HVT - NYSE

Greetings, and welcome to Haverty's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tiffany Hinkle, Assistant Vice President of Financial Reporting, Investor Relations. Thank you, you may begin.

Thank you, operator. Good morning, and thank you for joining our fourth quarter earnings call. I'm here today with our President and CEO, Steve Burdette; and Executive Vice President and CFO, Richard Hare. Before we begin, I'd like to remind everyone that today's conference call may contain 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 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. A replay of this call will be available on our Investor Relations website this afternoon. For commentary about our business, I will now turn the call over to Steve.

Good morning, and thank you for joining our 2025 fourth quarter and 2025 year-end conference call. We are excited to report an increase in both written and delivered comp sales for Q4, marking our second consecutive quarter of positive comps. Our net sales for Q4 were $201.9 million, which was up 9.5% with comps up 8.2%. Total written sales were up 3.5% with comps up 3.2%. Gross margins for the quarter came in at 60.4% versus 61.9% last year. However, we did incur $3.9 million in LIFO charges during the quarter. Pretax income for the quarter was $10.8 million or 5.3% operating margin versus $9.6 million or 5.2% operating margin, resulting in a $0.51 a share versus $0.49 a share. For the calendar year 2025, our net sales came in at $759 million, which was up 5% with comps up 2.1%. Gross margins for the year were flat with last year coming in at 60.7%, including $4.6 million in LIFO charges. Pretax profits were $26.8 million or 3.5% operating margin versus $26.2 million or 3.6% operating margin, resulting in $1.19 a share, which was flat with last year. Richard will provide additional details regarding our SG&A expenses and LIFO impact in his discussion. During the quarter, we saw our written sales fall off as the quarter progressed. However, it was nice to see our after Thanksgiving sales up 6.2% with strong average ticket in design at approximately $8,500 and our overall average ticket at $4,400-plus. For Q4, our average ticket increased 10.9% to $3,759 with design average ticket growing 11.9% to $8,072. Our design business accounted for 33.3% of our sales, driven by our upholstery special order business up 14.8%. Traffic for the quarter followed our written sales trend during the quarter, ending with a decrease in the low single digits for the quarter overall. It is important to remember for comparison purposes that we had just experienced our first positive traffic increase in November and December of 2024 following the presidential election in several years. Conversion rates remained slightly down for the quarter. For the calendar year, our written business was up 2.8% with comps up 0.7%. Our average ticket came in at $3,530, up 4.7%, and our designer average ticket was $7,781, up 9.7%. Traffic was up in the mid-single digits with conversion rates continuing to show improvement. Our merchandising and supply chain teams continue to partner with our outstanding vendors to ensure that our products are flowing consistently to avoid any disruptions for our customers. Our merchandising team continues to challenge our assortment to make sure that we are testing new styles, new colors, new price points and new categories, which creates excitement for our teams and customers by helping to differentiate ourselves from our competition. From a category perspective, for the quarter, bedroom and upholstery were up mid-single digits, followed by occasional up low single digits; and dining, mattresses and decor coming in flat. Our inventories are in a great position as we continue to focus on having best sellers in stock for immediate gratification for our customers. At year-end, our inventories were up $12.7 million versus last year to $96.2 million. We do expect to see this drop over the next 6 months as we had to get in front of some of the most recent tariffs in Q4 with our inventory purchases and new product arrivals. We did get some good news late December when the administration delayed the additional 5% tariff on Section 232 upholstered wood furniture, leaving it at 25%. However, last Friday, we finally heard from the Supreme Court as they ruled that the IEEPA tariffs were illegal. As we heard over the weekend from the administration, and we verified this morning effective at 12:01 a.m. today, a 10% worldwide tariff has been issued through Section 122 of the 1974 Trade Act. This tariff to understanding will replace the IEEPA tariffs and the fentanyl tariffs and these Section 122 tariffs are not stackable on Section 232 tariffs or applicable under the current USMCA agreement; however, they are stackable with the Section 301 tariffs. Haverty's will be thoughtful and deliberate in our approach with the continuing tariff adjustments so that we have a minimal impact on our customers, team members and shareholders. Our marketing, creative and media plans continue to resonate with our customers through broadcast, connected TV and digital marketing channels. We saw web traffic and key site engagement increased double digits year-over-year, contributing to our in-store success, and our written e-commerce sales increased 12.3% for the quarter. We ran our second direct mail campaign in late October in preparation for the after Thanksgiving shopping period. It was a 16-page piece mailed to approximately 750,000 new customers that highlighted our product assortment and design capabilities. We refined our targeting models based on results from the first campaign and added pricing, which we believe helped contribute to an improved conversion rate. Our marketing dollars were down slightly for the quarter as a percent of net sales, as we were able to leverage the increase in sales. We continue to emphasize 60 months no interest for competitive reasons in our promotions, creating an increase in our credit costs for the quarter. However, these credit costs remained slightly down for the year. We ended the year at 129 stores, but already have plans for 5 new stores in 2026. Four of the stores have been announced in St. Louis, Nashville and 2 in Houston. We are excited to announce today that we will be entering Pennsylvania, which will be our 18th state. We will open in Q4 in North Pittsburgh across from the Ross township mall. We are currently in lease negotiations on several other locations that we hope to be able to announce by next quarter's call. The opening of 5 new stores in 2026, along with 4 planned remodels, a refresh of the mattress and design areas in our stores, of which approximately 35% will be done, will push our CapEx budget to around $33.5 million, which Richard will cover in more detail. After careful evaluation, we have decided to close our Alexandria, Louisiana, location in March. This decision to close was driven by significant demographic shifts in the market, stagnant housing growth and the need for a major remodel. We wanted to thank all our team members who have served the Alexandria customers and surrounding markets for over the 40-plus years. Our dedicated distribution, home delivery and customer service teams continue their wonderful work serving our customers across our 17, soon-to-be 18 states. All of our new store growth will be served by our current distribution network, requiring no new investments. The ability of the teams to adjust the business to the current demands is outstanding, allowing us to provide our customers with a memorable experience on each and every encounter. The industry continues to face ongoing challenges. But even with all the uncertainty, our optimism remains high as we rebounded in 2025, feeling like we hit an inflection point in Q3 with the momentum continuing into Q4. Our push in 2026 is to continue our focus on testing new ideas and processes along with continuing our organic store growth. Thank you to all our Haverty team members for your dedication to our customers and our company's success. Our people define us, and I am proud to be a part of this great team. I want to continue to repeat that our debt-free balance sheet, our Haverty-branded products, our operational consistency, our integrity, our consumer focus, our design services, our commitment to quality and our regret-free experience provides our customers with the comfort and confidence to know that furnishing their homes with Haverty's is a great long-term investment. I will now turn the call over to Richard.

