Haverty Furniture Companies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to Haverty's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Speaker 1

I would now like

Operator

to turn the conference over to your host, Richard Haire, Chief Financial Officer. Please go ahead.

Speaker 2

Thank you, operator. During this 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 the date they are made in 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 Chairman and CEO, Clarence Smith, will now give you an update on our results And our President, Steve Burdette will provide additional commentary about our business.

Speaker 3

Good morning. Thank you for joining our Q2 conference call. Consolidated sales decreased 18.5 percent to $206,300,000 reflecting the consumers pullback in home related spending and the impact of higher interest rates on home sales. Incoming orders or written sales were down 14.7 percent with written comp store sales down 15.2%. Our earnings per share came in at $0.70 versus $1.27 last year.

Speaker 3

Recognizing the significant shift of consumer Spending and inflationary pressures, I believe that we delivered a solid performance. The quarter sales were negatively impacted the most in April And began to improve along with the increased temperature. We saw a very nice increase in our average sales driven by increases in special order and customer In custom design oriented sales, we continue to gain recognition for our quality products, service and free design. While we are investing heavily in our website as the first way customers learn about us and shop, the physical store And the personal relationship that we develop is the primary way we serve our customers. That in person relationship has increased in importance Since COVID, as our design focus and customization helps drive our average sale over $3,000 The importance of our brick and mortar stores where customers can see and touch their selections and gain knowledgeable input from a team member becomes more critical.

Speaker 3

We're strengthening our store locations and the footprint we're positioned from Maryland to Texas. There are several existing store opportunities that we believe will allow us to build on our base as well as our brand awareness and that can be served by our current distribution. Late this year, we plan to open 3 stores Concord, North Carolina, our 3rd store in Charlotte Dayton, Ohio served by our expanded Cincinnati home delivery center and an outlet store south of Richmond, Virginia. In the Q2, we bought back our Florida distribution center in Lakeland, which will allow us to be able to expand the facility in the future. We are pleased to acquire the leases on 4 stores in the Bed Bath and Beyond bankruptcy auction.

Speaker 3

3 of these stores are in important Florida locations, which allows us to reach new areas and leverage our marketing and distribution in those fast growing markets. The Pembroke Pines location is our furthest south near Miami and strengthens our position in Southeast Florida. St. Petersburg adds a major market near Tampa where we have been underrepresented. The Destin location Is ideally located to further penetrate that dynamic Emerald Coast.

Speaker 3

With the addition of these units, we'll have 33 stores in Florida. The 4th store in South Haven, Mississippi reaches an important growth suburb south of Memphis and adds our 17th state to our footprint. We're in an exceptionally strong position with our solid balance sheet and experienced management team to grow our Store count and sales in our regions. We are keenly focused on executing our strategic plan of opening 5 stores a year within our distribution footprint and growing our market share. While we experienced a fall off on the post COVID surge in the first half, We're encouraged by recent improvements in incoming orders, customers' reactions to new product introduction And the new growth opportunities that we are tackling.

Speaker 3

We are driven to help our customers' vision of their home come to life. As we deliver on that commitment, we will gain share and build on our returns for our shareholders. This is an exciting time to extend Haverty's reach. I'll now turn the call over to Steve Burdett, our President.

Speaker 4

Thank you, Clarence, and good morning. Q2 proved to be A very difficult quarter for us with weaker than expected results. However, the efforts by our team members have become even more important As we have made tremendous strides in making sure that we're getting back to basics and serving our customers' needs to ensure that we are furnishing happiness to each and every customer. Our supply chain network is functioning with no real headwinds. Our inventories were down 14.4 from Q2 last year and our backlogs remain consistent.

