Good day and welcome to the Haverty's First Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Dennis Fink, Executive Vice President and CFO. Please go ahead, sir..

Thank you, George. Good morning everybody. During this conference call, we will 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 of the date they are made and in 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 President, CEO and Chairman, Clarence Smith, will now give you an update on our results and our direction.

Clarence?.

Thanks for joining our 2016 first quarter conference call. As we previously reported, net sales increased 1.7% to $194.5 million, with comparable store sales up 0.9%. Our written sales were down 1.3% and written comparable sales down 2.2%. Our net earnings were $4.67 million, compared to $6.1 million last year, or $0.21 per share versus $0.27.

SG&A dollars for the first quarter increased $4.1 million compared with the same period last year. These were related to additional advertising, particularly in digital and direct mail and selling expenses related to our H Design program and increased occupancy and depreciation, relating to our upgrades and new stores over the past 20 plus months.

We are pleased with the recent sales increase so far in the second quarter, with April comparable delivered sales up 4.5% and written sales up 4.1% after adjusting for the Easter holiday.

We feel that many of the investments we have made in our H Design program, our store upgrades and higher quality merchandise, aligned with our target marketing, is gaining traction. For the second quarter to-date, we have seen a higher closing rate on flat traffic.

We were encouraged by the recent performance and hope the trends continue in the months ahead. We are investing approximately $33 million this year in CapEx, with almost half related to IT systems and hardware upgrades and a major expansion of our Lakeland, Florida distribution center opening this summer.

The distribution center experience will allow us to import more product directly to Florida, bypassing our North Georgia distribution center, which has been the main storage facility for that state.

This will help us reduce incoming freight cost, especially from Asia, and allow us to serve our 25 stores in the growing Florida markets, with specific coastal style merchandise much faster.

We are excited about the major improvements in our operations, with particular focus on the state-of-the-art warehouse and delivery scanners and new supply chains import support system, and the roll-out of the company to the company, of a new trial-based collaborative system.

We made major improvements in our web site presentation and the ease of use across multiple devices. Mobile is now 65% of our web activity and growing. With the new web site, we are seeing our customers utilize havertys.com a great deal more. This year's Internet sales have increased almost 50% and are now running at 1.6% of our total sales.

We have an easy-to-use site, which features a transparent process, which our customers are using for research, information, inspiration and ordering. We want to allow her to interact with us in any manner she wants. We believe that almost all of our customers research our web site before, during and after visiting our stores.

Gross profit was 53.7%, flat compared to last year's Q1 and slightly better than our plan. Our margins were negatively impacted by discontinued products, which were moving through our system. This may have some continued impact for several quarters.

We are having recent improvement in the reduction in these categories, as our team is focused on improving the product quality, and handling through the [ph] product lifecycle back to the actual root cause. We have done a deep dive into the area and expect to see further improvement in the months ahead.

We continue to see growth in upholstery, driven by increases in special order, which is influenced by our designers. We are seeing a nice increase in our dining program, with the addition of new, more casual designs that are hitting our [indiscernible]. Our H Design program is maturing and increasing the impact in our stores.

We are most recently doing 20% of our sales in the design program, which is providing an important service to our customers and continuing to separate us from the commercial players. Approximately 60% of these sales are from designer visits to the customer home, something we were not doing in the past.

These designers are a catalyst in helping us make accessories our fastest growing category. The accessories are 11% of sales for the H Designers, compared to 4.4% overall. We have a goal to hit a run rate of 25% of our sales to the H Design program by the end of 2016.

Our supply chain team is doing a better job of bringing in merchandise and having best sellers in stock, which allows us to more quickly serve our customers, and have a smaller backlog. Our out-of-stock position is one-fifth that of the same time last year, while warehouse inventories are lower than last year at the end of April.

We just installed phase one of the GT Nexus platform and have all of our direct import factories in the program. This allows us to have much better visibility of our orders, with the ultimate goal later this year of having full visibility all the way to the factory [indiscernible].

