Haverty Furniture Companies - Q2 2023

Transcript

Operator (participant)

Greetings, and welcome to Havertys' second quarter 2023 earnings call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Hare, Chief Financial Officer. Please go ahead.

Richard Hare (CFO)

Thank you, Operator. During this 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 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.

Clarence Smith (Chairman and CEO)

Good morning. Thank you for joining our second quarter conference call. Consolidated sales decreased 18.5% to $206.3 million, reflecting the consumer's pullback in home-related spending and the impact of higher interest rates on home sales. Incoming orders or written sales were down 14.7%, with written comp store sales down 15.2%. Our earnings per share came in at $0.70 versus $1.27 last year. 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 custom design-oriented sales.

We continue to gain recognition for our quality products, service, and free design. While we're 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. We're strengthening our store locations in the footprint we are 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 three stores: Concord, North Carolina, our third store in Charlotte, Dayton, Ohio, served by our expanded Cincinnati Home Delivery Center, and an outlet store south of Richmond, Virginia. In the second quarter, 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 four stores in the Bed Bath & Beyond bankruptcy auction. Three 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.

With the addition of these units, we'll have 33 stores in Florida. The fourth store in Southaven, 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 five 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're tackling. 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 Havertys' reach. I'll now turn the call over to Steve Burdette, our president.

Steve Burdette (President)

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 in 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. Our lead times from our vendors remain at approximately six 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. 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 A/B 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 that we will open from the Bed Bath & Beyond bankruptcy. We feel these stores will be an easy fit into our retail and distribution footprints as additional branches in existing markets in 2024. 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.

Richard Hare (CFO)

Thank you, Steve, and good morning. In the second quarter of 2023, net sales were $206.3 million, an 18.5% 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 $8.1 million or 6.9% to $110 million. As a percentage of sales, these costs approximated 53.3% of sales, up from 46.7% in the prior quarter. We experienced decreased selling, advertising, distribution and transportation expenses during the quarter.

Other income and expense for the second quarter of 2024 was negligible, interest income was approximately $1 million during the second quarter as we earned more on our cash deposits due to higher interest rates. Income before income taxes decreased $12.8 million to $15.8 million. Our tax expense was $4 million during the second quarter of 2023, which resulted in an effective tax rate of 25.5%. The primary difference in the effective rate and the statutory rate is due to state income taxes. Net income for the second quarter of 2023 was $11.8 million, or $0.70 per diluted share in our common stock, compared to net income of $21.7 million or $1.27 per share in the comparable quarter last year. Turning to our balance sheet.

At the end of the second quarter, our inventories were $114.7 million, which was down $3.6 million from December 31st, 2022, and down $19.3 million versus our Q2 2022 balance. At the end of the second quarter, our customer deposits were $45.6 million, which was down $2.4 million from the December 31st, 2022 balance and down $45.2 million versus the Q2 2022 balance. We ended the quarter with $109.1 million of cash and cash equivalents. 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 $33.8 million for the second quarter.

As a reminder, we repurchased our Florida distribution facility at the beginning of the quarter for $28.2 million. In addition, during the second quarter, 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 $4.9 million of regular dividends. During the second quarter, we didn't purchase any common shares under our existing stock buyback program, and we have approximately $20 million 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. 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% and 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&A expenses for 2023 are expected to be in the $286 million-$289 million range. The variable type costs within SG&A for 2023 are expected to be in the range of 19.5%-19.7%, with increases over 2022 primarily being inflation driven. Our planned CapEx for 2023 has increased to $57 million. In addition to our current year-to-date spending, we anticipate spending an incremental $3 million during the calendar year on refurbishing and reformatting the four former Bed Bath & Beyond stores we secured through the bankruptcy lease auction. Anticipated or new replacement stores, remodels and expansions account for $19.9 million.

Investments in our distribution network are expected to be $34.3 million, and investments in our information technology are expected to approximately be $2.8 million 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 second quarter financial results. Operator, we would like to open the call up for any questions at this time.

Operator (participant)

Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed.

Anthony Lebiedzinski (Senior Equity Analyst)

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

Richard Hare (CFO)

Yeah, Anthony, let me, let me kind of go back through our written business trends, back, back to Q1 to now. In the first quarter, our written trends each, each month, January through February, were in the low teens, down 10.5% January, down about the same, around 14% and 11%-12% in February and March. In the second quarter, we saw a pretty big drop. In April, we were down 20% in business, we saw some improvement in May. We were down approximately 13%, between 12.8% and 13%, and we're down about 11% in June. We've certainly seen, you know, 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 and June.

