Haverty Furniture Companies - Q3 2024

Transcript

Operator (participant)

Greetings and welcome to Havertys 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. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Hare, Chief Financial Officer. Please go ahead.

Richard Hare (CFO)

Thank you, Operator, and good morning. 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 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 third quarter conference call. Consolidated sales were $175.9 million, 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 two 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. We expect to see better traffic and sales once the elections are behind us. During the third quarter, we were excited about the opening of our new Pembroke Pines store in North Miami, Florida.

We're pleased with the store traffic, which is on par with our other recent openings in Southaven, Mississippi, and Destin, Florida, earlier this year. We expect to open three 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. 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 seventh-largest market in the country, is our top priority for the next two years. It is the largest market in our distribution footprint where we don't have stores.

We open a second store in Baybrook in January 2025, and we have several more potential locations that we are pursuing. 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 an expanded distribution center in Dallas.

I'll turn the call over now to Steve Burdette, our President.

Steve Burdette (President)

Thank you, Clarence, and good morning. Our third quarter results were disappointing as we continue 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 that 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.

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 six markets and 11 stores that were closed from one to four days during the quarter. However, our Asheville, North Carolina, store was closed for 19 days over September and October, reopening on 10/16. With Hurricane Milton, there were five markets, 20 stores, and one warehouse affected in early October.

Most stores and the warehouse were back operating within two to five days, with three stores closed seven to 10 days. With these types of events, this magnitude, it is not only the days you are closed, but the distraction that is 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. With regards to our website, due to continued A/B testing, we've made multiple modifications to the site to enhance personalization, navigation, and wayfinding. 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. 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. Our inventories continue to remain in excellent condition, and we're 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 Havertys future. Our margins are strong. Our overall average ticket is growing. Our design average ticket is growing. Traffic is improving. Closing percentages are stabilizing. Expenses are well controlled.

Inventories are balanced. We are growing five stores a year in difficult times. And finally, we are debt-free with over $100 million 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.

Richard Hare (CFO)

Thanks, Steve. In the third quarter of 2024, we reported net sales of $175.9 million, 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 $2.3 million in the third quarter of 2023. Excluding the impact of our LIFO reserve, our gross margins increased over 50 basis points over the prior year quarter. SG&A expenses decreased $11.8 million, or 10.4%, to $100.9 million. 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 third quarter were $333,000, and interest income was approximately $1.6 million during the third quarter of 2024. Income before income taxes decreased $16.1 million to $6.9 million. Our tax expense was $1.9 million during the third quarter of 2024, which resulted in an effective tax rate of 28.2% compared to an effective tax rate of 25.1% in the third quarter of 2023. 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 third quarter of 2024 was $4.9 million, or $0.29 per diluted share in our common stock, compared to net income of $17.2 million, or $1.02 per share in the comparable quarter last year.

Now, turning to our balance sheet at the end of the third quarter, our inventories were $88.7 million, which was down $5.3 million from December 31st, 2023, and down $13.6 million versus Q3 2023. At the end of the third quarter, our customer deposits were $43.9 million, which was up $8.1 million from the December 31, 2023 balance, and down $2.4 million versus the Q3 2023 balance. We ended the quarter with $121.2 million of cash and cash equivalents. We have no funded debt on our balance sheet at the end of the third quarter of 2024. Looking at some of the uses of our cash flow, CapEx was $24.3 million for the first nine months of 2024. We also paid out $15.3 million of regular dividends in the first nine months of 2024.

We didn't utilize our share repurchase program during the third quarter of 2024, and we have approximately $13.1 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 margins for 2024 to be between 60.0% and 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&A expenses for 2024 are expected to be in the $279 million-$281 million range, which is a reduction in our previous estimate. We anticipate continued reductions in incentive compensation and professional fees during this year. The variable-type costs within SG&A for 2024 are expected to be in the range of 19.6%-19.9%.

We anticipate continued reductions in third-party credit costs and delivery costs. Our planned CapEx for 2024 is $33 million. Anticipated new or replacement stores, remodels, and expansions account for $28 million. Investments in our distribution network are expected to be $2.5 million, and investments in our information technology are expected to be approximately $2.5 million. 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 third quarter financial results. Operator, at this time, we would like to open up the call for any questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question 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 key. Your first question comes from Michael Legg, The Benchmark Company. Please go ahead.

Michael Legg (Equity Research Analyst)

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's rebuilt. Could you just talk about any anticipated demand longer term from that?