I believe we have the best supply chain organization in the industry, which along with our state-of-the-art distribution team will continue to help us serve our customers faster and more efficiently than our competition.

We are encouraged by the recent second quarter sales results, and expect to build on the strengths of Haverty's brand, in the heart of many of the best markets in the country. I will now turn it back over to Dennis..

Thank you, Clarence. We covered our financial highlights in last night's earnings press release. I will touch on a few of those points now, before we open up the call to your questions. We customarily give guidance for expected gross margin and SG&A expenses for the current year, within each of our earnings releases.

We don't publicize any sales forecast. But, we do announce our actual sales within a few days after each quarter end and then disclose how sales within each quarter to-date are trending, when we announce our quarterly earnings. Our total SG&A expenses for the first quarter of 2016 increased $4.1 million compared to the prior year.

Selling costs increased $800,000 in 2016 over last year, due mainly to greater sales commissions and salaries. Occupancy expenses rose $800,000, primarily due to increases in depreciation and other costs, associated with the previous year's [ph] versus last year. Advertising and marketing expenses, as Clarence mentioned, were up $1.2 million.

Our admin costs are $600,000 higher than a year ago, primarily from higher -- tight interim expenses, amortization in [indiscernible] has been partially offset by lower non-equity incentive comp.

More employees have group medical coverage this year and newer prescription drugs and newer expenses -- the company has had stock loss, insurance coverage on our self-funded health plans, both on an individual claimant basis, and on an aggregate basis.

Fixed and discretionary expenses for Q1 were $61.1 million compared to $57.9 million in first quarter of 2015.

The increases in the rest of the year will be the largest in the second quarter and should be smaller increases in the third and fourth quarter and the guidance for the year has remained the same, as previously announced in February, and that is that $251 million for the year of these fixed and discretionary type expenses, and that's versus $240.9 million for the same categories in 2015 for the full year.

Q2 sales are normally a little lower than Q1, so the profitability will be impacted by the higher fixed and discretionary costs. Until we reach the usual higher sales volumes seasonally in the third and fourth quarter.

The variable type costs within SG&A for the first quarter of 2016 were 18.1% of sales compared to 18.0% in 2015 and for the full year are anticipated to be about 17.9%.

We are having .three stores that we will open this year; one is already opened, it’s a temporary replacement stores in Lubbock, Texas; and then in the third quarter we will b e opening in new markets, one in College Station, Texas, and one in Charlottesville, Virginia; and there will be one closure in the third quarter, that's to be announced.

These changes combined with other activities should increase net selling square footage in 2016 by approximately 1.4%. The capital expenditures for the year is estimated to be a little over $33 million, depending on the timing of spending on new projects.

I wanted to mention the weighted average square footage changes by quarter and for the first quarter, the weighted average square footage of selling space increased to 1.1%. In the second quarter it's expected to increase 0.5%.

The third quarter year-over-year will be flat in selling square footage and the fourth quarter finally would be up $0.07 or 1% year-over-year. For the full year, there will be about a six-tenths of a percent increase in the weighted average square footage.

The reason I like to point this out is that is somewhat of a proxy for the difference between total sales increases and comp store sales increases. So, as you can understand, the rest of the year comp store sale increases will be closer to the total sales percent increases for the year.

Our cash flows in the first quarter, used in operating activities were $4.8 million compared to cash flows provided by operating activities in the first quarter last year of $13.6 million. The decrease was primarily due to larger increase in net inventories and decreases in accounts payable and improved liabilities.

The decrease in accrued liabilities is $1.5 million, that is due to typical payments made in the first quarter of this year. For yield accruals, such as incentive fee and also due to the timing of income tax payments and estimated tax payments.

Wanted to call out today, the Lubbock store was severely damaged by a blizzard that yielded December last year. And it is a better location than average for Haverty's. The negative impact from not having a store open and some continuing expenses, is about $500,000 swing from last year to this year -- in the first quarter that is.