Anthony Lebiedzinski (Senior Equity Analyst)

Okay, got it. So, so less bad, I guess, you know, but, but, okay, but, just wanted to get that clarification in. Thank you for that. Then, you know, in terms of, you know, the average ticket, obviously, at an all-time high, your freight costs are down, and demand is still, let's see, apparently, it looks like kind of still soft here. How should we think about the sustainability of the average ticket here going forward?

Steve Burdette (President)

Anthony, this is Steve. I, 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, you know, we're really focused on exposing that to more customers as they come in the door. We really think there's an opportunity to continue to grow that. Average ticket has not been an issue for us, and we don't see that being an issue going forward.

Anthony Lebiedzinski (Senior Equity Analyst)

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

Richard Hare (CFO)

Well, Anthony, this is Richard. Just from the credit perspective, as we said last quarter, we are being more disciplined on offering extended credit terms of 60 months. We still do that in certain promotions, we are doing it for less, a less smaller time period during the promotion period. Steve, do you want to comment?

Steve Burdette (President)

We still are using the 60 months to drive around our major holidays, Anthony. We'll continue to do that. 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, you know, bigger promotions, bigger events.

Anthony Lebiedzinski (Senior Equity Analyst)

Understood. Best of luck going forward.

Steve Burdette (President)

All right. Thanks, Anthony.

Operator (participant)

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

Speaker 6

Hi, good morning. This is Mickey on behalf of Mike. Just a quick one here. I'm just curious what you're seeing 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 credits. Just curious what you're seeing from your competitors.

Clarence Smith (Chairman and CEO)

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

Speaker 6

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

Clarence Smith (Chairman and CEO)

Thank you.

Richard Hare (CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Cristina Fernández with Telsey Advisory Group. Please proceed.

Cristina Fernández (Managing Director and Senior Research Analyst)

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. What 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?

Steve Burdette (President)

Yeah, Cristina, this is Steve. I'd say our categories are still performing the same area. We did get in a lot of new case goods, bedroom, dining room in the first quarter. We've seen certainly an uptick in that category. Still, upholstery is strong for us. There's no real trend change. We have seen some improvement in bedding, which has been a nice thing to see, and that's been a category that we've been struggling in, but we've seen some improvement in that through the quarter. All in all, things are, are pretty, you know, steady.

Cristina Fernández (Managing Director and Senior Research Analyst)

The, the second question I have is around the, the, the expenses. Last quarter, you, 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 and like, you, what, what you saw this quarter, to, to have better profitability on the back half, or you're comfortable with where you are?

Steve Burdette (President)

Right now, Cristina, we're comfortable where we are 'cause, you know, we just transitioned through that through the quarter. We will constantly review that and look at that, and we'll continue to make changes if necessary, in our distribution and delivery and service side. At the store side, you know, our adjustments there have been more on the, you know, number of sales associates that are needed, but we have an X minimum number that are needed to run the store. I don't see much adjustment on the store side, but any further adjustments that would be needed, that would be because conditions worsen, would be in the delivery and distribution side. We're hopeful that that's not gonna be the case, and that we're, we're positioned right to carry us forward for the rest of the year.

Cristina Fernández (Managing Director and Senior Research Analyst)

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

Richard Hare (CFO)

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. You know, we've allocated $3 million of capital for this year. Each location's probably between $2.5 million-$3 million of capital required to go in and refurbish it and make it a Havertys location. 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. We're also gonna sublease or we have plans to sublease, on a temporary basis, these locations to a seasonal tenant, as we ramp these things up.

That'll offset partially offset some of the rent. We're real excited about these locations, and we think, you know, it, it says a lot that we're investing in our future during a, a downturn in the business.

Cristina Fernández (Managing Director and Senior Research Analyst)

Actually, one, one clarifying question. As we think about the store openings next year, will these four locations, kind of meet your target for five openings a year, or could next year even go beyond those five openings?

Clarence Smith (Chairman and CEO)

I think next year could go beyond that, yes.

Steve Burdette (President)

That would be our hope.

Clarence Smith (Chairman and CEO)

Yeah. We, we do have a number of sites that we're looking at and have LOI out that we think could work for us, but we don't know that, and we don't announce leases until they're signed. It, it could be a year of more next year, Cristina. I'll, I'll go back in our history. At year 2000, we, we took over, I think, nine HomeLife stores from Sears, and we were able to open those over basically 18 months or so. We're very good at converting existing boxes to Havertys, and, and we think they're gonna be opportunities for us.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you, and best of luck this quarter.

Richard Hare (CFO)

Thank you.

Steve Burdette (President)

Thank you.

Operator (participant)

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

Richard Hare (CFO)

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

Operator (participant)

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