Steve Burdette (President)

Yeah. We would expect it to be there. Our anticipation is probably it's going to be somewhere three to six 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 how that recovers from that area, and I think that'll be longer term, and then in Florida, which 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 because 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.

Michael Legg (Equity Research Analyst)

Okay. Okay. Great. Yeah, I would expect it also. And then just on the store opening, I mean, you've announced a bunch of stores, but as you look at the weak consumer, how does that position you now for continued five-store growth annually longer term?

Clarence Smith (Chairman and CEO)

We're not changing that. We think, actually, we may have six stores net five, but open six net. And we have a relocation plan next year. So our plan is five stores. You heard my comments there that the real focus is Houston. We want to get positioned there. That's our priority. So we're not backing off of that plan.

Michael Legg (Equity Research Analyst)

Great. And in tough times, you guys are doing a great job. The company's well fundamentally positioned. Look forward to continued results. Thanks.

Steve Burdette (President)

Thank you.

Operator (participant)

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

Anthony Lebiedzinski (Senior Equity Analyst)

Good morning and thank you for taking the question. So I guess first, can you guys 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?

Richard Hare (CFO)

Hey, good morning, Anthony. Let me take the numbers part, and then Steve's got some commentary on the markets where the storms were impacted the most. But in terms of written business, it was a 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%. 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 third quarter.

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

Steve Burdette (President)

Yeah. 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. And 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.

Anthony Lebiedzinski (Senior Equity Analyst)

Yeah. 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. 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, but so there's going to be some inventory built for that. But just overall, how should we think about that?

Steve Burdette (President)

Yeah. 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, 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 in a good place right now. We can run a turn and get a good turn going and a good flow of the inventory. We just need more consistency. The Red Sea we've been dealing with, the port strike, we've gotten all these disruptions that have caused some longer lead times. As those shorten up, then we can get more continuity, more consistency with that inventory flow.

Anthony Lebiedzinski (Senior Equity Analyst)

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

Steve Burdette (President)

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

Anthony Lebiedzinski (Senior Equity Analyst)

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

Steve Burdette (President)

Thanks, Anthony.

Operator (participant)

Next question, Cristina Fernández with Telsey Advisory Group. Please go ahead.

Cristina Fernández (Managing Director and Senior Research Analyst)

Hi, good morning. I wanted to ask about the traffic trend that you're seeing in October. Clarence, 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?

Clarence Smith (Chairman and CEO)

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.

Steve Burdette (President)

I think, Cristina, 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 third quarter now, toward the end of the third quarter, we started seeing in the mid-single digits as far as a decrease.

Clarence Smith (Chairman and CEO)

Cristina, 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. We brought in Heidi Jones, who was in the business. She's been a retailer for 20 years. She was at Arhaus. She's a Vice President now for us and promoted an internal candidate who's very talented. Alice Anderson has been with us for six years. She's now managing our upholstery, and a new talent, Valerie Naples, came from Ballard's and joined us. So we've got new talent, and we promoted some other folks in that department, all under John Gill.

We feel very good about where we currently are and some of the new energy and talent we have coming in. It's a significant enhancement to our team, and we're encouraged by that.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you for that color. I also wanted to ask around the big weekends, Labor Day. I know you mentioned it was disappointing, but a little bit better than Memorial Day. So maybe, Steve, what's working? What's the consumer responding to? I noticed you did a little bit bigger financing offer, and what learnings will you take to the upcoming big selling periods?

Steve Burdette (President)

Yeah. Cristina, 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. 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?

Richard Hare (CFO)

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%. And their delinquency rates are back to pre-pandemic levels, and our credit 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.

Steve Burdette (President)

So as traffic improves, Cristina, I don't think it's a media impact. I mean, it is a shopping process they go through. And so we're still seeing big design sales. We reported out, I think our design business is about 34%, a little over 34% of our business. So we're excited about that. We're still seeing extremely big sales from the customer. So we want to be consistent and provide the right service to our customers, and we're going to stay committed to that.

Cristina Fernández (Managing Director and Senior Research Analyst)

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

Clarence Smith (Chairman and CEO)

I don't know what we have longer term, but I think we would like to have five 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. I think we've got eight or 10 stores around Atlanta. We probably wouldn't normally have that. But in Houston, that's our target to begin with.

Cristina Fernández (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

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

Richard Hare (CFO)

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

Clarence Smith (Chairman and CEO)

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 Budd Bugatch. Budd was 40+ 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. 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 Budd. So just want to recognize that.

Richard Hare (CFO)

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

Operator (participant)

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