Thank you, Steve, and good morning. In the fourth quarter of 2025, net sales were $201.9 million, a 9.5% increase over the prior year quarter. Comparable store sales were up 8.2% over the prior year period. Our gross profit margin decreased 150 basis points to 60.4% from 61.9%. Excluding the impact of the $3.9 million LIFO expense in the fourth quarter of '25 and the $925,000 LIFO pickup in the prior year quarter, our adjusted gross profit margin increased 100 basis points to 62.4% from 61.4%. Selling, general and administrative expenses increased $6.6 million or 6.3% to $112.5 million. As a percent of sales, these costs approximated 55.7% of sales, down from 57.4% in the prior year's quarter. We experienced increased selling, occupancy and administrative costs during the quarter. Other income expense in the fourth quarter of 2025 was $29,000, and interest income was approximately $1.2 million during the fourth quarter of 2025. Income before income taxes increased $1.2 million to $10.8 million. Our tax expense was $2.3 million for the fourth quarter of 2025, which resulted in annual effective tax rate of 26.5% for the year. Net income for the fourth quarter of 2025 was $8.5 million or $0.51 per diluted share on our common stock compared to net income of $8.2 million or $0.49 per share in the comparable quarter last year. Now turning to our balance sheet. At the end of the fourth quarter, our inventories were $96.2 million, which was up $12.7 million from December 31, 2024, and up $3.7 million versus Q3 of 2025. At the end of the fourth quarter, our customer deposits were $35.5 million, which was down $5.2 million from the December 31, 2024, balance and down $8.4 million from the Q3 2025 balance. We ended the quarter with $125.3 million of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of Q4 of 2025. Looking at some of our cash flow usage. Capital expenditures were $4.4 million for Q4 2025 and $19.7 million for the calendar year. We also paid out $5.3 million of regular dividends in the quarter and $20.8 million for the calendar year. We purchased $2.8 million of common stock during the quarter at an average price of $22.63. During the calendar year, we purchased a total of $4.8 million of common stock, representing 216,482 shares. On February 20, 2026, our Board of Directors approved an additional $15 million authorization for our share buyback program. We currently have approximately $18.3 million of existing authorization in our buyback program. Our earnings release lists out several additional forward-looking statements, including our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. On February 20, 2026, the Supreme Court invalidated certain tariffs imposed by the administration under the International Emergency Economic Protection Act during 2025. The administration announced its intentions to impose new tariffs under different regulations. Our 2026 guidance includes the impact of the new tariffs announced by the administration. We continue to monitor tariff developments and assess their potential impact on our business. We expect our gross margins for 2026 to be between 60.5% and 61%. We anticipate gross profit margins will be impacted by our current estimates of product freight and LIFO expenses. Our fixed and discretionary type SG&A expenses for 2026 are expected to be in the $307 million to $309 million range. The increases over 2025 are primarily related to store growth and modest inflation. The variable-type costs within SG&A for 2026 are expected to remain in the range of 18.6% to 18.8%. Our planned CapEx for 2026 is $33.5 million. Anticipated new or replacement stores, remodels and expansions account for $27.2 million. Investments in our distribution network are expected to be $3.2 million, and investments in our information technology are expected to be approximately $3.1 million. Our anticipated effective tax rate in 2026 is expected to be 26%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my commentary on the fourth quarter financial results. Operator, we would like to open up the call for any questions at this time.

