Haverty Furniture Companies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to Haverty's Third Quarter 2024 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. It is now my pleasure to introduce your host, Richard Hare, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

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 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 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 2

Good morning. Thank you for joining our Q3 conference call. Consolidated sales were $175,900,000 down 20.2% from last year. Earnings per common share were $0.29 versus $1.02 We're seeing a cautious consumer and we were impacted by the 2 hurricanes hitting our regions. We do believe that our customer is beginning to move back into the buying process based on an improvement in store traffic over the last month.

Speaker 2

We expect to see better traffic and sales once the elections are behind us. During the Q3, we were excited about the opening of our new Pembroke Pines store in North Miami. We are pleased with the store traffic, which is on par with our other recent openings in South Haven, Mississippi and Destin, Florida earlier this year. We expect to open 3 additional stores this year in St. Petersburg, Florida and Greenwood, Indiana, south of Indianapolis, and we begin our return to Houston, Texas after 43 years with our first store in The Woodlands area in December.

Speaker 2

We expect to end the year with 129 stores. We're investing in store growth in our regions, which puts us in a strong position in the best markets in the country for future growth. Houston, the 7th largest market in the country is our top priority for the next 2 years. It is the largest market in our distribution footprint where we don't have stores. We opened a second store in Baybrook in January 2025 and we have several more potential locations that we are pursuing.

Speaker 2

We're committed to having a significant position in the Greater Houston market. The Houston stores will provide additional operating leverage and be served by expanded distribution center in Dallas. I'll turn the call over now to Steve Burdette, our President.

Speaker 3

Thank you, Clarence, and good morning. Our Q3 results were disappointing as we continued to face high interest rates, an unaffordable housing market and the build up to the presidential election. We were glad to see the Fed cut the interest rate 50 basis points at their September meeting and remain cautiously optimistic as this will continue later this quarter and into 2025. With the election coming to a conclusion in less than a week, we are hopeful for a smooth transition leading up to the inauguration day, which should provide a lift to our business environment. Our Labor Day event, which is a key selling period for the quarter, was down in the mid teens compared to last year, but there was an improvement over our Memorial Day event earlier this year, which was encouraging.

Speaker 3

As you know, we do not normally give a weather report, but due to the devastation caused by Hurricane Helene in late September and Hurricane Milton in early October, we felt it necessary to update you on the impact to Havertys. We are glad to report that all our team members are safe. All our stores throughout Florida, Georgia and the Carolinas, along with our Florida warehouse, had minimal damage to report from the two storms other than a few roof leaks and power outages, which caused some extended closures. With Hurricane Helene, we had 6 markets and 11 stores that were closed from 1 to 4 days during the quarter. However, our Asheville, North Carolina store was closed for 19 days over September October reopening on ten-sixteen.

Speaker 3

With Hurricane Milton, there were 5 markets, 20 stores and 1 warehouse affected in early October. Most stores in the warehouse were back operating within 2 to 5 days with 3 stores closed 7 to 10 days. With these types of events, this magnitude is not only the it is not only the days you are closed, but the distraction that has caused before the storm getting prepared and afterwards with the cleanup from the storm. It is a tremendous burden on our team members and our customers. Havertys is thankful and appreciative to our team members in Florida, Georgia and the Carolinas for their unwavering commitment to their families, our customers and Havertys.

Speaker 3

With regards to our website, due to continued AB testing, we've made multiple modifications to the site to enhance personalization, navigation and way finding. Additionally, we've added some new features like augmented reality to improve the overall user experience. From a merchandising standpoint, our decor and upholstery categories are the best performing driven by our design business. Bedding continues to perform within company averages, while bedroom and dining room are slightly below company averages. Overall, our store traffic continues to improve, but we are still seeing a more deliberate consumer, which has caused our closing rates to remain below our levels of last year.

Speaker 3

However, those customers that are buying are spending more as our average ticket continues to rise over 3% from last year to almost $3,500 Our design business continues to thrive by growing over 19% for the quarter as a percentage of our business. Our design and sales team remain focused on increasing the number of customers participating in design, which continues to grow at a double digit pace. Our average ticket is the driver of our design business as it moved higher to approximately $7,300 which is roughly a 5% increase for the quarter. Our special order business continues to grow to 36% of our upholstery business, which is up 10% from last year. Our supply chain network was able to navigate through the port strike with no real impact on our customers.

Speaker 3

Our inventories continue to remain in excellent condition and were down 4% compared to Q2 and approximately 13% down from Q3 2023. Distribution, home delivery and customer service continue to be focused on productivity and execution. While we continue to experience a difficult sales environment, we have all the reasons to remain optimistic about Haverty's future. Our margins are strong. Our overall average ticket is growing.