As I mentioned, we opened a temporary store in April so we are hoping to offset some of that negative going forward and we hope to have the replacement store open in December of this year.

We have very good insurance coverage at replacement value, and we also have business in [TECHNICAL DIFFICULTY] Sorry about that, we had some technical difficulties. Let me start by again commenting on our Lubbock store. Apologize if I am repeating myself, but the Lubbock store was damaged in a blizzard at the end of 2015.

It was a better than average location for Haverty's and the first quarter impact versus the prior year on our profitability was about $500,000 profitable last year, and was not profitable this year.

We just had the temporary store open in April, and the stated insurance coverage we have, the replacement value and our business interruption coverage is also included in that site.

Over the next four quarters, the other income gain is likely to be somewhere about $3.5 million, partially in the second quarter and fourth quarter, and then probably finishing up in early 2017. We are building a new store on the same cycle, that cost about $3.8 million in capital expenditures, and that is included in our 2016 CapEx projections.

Operator, we will take questions from the audience at this time..

[Operator Instructions]. And our first question comes from Budd Bugatch with Raymond James. Please go ahead..

Good morning Clarence. Good morning Dennis. Sorry you had those technical difficulties. I guess, Dennis, thank you for all the color on the cost side of the equation and some on the interruptions in sales.

I am curious though to get a feel for how to think about sales and revenues going forward? You had to compare against some pretty substantial issues, including Texas, a couple of issues in Texas and building some new stores that probably wanted maturity when they started.

Can you give us a feel as to how sales might progress from here? It seems like you -- well I will let you talk as opposed to mine..

Well I think Budd, we feel pretty good about things, after we have seen in the start of this quarter. Texas has been a drag on us, with the oil issue, as well as the competitor issue in Dallas. I was telling Dennis earlier, I think your predictions that with us, a year and a half, two years ago, are pretty true.

We were down double digit in Dallas, when the new competitor came in, but we are now positive. So we are now anniversarying that. I think that Texas or Dallas specifically is going to be a positive for us for the rest of the year and going forward. Texas, with the oil issue, was another factor. I mean, that is definitely a drag.

But it isn't going to be the drag that it was the last six to nine months, in my mind, because I think it will start to level off. But that was the main issue, last year, as you know, was Texas. That was the real headwind that we had to take on, and I think that's more behind us. We feel better about it.

And I have mentioned, that we have got a number of things that we feel pretty good about, investments that we have made that haven't yet started to pay off, particularly South Florida. We are very pleased with our new position down there, and it's just now starting to make sense for us, as far as profitability.

So we feel better about things right now..

And -- that's what I was getting to, the second question was on those new stores. They are coming along.

Where are they on the maturity curve? When do they reach profitability? Have they all reached profitability yet?.

We did a lot of investment, not only in new stores, but a significant investment in rebuilding and remodeling existing stores, where we'd spend up to $3 million to $3.5 million redoing some of those. Those remodels, relocations have been very good for us.

Most of them are profitable immediately, and kicking in immediately like we rebuilt a Lakeland store that's immediately accretive, so is our Greenville store; and the Winston, Salem, the relocation there has been immediately good.

The position down in South Florida, those were three -- we took over a major player down there, as you know, and remodeled those. We are still gaining traction there.

We are not yet where we want to be, but I think by the middle -- the end of this year, we will be positioned, where we are making the money we expected, in this period of time, and we feel good about that. Some of our other stores in Florida have been good, that we opened the Kissimmee store in Orlando was a really good store for us.

The Texas stores we opened have not done quite what we wanted. But I think as we talked, I think they will start to come back. It usually takes two to three years for these to reach some kind of maturity. Some stores do faster than that, but it usually takes that kind of time..

Okay. Couple of other questions; can you talk a little bit about the character of sales, what's selling, what's not? We have seen -- you did call out dining room and special order upholstery.

I didn't read anything about mattresses or bedding and maybe bedroom and other parts of that, and are you seeing a [indiscernible]?.