[Operator Instructions]. First question comes from Anthony Lebiedzinski with Sidoti & Company.

Certainly nice performance here in the fourth quarter. Can you first just start us off with just some further details about your same-store sales trends throughout the quarter? If you could just kind of walk us through October through December, provide some additional color on that?

Sure. So in terms of the trend for the business. In terms of written business, we were up high single digits in October. We were -- in November, we were middle single digits up. In November and December, we were down low single digits. In terms of deliveries, we were up 10% in October, mid-single digits in November and up almost 15% in December.

That's very helpful. Okay. And then -- so I guess the other thing is as we look at the guidance for variable SG&A expenses for '26, it implies essentially flattish percentage from '25. You've talked about some sales momentum here that you had. I know there was a deceleration in the last month of the quarter, but nevertheless, the second consecutive quarter of positive same-store sales. So maybe if you could just kind of walk us through the different puts and takes in terms of what's affecting the variable component of your SG&A outlook for '26?

Sure. Anthony, so we came in, I believe, at 18.9% for the fourth quarter. We felt good about our guidance for 2025 being between 18.6% and 18.8%. Looking at this year, we felt like we needed to keep it in line, even though we anticipate having some leverage, we do anticipate having basically higher pressure on the selling cost in 2026 with higher sales commissions, and we need to remain competitive, so there could be some additional third-party credit costs going to the next year. So we wanted to keep that basically flat as a percentage. And then you noticed on the gross profit margins, we increased those. We had some significant pressure this year, as we called out in the press release, related to LIFO. As prices stabilize in 2026, we don't anticipate having that level of pressure. So we felt some confidence with our gross profit margin guidance going up. And then just overall, with the nonvariable piece. I mentioned in my remarks, that was primarily store growth and inflation. So I think that if you take to the -- we ended at $298 million and the middle of the estimate is $308 million, it's about a $10 million spread. About 40% of that increase is going to be occupancy cost as we grow the business and the rest is around about a 2% modest inflation on wages and incentives. And we don't really anticipate a great deal more of advertising cost. I think most of the pressure on the nonvariable is in occupancy costs and then just overall inflation with wages and insurance, et cetera.

That's very helpful. Okay. And then so with the evolving tariff environment, how do you guys think about as far as any additional potential new pricing actions? Is there anything already in the works or are you going to be holding off for now? Just wondering if you could speak to that?

Yes, Anthony, this is Steve. We're going to be very deliberate in that process. Obviously, our current inventories already have the tariffs baked in them. So we've got to work through those inventories as well before we get any impact of the new tariffs and if they're -- how sustainable are they, right? I mean, we've already -- it's 10% now, but obviously, over the weekend, we talked about it going -- administration, moving it to 15%. Is that going to happen? When that will happen? So at this point, there's not going to be any actions or reaction off of it. We're going to wait and see how it kind of plays out over the next few months and as we work this inventory through.