Speaker 3

Our design average ticket is growing. Traffic is improving. Closing percentages are stabilizing. Expenses are well controlled. Inventories are balanced.

Speaker 3

We are growing 5 stores a year in difficult times. And finally, we are debt free with over $100,000,000 cash in the bank. I want to thank all the Haverty team members across the company for their hard work and dedication to furnishing happiness to our customers at every point of contact. Now, I will turn the call over to Richard.

Speaker 1

Thanks, Steve. In the Q3 of 2024, we reported net sales of $175,900,000 a 20.2% decrease over the prior year quarter. Comparable store sales were down 20.5% over the prior year period. Our gross profit margin decreased 60 basis points to 60.2% from 60.8%. The decrease was driven by the change in the LIFO reserve, which generated an immaterial impact on gross profit in 2024 compared to a positive impact of $2,300,000 in the Q3 of 2023.

Speaker 1

Excluding the impact of our LIFO reserve, our gross margins increased over 50 basis points over the prior year quarter. SG and A expenses decreased $11,800,000 or 10.4 percent to $100,900,000 As a percentage of sales, these costs approximated 57.4% of sales, up from 51.1% in the prior year quarter. We experienced decreased selling costs, advertising, administrative, warehouse and delivery expenses during the quarter. Other income expenses in the Q3 was $333,000 and interest income was approximately $1,600,000 during the Q3 of 2024. Income before income taxes decreased $16,100,000 to $6,900,000 Our tax expense was $1,900,000 during the Q3 of 2024, which resulted in an effective tax rate of 28.2 percent compared to an effective tax rate of 25.1 percent in the Q3 of 2023.

Speaker 1

Primary difference in the effective rate and statutory rate is due to expected state income taxes and non deductible items for the year. Net income for the Q3 of 2024 was $4,900,000 or $0.29 per diluted share on our common stock compared to net income of $17,200,000 or $1.02 per share in the comparable quarter last year. Now turning to our balance sheet at the end of the 3rd quarter, our inventories were $88,700,000 which was down $5,300,000 from December 31, 2023 and down $13,600,000 versus Q3 2023. At the end of the Q3, our customer deposits were $43,900,000 dollars which was up $8,100,000 from the December 31, 2023 balance and down $2,400,000 versus the Q3 2023 balance. We ended the quarter with $121,200,000 of cash and cash equivalents.

Speaker 1

We have no funded debt on our balance sheet at the end of the Q3 of 2024. Looking at some of the uses of our cash flow, CapEx was $24,300,000 for the 1st 9 months of 2024. We also paid out $15,300,000 of regular dividends in the 1st 9 months of 2024. We didn't utilize our share repurchase program during the Q3 of 2024 and we have approximately $13,100,000 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 1

I will highlight a few, but please refer to our press release for additional commentary. We expect our gross margins for 2024 to be between 60.0% 60.5%. We anticipate gross profit margins will be impacted by our current estimates of product and freight costs. Our fixed and discretionary type SG and A expenses for 2024 are expected to be in the $279,000,000 to $281,000,000 range, which is a reduction in our previous estimate. We anticipate continued reductions in incentive compensation and professional fees during this year.

Speaker 1

The variable type costs within SG and A for 2024 are expected to be in the range of 19.6% to 19.9%. We anticipate continued reductions in third party credit costs and delivery costs. Our planned CapEx for 2024 is $33,000,000 anticipated new or replacement stores, remodels and expansions account for $28,000,000 investments in our distribution network are expected to be $2,500,000 and investments in our information technology are expected to be approximately $2,500,000 Our anticipated effective tax rate for 2024 is expected to be 28%. This projection excludes the impact of vesting of stock awards and any new potential tax legislation. This completes my commentary on the Q3 financial results.

Speaker 1

Operator, at this time, we would like to open up the call for any questions.

Operator

Thank you. We will now be conducting a question and answer session. Your first question comes from Michael Legg with The Benchmark Company. Please go ahead.

Speaker 4

Thanks. Good morning, guys. I wanted to talk a little bit about the impact of the hurricanes and the damage to the housing and how you expect that to impact demand over the longer term as the housing is rebuilt. Could you just talk about any anticipated demand longer term from that?

Speaker 3

Yes. Mike, we would expect it to be there. Our anticipation is probably it's going to be somewhere 3 to 6 months out before we start to see anything on that. Obviously, the two events were totally separate of each other, meaning Helene went up through Georgia and through North Florida. Obviously, most of the damage there and the impact will come out of Asheville, and we'll see that how that recovers from that area, and I think that will be longer term.

Speaker 3

And then in Florida, which across went right across the state there, affecting Tampa, Orlando, Fort Myers, obviously, a big swath of our stores there. We anticipate there that we will see that probably a little bit quicker as they'll recover faster out of that from those areas. But I don't know specifically what to expect, but we would definitely expect a lift from it.