Speaker 4

Our lead times from our vendors remain at approximately 6 weeks, helping us to continue to drive our special order business. For Q2, our special order business was up over 50% Over last year and represents 30% of our upholstered business for the quarter. These increases have continued to be driven by our design business, which grew to over 28% of our business for the quarter with average ticket growing close to 6% over last year. Also, we are encouraged by the increase in the number of customers that have engaged with design and the opportunity to expose our design services to more customers in the future. We are making progress with the website with our new business partner.

Speaker 4

We are seeing improvements in site performance And now are getting more robust analytics that will help us to continue to improve the user experience as well as drive more AB testing and personalization. We are looking forward to our biggest holiday promotion of the year, Labor Day, which occurs in a few weeks. The new products that our merchandising teams Brought in earlier this year are starting to gain traction with our sales and design teams. As Clarence mentioned in his remarks, we are excited about the 4 new stores We will open from the Bed Bath and Beyond bankruptcy. We feel these stores will be an easy fit into our retail and distribution footprints As additional branches and existing markets in 2024.

Speaker 4

Finally, we continue to focus on our execution, training and retention across the organization. As I mentioned on our last call in May, we were matching the staffing levels in our retail distribution and delivery networks to the current business conditions. The plan was to reduce over 200 positions through normal attrition by the end of Q2, which we have been able to achieve. Now, I will turn the call over to Richard.

Speaker 2

Thank you, Steve, and good morning. In the Q2 of 2023, net sales were 206 $300,000 a 18.5 percent decrease over the prior year quarter. Comparable store sales were down 19.1% over the prior year period. Our gross profit margins increased 260 basis points to 60.5% from 57.9% due primarily to reductions in freight and a positive LIFO inventory adjustment. Selling, general and administrative expenses decreased $8,100,000 or 6.9 percent to $110,000,000 As a percentage of sales, these costs approximated 53 point 3% of sales, up from 46.7% in the prior year quarter.

Speaker 2

We experienced decreased selling, advertising, distribution and transportation Other income and expense for the Q2 of 2024 was negligible and interest income was approximately $1,000,000 during the second quarter as we earned more on our cash deposits due to higher interest rates. Income before income taxes decreased $12,800,000 to $15,800,000 Our tax expense was $4,000,000 during the Q2 of 2023, which resulted in an effective tax rate of 25 point The primary difference in the effective rate and the statutory rate is due to state income taxes. Net income for the Q2 of 2023 was $11,800,000 or $0.70 per diluted share in our common stock compared to net income of $21,700,000 or $1.27 per share and a comparable quarter last year. Now turning to our balance sheet at the end of the second quarter, our inventories were $114,700,000 which was down $3,600,000 from December 31, 2022 and down $19,300,000 versus our Q2 2022 balance. At the end of the Q2, our customer deposits were $45,600,000 which was down $2,400,000 from the December 31, 2022 balance and down $45,200,000 versus the Q2 2022 balance.

Speaker 2

We ended the quarter with $109,100,000 of cash and cash equivalents and we have no funded debt on our balance sheet at the end of the second quarter. Looking at some of our uses of cash flow, capital expenditures were $33,800,000 for the 2nd quarter. As a reminder, we repurchased our Florida distribution facility at the beginning of the quarter for $28,200,000 In addition, during the second Our Board of Directors authorized a 7.1% increase in the quarterly dividend from $0.28 per share to $0.30 per share, resulting in a payment of $4,900,000 of regular dividends. During the Q2, we didn't purchase any common shares under our existing stock buyback program and we have approximately $20,000,000 of existing authorization in our buyback program. Our earnings release lists out several additional forward looking statements indicating our future expectations of certain financial metrics.

Speaker 2

I will highlight a few, but please refer to our press release for additional commentary. We expect our gross profit margins for 2023 to be between 59.5 60%. We anticipate gross profit margins will be impacted by our current estimates of product and freight costs and changes in our LIFO reserve. Our fixed and discretionary type SG and A expenses for 2023 are expected to be in the $286,000,000 to $289,000,000 range. The variable type cost within SG and A for 2023 are expected to be in the range of 19.5% to 19.7% With increases over 2022 primarily being inflation driven.

