outperform and out service our competition.

In early July, we celebrated the grand opening of our 110,000 square foot expansion of our Lakeland Florida Distribution Center. This high racked additional about 85% more storage capacity for the facility, which will alter and improve how we serve our Florida stores and customers. We’ll be bringing in containers from Asia directly into the Lakeland facility from the port of Jacksonville and Tampa, greatly reducing the inbound freight compared to moving containers today from Savannah to North Georgia then shipping them back to Lakeland.

Another advantage or major advantage is reducing the handling of furniture which can cause damage and delay deliveries. We’ll be able to react quicker to delivery issues and eliminate days to deliver to the customer. This expansion is the major capital investment for the company this year, along with the large information technology upgrades.

In the next few months, we planned to open in two important markets within our distribution footprint and complementary to existing stores. We open in a new Texas market College Station which will be our sister store to Waco and both were important college town markets. These two cities are in the common medium market which will help us make an efficient advertising impact in both markets.

Early in the fourth quarter we will open Charlottesville, Virginia, a new city for Haverty’s. It will be a branch store of our two store Richmond Virginia operation. These cities are also operating in the same MSA medium market which will add to our impact in the region.

The Charlottesville store will serve another important college town in our footprint. We’ve historically done well in these markets and expect these two new stores to have a short development cycle.

We’re in the final stage of closing a store in Southeast Florida which overlaps with our new Fort Lauderdale and Coconut Creek stores recently opened. This is a higher rent location which we expect once closed, will help us add to the markets profitability.

We expect to end the year 2016 with a 123 stores and 4.4 million square feet of retail space, a third consecutive year of slight increases in retail square footage. Our ongoing goal is to improve our existing store sales to over the $200 per square foot number that we reached in 2006 prior to the deep recession. We’re closing that on that target and expect to reach it in the near future.

We were pleased to return to our stockholders over $25 million in dividend and share repurchases in the first half and expect to generate significant cash flow for the rest of the year and for 2017. We continue to see a significant increase in the internet written sales, which were up 40% in the second quarter and continue to run at an even higher rate in the third quarter. We’re investing and improving the sales process and integrating a true Omni channel process to make it easy for the customer to transact business with Haverty’s in any manner she chooses.

Well close to 90% of our customers use our website at some point in the sales process with mobile site use at 65% and increasing, less than 2% of our delivered sales are sold over the internet. Technology aside, our customers generally want to visit our stores and speak with our sales associates and design expertise in addition to physically trying out the furniture. We’re increasing our efforts to make our digital 3D and online experience to be the best in the industry.

We’re excited about many of the new collections that we have coming to our floors this quarter, we’re expanding our debt of selection in contemporary and clean line upholstery and adding multifunctional designs and technology to our motion upholstery category. We’re adding several major groups to the [indiscernible] category with more transitional styles, colors and sectional presentations which we expect to be major new winners on our floors.

We have a large number of new wood collections in contemporary styles and reclaimed finishes with traditions to some of our current bestselling groups. We’re also adding a number of lighter finishes to our presentations which are so important to today’s customer. We believe that we will be in the best in-stock position for the important fall selling season that we’ve been in several years.

We continue to see growth in our special order and custom order sales. Our H design organization has had a major impact on our sales team and in reaching and serving our customer in her home. We’re developing more products for the design part of our business to improve our service to the customer and expect to continue to see those sales drive our average ticket. We’re currently doing over 20% of our sales in the H design category up from 16% last year. We’re on track to reach our goal of a 25% H design run rate by the end of the year.

We’re pleased to see the positive trend of business after the slow start to the year in the first quarter. We’re very encouraged by the several significant initiatives that we put in place to better serve our customer and to grow our business. The recent positive news about home sales in the regions along with our strong position in our markets gives us real encouragement for strong second half.

I’ll now turn the call back over to Dennis.

Dennis Fink

Thank you, Clarence. I’ll just make a few comments about our financial highlights from last night’s earnings press release and then we’ll take your questions.

Within our SG&A, our fixed and discretionary type expenses were $61.4 million for the second quarter of 2016, that’s $2.8 million above the $58.6 million recorded last year. As stated in the release, we estimate that the full year total expense for this category will be approximately $252 million which is about $1 million higher than our prior guidance. We expect that will translate into increases over the prior year for Q3 and Q4 of approximately $2.4 million to $2.5 million each quarter in this fixed and discretionary SG&A category.

The increases are largely due to depreciation and occupancy costs for new and relocated and remodeled stores, for staffing increases and higher health and benefit expense as well as inflation.

Second half sales were normally higher than the first half so profitability should be impacted less by the fixed and discretionary cost increases in Q3 and Q4 than they were in the first half. In the health benefits area, although we do have more employees under coverage this year and newer prescription drugs are more expensive, the cost increases have mostly come from higher individual medical claims than in recent years. The company is self-insured but we have Star Plus insurance coverage both on an individual and aggregate basis.

The variable type costs within SG&A for the second quarter of 2016 were 18.2% of sales, the same is in last year’s quarter and full year variable costs are also anticipated to run at the same rate as last year’s 17.9%.