Speaker 5

Okay, great. Yes, I would expect it also. And then

Speaker 4

just on the store opening, I mean, you've announced both bunch of stores, but as you look at the weak consumer, what do you how does that position you now for continued 5 store growth annually longer term?

Speaker 2

We're not changing that. We think actually we may hit 6 stores net of 5, but open 6 net and we have a relocation plan next year. So our plan is 5 stores. You heard my comments there that the real focus is Houston. We want to get positioned there.

Speaker 2

That's our priority. So we're not backing off of that plan.

Speaker 4

Great. Tough times, you guys are doing a great job. Company is well firmly positioned. Look forward to continued results. Thanks.

Speaker 3

Thank you.

Operator

Next question, Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Speaker 5

Good morning and thank you for taking the questions. So I guess, first, can you guys just share maybe some monthly trends that you saw, whether it's written sales or delivered sales? And also as far as other than the storm related impact, did you see any notable regional differences in terms of sales trends?

Speaker 1

Hey, good morning, Nancy. Let me take the numbers part, and then Steve's got some commentary on the market where the storms were impacted the most. But in terms of written business, it was pretty constant trend throughout the quarter. In July, we were down around 14%, it was around 50% in written business in August and slightly over 16% in September. So the average was 15.3%.

Speaker 1

So fairly consistent throughout. On deliveries, we were down around 16% in July, around 18% in August, and then with that storm at the end, it kind of deferred some deliveries. So we were down around 25% in September for an average of 20.2% for the quarter. Overall, Steve gave a lot of commentary about the storms. From a financial impact, it was a very minimum impact in the Q3.

Speaker 1

It impacted some deliveries, but not significant numbers, and we'll make those up in the Q4.

Speaker 3

Yes. And Anthony, if you're looking at it from a regional or district standpoint, the Midwest and Central districts have been outperforming. Our other districts in Florida and the West have been a little bit underperforming in those areas. But obviously, we know that's our biggest concentration in Florida and Texas. So we're looking for those to bounce back certainly from the storm, which has caused obviously some disruptions there.

Speaker 5

Yes, understood. Okay. And then just in terms of just actually switching to the balance sheet. So nice job with inventory reduction. It was a very good cash flow quarter actually.

Speaker 5

Do you think you can further reduce inventories or do you think you're kind of more or less tapped out? Obviously, you're adding stores, so there's going to be some inventory build for that. But just overall, how should we think about that?

Speaker 3

Yes. I don't see inventories going down anymore, Anthony, and some of it may have been impacted by the port strike in anticipation of it and what happened there is some flow with some of that coming in. But we feel comfortable with it where we are and we feel like it can fluctuate up with the new stores we got coming, but it's not going to be any dramatic change. We feel our levels are pretty in a good place right now. We can run a turn and get a good turn going and a good flow of the inventory.

Speaker 3

We just need more consistency. The Red Sea, we've been dealing with. The Port Authority has gotten all these disruptions that have caused some longer lead times. As those shorten up, then we get more continuity, more consistency with that inventory flow.

Speaker 5

Understood. And also, a few months ago, you guys changed your media buyers. So just wondering if you could comment on that, like as far what you've seen so far and whether or not you plan to make any other changes to your marketing strategy?

Speaker 3

We're very pleased with it. We reported and you heard us talk about traffic is improving and that they started in April and we gradually started seeing a little slow improvement in traffic and it's we're really pleased with what we're seeing so far through the Q3. So I think we'll continue to go forward with that in their plan, which is still the same thing. We're using digital, using broadcast and over the top communicating social. So that's a big part of what we're doing, and we continue that.

Speaker 5

Understood. Well, thank you very much and best of luck.

Speaker 1

Thanks, Anthony.

Operator

Next question, Christina Fernandez with Telsey Advisory Group. Please go ahead.

Speaker 6

Hi, good morning. I wanted to ask about the traffic trend that you're seeing in October, Claris. You mentioned that you've seen some improvement. Can you talk about what the delta has been? And is that translating into improved demand or is it still too early?

Speaker 2

I think it's a little early, but it is improved. I mean, we're seeing a little better traffic. It's not down as much And recently we've seen some improvement. We're not going to give you details on that, but we are encouraged with the recent feel of the customers coming in, the interest in our product and the fact that it's less negative than it was before.

Speaker 3

Steve? I think, Christina, the customer is still a little cautious. I mean, a little more deliberate, the elections and everything out there, high interest rates, but it is nice to see the traffic improving. I think we said earlier in the year, we were down we never gave specifics, but we said we were down traffic was down double digits. And in the Q3 now toward the end of Q3, we started seeing in the mid single digits as far as a decrease.