Speaker 2

Our planned CapEx for 2023 has increased to $57,000,000 In addition to our current year to date spending, we anticipate spending an incremental $3,000,000 during the calendar year on refurbishing and reformatting The 4 former Bed Bath Beyond stores we secured through the bankruptcy lease auction anticipated or new replacement stores remodels and expansions Account for $19,900,000 investments in our distribution network are expected to be $34,300,000 and investments in our information technology are expected to approximately be $2,800,000 this year. Our anticipated effective tax rate in 2023 is expected to be 25% and this projection excludes The impact of vesting of stock awards and any potential tax legislation. This completes my commentary on the Q2 financial results. Operator, we would like to open the call up for any questions at this time.

Operator

And our first question comes from the line of Anthony Lebiedzinski with Sidoti and Company. Please proceed.

Speaker 5

Good morning and thank you for taking the questions. So I just wanted to follow-up about the comment about the recent improvements of Coming orders, can you shed some more color on what you've seen? Anything you can help us out with, that would be great.

Speaker 2

Yes, Anthony, let me kind of go back through our written business trends back to Q1 to now. So In the Q1, our written trends each month, January through February, were in the low teens, down 10.5 percent January and down about the same around 14%, 11% to 12% in February March. In the Q2, we saw a pretty big drop in April. We were down 20% in rent business, but then we saw some improvement in May. We were down Approximately 13% between 12.8% and 13% and then we're down about 11% in June.

Speaker 2

So We've certainly seen an improvement from April. I believe Clarence mentioned that in his remarks that April was The most challenging in the quarter, but we've seen kind of more of a leveling back to the low teens in May June.

Speaker 5

Okay, got it. So less bad, I guess, but okay, but just wanted to get that clarification. And so thank you for that. And then in terms of the average ticket, obviously, at an all time high. Your freight costs are down And demand is still apparently, it looks like kind of still soft here.

Speaker 5

So how should we think about the sustainability of the average ticket here going forward?

Speaker 4

Anthony, this is Steve. I don't we've seen our average ticket grow and it's continued to grow and that's mainly driven by obviously Our design business and our continued increase there. As I talked about it, we're up to 28% and we're really focused on Exposing that to more customers as they come in the door. So we really think there's an opportunity to continue to grow that. So average ticket has not been an issue for us and we don't see that being an issue going

Speaker 5

Okay. Sounds good. And then, as far as your outlook for Credit promotions, how should we think about that? Looks like right now you're offering 0% financing for 36 months, but Obviously, as we all know, interest rates have gone up and who knows where we go from here. But so just wanted to get your take on that as far Is that the main demand lever you see or is there anything else that you plan to do to try to increase the demand?

Speaker 2

Anthony, this is Richard. Just from the credit perspective, as we said last quarter, we are being more disciplined On offering extended credit terms, the 60 months, we still do that in certain promotions, but we are doing it for less Smaller time period in the promotion period, but Steve, if you want to

Speaker 4

comment on that. We still are using the 60 months to drive around our major holidays, Anthony, and we'll continue to do that. But the time period, As Richard said, we're being more disciplined. We're not running it for the same time periods that we did last year, but we are still actively running them in the bigger promotions,

Speaker 5

Best of luck going forward.

Speaker 4

All right. Thanks, Anthony.

Operator

Our next question comes from the line of Michael Legg with The Benchmark Company. Please proceed.

Speaker 1

Hi, good morning. This is Mickey on behalf of Mike. Just a quick one here. I'm just curious what you've seen from a Promotional environment in the industry as far as your competitors go. I know you guys don't engage in too much of that besides these Credit.

Speaker 1

So just curious what you're seeing from your competitors?

Speaker 3

Mickey, I haven't seen anything really different. I think the industry you're seeing the sales issues and declines Across the board, but I don't see anything radically different with promotions. And there are people who are using credit pretty heavily, But I haven't seen anything significantly different.

