HVT - NYSE

Greetings, and welcome to Haverty’s Second Quarter 2023 Earnings Call. [Operator Instructions] 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.

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 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.

Good morning. Thank you for joining our second quarter conference call. Consolidated sales decreased 18.5% to $206.3 million, 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% 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 customer -- and 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 is 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 3 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 have acquired the leases on 4 stores in the Bed Bath & Beyond bankruptcy auction. Three of these stores are in important Florida locations, which allow us to reach new areas and leverage our marketing and distribution in those fast-growing markets. The Pembroke, Pines location is our further 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 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 falloff from 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. We are drilling 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.

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. Our lead times from our vendors remain in 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. 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 that we will open from the Bed Bath & Beyond bankruptcy. We feel these stores will be an easy fit into our retail and distribution footprint 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.

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 year 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 and 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 on our common stock compared to net income of $21.7 million or $1.27 per share in the comparable quarter last year. Now 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 31, 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 31, 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, 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 $33.8 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 list 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 changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for 2023 are expected to be in the $286 million to $289 million range. The variable-type costs within SG&A for 2023 are expected to be in the range of 19.5% to 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 4 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 Instructions] And our first question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

So I just wanted to follow up about the comments about the recent improvements of incoming orders. Can you shed some more color on what you've seen. Anything you can help us out with, that would be great.

Yes, Anthony, let me kind of go back through our written business trends back to Q1 to now. So in the first quarter, our written trends each month, January, February were in the low teens, down 10.5% in January and down about the same, around 14% and 11% to 12% in February and March. In the second quarter, we saw a pretty big drop in April. We were down 20% in written 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. 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 and June.

Okay. Got it. So less bad, I guess. But -- okay. But I just wanted to get that clarification. 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. So how should we think about the sustainability of the average ticket here going forward?

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, 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 forward.

Okay. Sounds good. And then as far as your outlook for credit promotions, how should we think about that? It 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 I 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?

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

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

This is Mickey on behalf of Mike. Just a quick 1 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 credit. So just curious what you're seeing from your competitors.

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.

Okay. Great. That's like what we like to hear. That's all from us today.

I think next year could go beyond that. Yes.

That would be our hope.

Yes. 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. Cristina, and I'll go back in our history at year 2000, we took over, I think, 9 Homelife stores from Sears able to open those over basically 18 months or so. So we're very good at converting existing boxes to Havertys and we think they're going to be opportunities for us.

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.

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.