Speaker 2

Christina, one other comment there is we're pleased with the new products we're bringing in. Those are some of our best sellers. Steve said we've managed our inventories well. We also announced last week a major enhancement to our merchandise team. We brought in some new talent and we all were just at the furniture market this past week together and they're learning us.

Speaker 2

We brought in Heidi Jones, who was in the business. She's been a retailer for 20 years. She was at our house. She's a vice president now for us and promoted an internal candidate who's very talented. Alice Anderson has been with us for 6 years.

Speaker 2

She's now managing our upholstery. And a new talent, Valerie Naples, came from Ballard's, joined us. So we've got new talent and we promoted some other folks in that department all under John Gill. And we feel very good about where we currently are and some of the new energy and talent we have coming in. So it's a significant enhancement to our team and we're encouraged by that.

Speaker 6

Thank you for that color. I also wanted to ask around the big weekends Labor Day. I know you mentioned this disappointing, but a little bit better than Memorial Day. So maybe, Steve, like what's working? What's the consumer responding to?

Speaker 6

I noticed you did a little bit bigger financing offer. And what learnings will you take to the upcoming big selling periods?

Speaker 3

Yes, Christina, I don't know that the consumer from our promotion standpoint, we haven't changed anything there. We feel very good where we are. We don't want to start chasing that and go aggressive with further discounting. We don't think that's the answer. Certainly, in this environment, with housing where it is and the election where it is, we don't think that would be.

Speaker 3

And then from a credit offering, the consumer is not we've got the aggressive offers out there, if needed for the consumer for the bigger tickets, but we're just not seeing the demand. And as a result of that, we've seen credit costs. Richard, do you want to give some commentary on that?

Speaker 1

I was just going to add that our credit scores according to Synchrony are still very strong in the upper 700s. Our approval rates are still in store, upper 80s, low 90 percent and their delinquency rates are back to pre pandemic levels and our credit as percent of sales is still a third. So all those metrics are still strong in terms of the credit of our customer that's using Synchrony.

Speaker 3

So as traffic improves, Christine, I don't think it's a media impact. I mean, people it is a shopping process they go through. And so we're still seeing big design sales where we reported out. I think our design business is about 34%, a little over 34% of our business. So we're excited about that.

Speaker 3

We're still seeing extremely big sales from the customers. So we just we want to be consistent and provide the right service to our customers and we're going to stay committed to that.

Speaker 6

And the last question I had was on the Houston market. How many stores do you think that market or how many have already store can that market ultimately hold? How many can you have longer term?

Speaker 2

Well, I don't know what we have longer term, but I think we would like to have 5 stores to cover the marketplace at least around we're going to the outer perimeters mainly and positioning to where the growth areas are. It's a big market. We I think we've got 8 or 10 stores around Atlanta. We probably wouldn't normally have that, but in Houston, that's our target to begin with.

Speaker 6

Thank you.

Operator

There are no further questions. I would like to turn the floor over to Richard for closing remarks.

Speaker 1

Well, we appreciate your participation in today's call. And before we conclude our call, Clarence Smith has a few closing remarks.

Speaker 2

I want to recognize on this call the loss of one of our industry and investor legends who would always be on this call, that's Bud Bugatch. Bud was 40 plus years at Raymond James. I've traveled the investment world with him, learned a lot about it. He was an incredible advocate for the furniture industry. He loved retail and he loved merchandising.

Speaker 2

He was a former furniture retailer and we had many lively debates and discussions, always interested a brilliant man. We lost him way too quickly and way too early and we missed Bud. So just want to recognize that.

Speaker 1

Thank you, Clarence. And we look forward to talking with each of you in the future when we release our 4th quarter results. Thank you.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect.

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Key Takeaways

  • Consolidated Q3 sales fell 20.2% to $175.9 M with EPS down to $0.29 from $1.02, reflecting a cautious consumer, election uncertainty and hurricane disruptions.
  • Haverty’s remains committed to its store growth plan, adding Pembroke Pines and planning three more openings this year—including a return to Houston after 43 years—to end 2024 with 129 stores.
  • The design business grew 19% in Q3, overall average ticket rose 3% to nearly $3,500, and special orders now account for 36% of upholstery sales, underscoring higher spend per transaction.
  • Financially, Haverty’s is debt free with $121.2 M in cash, inventories down 13% YoY, SG&A costs reduced, and gross margins expected at 60.0–60.5% for 2024.
  • Despite a tough sales environment, the company is optimistic as store traffic improves, closing rates stabilize, and expansion into key markets like Houston is underway.
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Earnings Conference Call
Haverty Furniture Companies Q3 2024
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