Speaker 1

Okay, great. That's Like what we like to hear. That's all from us today. Thanks for that.

Speaker 5

Thank you. Thank you.

Operator

Our next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please proceed.

Speaker 6

Hi, good morning. I have a couple of questions. The first one, I wanted to see if you could expand on the demand commentary In response to Anthony's question, I think you mentioned initially that there was some impact from cooler weather in the quarter. Can you give some colors about what categories that affected? And are the trends you're seeing pretty broad based Across categories or any areas performing better than others?

Speaker 4

Yes, Christina, this is Steve. I'd say our categories are still performing in the same area. We did get in a lot of new case goods, bedroom, dining room in the Q1, and we've seen certainly An uptick in that category, but still upholstery is strong for us. So there's no real trend change. We have seen some improvement in bedding, which has been a nice thing to see and it has been a category that we've been We've seen some improvement in that through the quarter.

Speaker 4

But all in all, things are pretty steady.

Speaker 6

Then the second question I have is around the expenses. Last quarter, you did a headcount reduction to try to align The structure to the sales level, do you feel like you need to make more reductions in what you saw this quarter To have better profitability on the back half or you're comfortable with where you are?

Speaker 4

Right now, Christina, we're comfortable where we are because We just transitioned through that through the quarter, but we will constantly review that and look at that and we can continue to make changes If necessary, in our distribution and delivery and service side, at the SCOR side, we are adjustments there have been more on this Number of sales associates that are needed, but we have an x minimum number that are needed to run the stores. So I don't see much adjustment on the store side, but Any further adjustments that would be needed to be because conditions worsen would be in the delivery and distribution side. But We're hopeful that that's not going to be the case and that we're positioned right to carry forward for the rest of the year.

Speaker 6

Then the last question I have is on the Bed Bath and Beyond, the acquired leases. Congratulations on those. When as you see it today, when do you think those stores can open? And What is the type of work required to get those to your standards?

Speaker 2

Hey, Christina, this is Richard. We anticipate being done with that in the first half of Next year, probably more in the Q2 time period, we've allocated $3,000,000 of capital for this year. Each location is probably between $2,500,000 to $3,000,000 of capital required to go in and refurbish it and Make it a Havertys location. We did we just took the leases over beginning of this month. And so we are going to obviously start paying rent on those now and we bake that into our expense forecast that we've shared with you guys.

Speaker 2

We're also going to sublease or we have plans to sublease on a temporary basis these locations to a seasonal tenant As we ramp these things up, so that will all offset partially offset some of the rent, but we're really excited about these locations and we think It says a lot that we're investing in our future during a downturn in the business.

Speaker 6

And actually one clarifying question. As we think about the store openings next year, will these 4 locations kind of meet your target for 5 Openings a year or should could next year even go beyond those 5 openings?

Speaker 3

I think next year could go beyond that, yes. That would be

Operator

our hope.

Speaker 3

We do have a number of sites that we're looking at and have LOIs out That we think could work for us, but we don't know that and we don't announce leases until they're signed. So it could be a year of more Next year, Christina, and I'll go back in our history at year 2000, we took over, I think, 9 Home Life stores From Sears and we were able to open those over basically 18 months or so. So we're very good at converting existing boxes to Havertys and we

Speaker 5

think they're going to be opportunities for us.

Speaker 3

And we think there are going to be opportunities for us.

Speaker 6

Thank you and best of luck this quarter.

Speaker 5

Thank you.

Operator

Thank you. Ladies and gentlemen, this It concludes today's question and answer session. I'd like to turn the call back to Richard Hare for closing remarks.

Speaker 2

Well, we appreciate everybody's in the call today, and we look forward to talking to you in the future when we release our Q3 results later this year.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Haverty Furniture Companies Q2 2023
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