Got you. And my last question here. So as we look to update our quarterly models, is there anything that we should be aware of in terms of seasonality or timing of expenses or anything related to recent weather events that you guys need to call out? Just would love to hear your thoughts on that.

I'll say it and Richard can jump in here. I would say no, Anthony. And as far as weather events, we always have snow and weather in January and February, so that's not something that's unusual. So I don't see anything that would be a call out.

Your next question comes from Cristina Fernandez with Telsey Advisory Group.

I wanted to follow up on the tariff question. If the tariff goes to 15% from 10%, does that change the gross margin guidance you gave in perhaps a little bit more color on the timing of the inventory you have today, the tariff rate that was in effect in the fourth quarter, how long will it take to work through that inventory? Are we mostly looking at the first half or a little bit longer?

Yes. As far as the guidance, I don't see there being any changes. We've got that baked in as to where it is, whether it's 10% or 15%, Cristina, as far as going forward. And then as far as working through the inventory, I think it will take us the first half of the year. But we will be strategic about it and if there are things that we need to address to be competitive in certain price points, we will move on those. But again, we will move on those and still be able to maintain the guidance that we've given on the margins as far as going forward. But we feel like at this point, it will be -- the current inventory where we are, probably we'll work through the first half of the year, and then we'll bring in, obviously, the newer inventory, the newer cost. And again, this new tariff is only for 150 days, so it expires on July 24, and we know the administration is aggressively looking at other alternatives under Section 232, Section 301 and how they can get further increases in the tariffs. So time will tell.

And then I wanted to ask about the trends in the quarter that you talked about, specifically the written order trends that they decelerated a bit. Do you feel it's more a function of the year-over-year comparisons? Or do you notice any change, I guess, on the underlying, I guess, consumer behavior as you look at your regions or traffic or kind of what consumers were looking for when they came into the stores?

I don't think there's any specific, but I will tell you, I don't think the government shutdown helped us. Being shutdown for almost 45 days-or-so, that didn't set a good precedent as we move forward and kind of created some unknowns out there. But we talked about traffic. When we compare back to '24, Cristina, we were up double digits in traffic in November and December of '24. So we're not concerned about the traffic, and we were not overly concerned. We were excited about the average ticket that we were able to continue to drive up, and we were able to drive it through design. We're actually seeing an increase in design and the number of pieces per ticket. So that's encouraging as we go forward. So nothing that is -- would be a call out or alarming to us in the overall trend. And obviously, we're happy with the numbers overall.

And then my last question is regarding the mattress, the bedding refresh program. I think you tested it at a couple of stores. So can you talk about the lessons you've gotten and the stores that you tested it? And I guess what's changing the most? Is it the presentation, the merchandising? Maybe a little more detail on what consumers will see as you go through that program.

Yes, it will take us to get through all the stores into next year to complete. As I said, we're doing about 35% of the stores this year where we do the mattress and design centers. We have seen traction with our bedding, an improvement. And I think more of it is more about -- it's more informational. It's easier for the consumer to understand what they're looking at with each mattress set, and it's also easier for our sales consultants on the information needed to provide for that customer. So it's just a better presentation. I think it calls out the brands, puts it more in the consumer's face when they come into the store, makes them aware that we're in the business where before we were a little subdued in our presentation. So I think calling out the brands has certainly helped attract the consumer attention to that area. And I do think -- I think some of the recent reports showed the mattress business -- some of the people have reported already that the mattress business was down in the fourth quarter in the mid-single digits, if not higher, and we were flat. So we feel good about our traction that we're having and in especially the stores that have gotten the redone bedding departments.

And the last question I had was on the marketing and advertising side. You made some investments and changes through 2025. I mean I think you said fourth quarter spending was down, so as we look at 2026, do you expect, I guess, marketing and advertising to be flat as a percentage of sales? Or how should we think about those -- that expense item and investments there?

Yes. In '25, we increased our advertising. I think it's up about $4 million for the year. And that was because we cut it too much in '24. But we do feel like we're at that level. And in 2026, we anticipate our marketing spend to be flat with 2025.

I would like to turn the floor over to Tiffany Hinkle for closing remarks.

Thank you for your participation in today's call. We look forward to speaking with you in the future when we release our first quarter results. Have a great day, everyone.