Our weighted average square foot changes by quarter for 2016, and the first quarter we had 1.1% higher average square footage, second quarter 0.5% higher over last year, the third quarter we actually have a decrease, slight decrease in square footage with 0.3% and the fourth quarter will be a 0.7% increase year-over-year. So for the full year the weighted average square footage change will be about 0.5%.

The rest of the year comp store sales percent increase is likely to be very close to the total percent increase in sales since the square footage increase is fairly modest in the second half of the year.

Our balance sheet for the six months ended June 30, versus a year end, we had an increase in prepaid expenses of $9.8 million that was due to higher payments for estimated income taxes this year and also maintenance agreements for new computer hardware. The increase in property equipment net was $8.7 million and it’s due to higher CapEx this year and also one additional lease property recorded on our balance sheet. Increase in customer deposits of $6.8 million as of 6.30 compared to 12.31 is based on the undelivered sales increase that is typically higher at June 30, than the annual low at 12.31.

We also had a decrease in accrued liabilities of $7.5 million and that’s typical due to payments made for year into accruals and income tax liabilities. Finally the increase in lease obligation was $2.4 million as [indiscernible] store was recorded on the balance sheet.

The topic of our Lubbock store and the gain we had on the property that was destroyed – severely damaged and destroyed on the blizzard that was on December 27, 2015. It was a better than average location for Haverty’s. We have very good insurance coverage at replacement value and business interaction is also included in that coverage. There was a $1.9 million gain recorded in the second quarter. Year-over-year for the first half comparing that operation performance, there was about a $1 million negative operating profit swing that is reflected in lower sales gross margin and continuing expenses, so we did have that in the regular part of the P&L and the gain we had – again it was another income.

Over the next three quarters the other income gain is likely to be an additional $2 million, up to half of that is likely in the fourth quarter this year and the rest would be in early 2017. We’re building a new store in the same site will cost us approximately $4.3 million and most of that amount is included in our 2016 capital expenditure protection with the rest of the spend in the first quarter of 2017.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Bud Bugatch of Raymond James. Please go ahead.

David Feaster

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

Clarence Smith

Good morning, Dave.

David Feaster

Let’s just start out, when you’re looking at the retail environment this year versus last year, what are some of the biggest changes you’re seeing and what are some of the biggest changes the company has made, whether it’d be from a product promotional or other standpoint?

Clarence Smith

We haven’t had any major changes in the last year that I can – we started lot of this process of upgrading our product in the H design. I think that’s maturing, I think some of our product selection is hitting more to the customer, we are doing more special order in custom which I think continues to grow. As far as parts of our territory, Texas is still a drag, particularly the West Texas the old part of the start is a drag, some of the other parts of the city – of the state are doing better but overall it’s down. So I would say that the main difference is that we just are continuing on this upgrading plan and adding the kind of product that our customers are trying to – like to mix and it’s being a little bit more successful. We were up single digit so it’s not a major issue but we are seeing some real positives that we’re encouraged about.

David Feaster

Got it. And any – how is your product inventory of older product that may need to be discounted or cleared out, how is the level there, are you happy with it or – and is it improving?

Clarence Smith

We do have – well it is coming down and we do need to move more of it out, we have a plan to do that. We’re running most of it through our clearance centers and we’ll be a little bit more aggressive on that in the next several months but I think our plan is solid and we will get it to the position we want by the end of the year.

David Feaster

Okay. Going to the Lakeland – new Lakeland Distribution Center, nice to see that that’s in place, hopefully you get some good benefits from it. Along that line when do you think we’ll expect to see some of those benefits start to hit the P&L?

Clarence Smith

It will take a while, I mean it’ll be a slow ramp up, we’re moving product that down there now that we couldn’t before that’ll be our best sellers to begin with. I think it’ll take a while for that to play out completely. The main thing that will give us within the next quarter or so as a quicker service to the customers there, so hopefully just serve the customer and grow our business in Florida quicker. I think the cost savings won’t kick in for a while because it will take a while to offset those loads that we’re bringing down from Braselton and they reduced great inbound freight to come through the P&L.

David Feaster

Okay, great. And then two more from me then I’ll get off the line. Any changes in the promotional strategy going into yearend and how do you see the promotional environment right now?

Clarence Smith

Well it’s pretty promotional out there, you know that. We’re consistent with what we did last year and we’ll be an aggressive in a few different areas that we weren’t before. But I don’t see any major changes, I think it’s all baked into what we’re projecting here as far as the cost and the advertising mix that we’ve given in the past.

David Feaster

Got it. Thank you and to confirm, percentage penetration of online sales you – internet that was less than 2%, is that correct at this time?

Clarence Smith

It’s less than 2% but it’s growing rapidly so that shows you that it was a minimal number, it was like 1.5%, we’re getting closer to 2%. So it’s growing, it will continue to grow, we’re spending more money on digital advertising and trying to reach that customer better. But still most of great majority of our customers want to see the product in the store, and we encourage that.

David Feaster

Great. Thank you very much and good luck on the next quarter.

Clarence Smith

Thanks so much.

Operator

[Operator Instructions] It appears there are no further questions at this time. Mr. Fink, I’d like to turn the conference back over to you for any additional or closing remarks.

Dennis Fink

Thank you, operator. We appreciate participation and look forward to good second half. Thank you for being an attendance.

Operator

This concludes today’s call. Thank you for your participation. You may now disconnect your line and have a wonderful day.

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