About mattresses, we are in the middle as most of the industry is, carrying these name brands in the middle of a major bedding swap-out which took place in March and April. We now have those positions on our floor. Almost all of the vendors changed their line-up, and it was very disruptive for the stores.

And in the first quarter, we were down in bedding and mattress sales. There was no particular trends amongst the individual vendors. I will say that, the second quarter to-date, we are up double digit. We feel good about it. We like the program, we like the line-up.

Inner Spring is strong at this particular, a little different than what we have seen in the past. But the inner spring is doing really well for us. So we feel good about our line-up. We have made some significant changes, a lot of them, because the vendors made us do that, but we also have a new product mix and we are happy with it..

Okay.

And finally for me, the Lakeland DC rebuild to improve freight, any thought as to what that might be to the overall gross margin and is there any way to characterize what that could be in basis points, or how do we think about that, Clarence?.

I don't think we know yet. Now, we are going to have higher operating expenses and we believe the sales and freight will be more than enough to start generating the payback. But the exact numbers, not able to share right now..

Well also, it comes to two different categories, one is in --.

Yeah, one is in gross profit and operating expenses, that's part of our increase in operating expenses this year..

Okay..

We think it's an important move, as I commented on for serving our Florida customer and our growth down there. It just doesn't make a lot of sense, as much as we are importing today, to bring everything through Braselton to Lakeland. Now we can bring it directly to Lakeland and serve the customer quicker..

And I am going to sneak one other; you talked about South Florida. We have heard all those talk about South Florida being impacted by currency issues for South America and that customer, who may find it less attractive to make as many trips up to South Florida as they have been over the last three or four years.

Are you seeing any of that impact, or can you see that --.

Well, we don't ship much to South America. However, I will say that there were and have been a lot of South Americans who come to -- let's just say specifically, not South Florida, but Orlando. They like Orlando, they like Central Florida, and buy a condo and want to furnish it. And that has softened significantly.

So I would say that, the valuations and the currency issues has affected some of our clientele. We are not major exporters, but certainly, I think it has affected that clientele, who is the better customer..

Okay. Thank you very much. Good luck on the second quarter and the balance of the year..

Thank you, Budd..

Thanks Budd..

Thank you. And our next question comes from Brad Thomas with KeyBanc. Please go ahead..

Thank you and good morning Clarence and Dennis..

Good morning Brad..

Just a follow-up on some of the earlier questions from Budd.

Just as we think about the most recent April results here, how much of the improvements is coming from Texas and lapping some easier comparisons in Dallas, versus what you are seeing across the balance of the chain?.

Well in order to get the increases we have been seeing, it's pretty balanced. Certainly, when we had a negative in Texas, let's just specifically say Dallas and that's a positive, that's a nice improvement. It was just such a drag, that it's now a positive, and that's major.

I don't know about the factor there, Dennis, do you want to comment on that, about how much that impacted?.

Well it is -- Brad, well as you know, the soft open in March and then a grand opening, two months later. So we are kind of comparing against the soft opening right now. But in May -- starting this month, May, we will gauge whether or not we can get back and gain some back from the market. But it's to be seen.

I mean, it’s a competitive environment and let's see how we do..

Got you.

And maybe, can you talk a little bit about your level of promotional activity, and maybe what's working and what's not and your likelihood to get more promotional or less promotional going forward?.

I don't see us changing significantly from what we have done in the past. But, we are not going to be known as a discounter. We are talking about our brand. We are more specific in our pricing of what we put out there, and not only in print, but on television. We are letting people know about our values a little bit more.

But I don't think you are going to see, that we would be more promotional. Our advertising mix is a little different. We are doing more digital advertising now, more direct mail. We are still a major television advertiser. But I don't see us changing significantly from the last couple of years..

Great. And then just on the topic of backlogs and out of stocks; it sounds like you have made real progress in delivering merchandise faster to the customer.

Where does the backlog stand today, and how are you thinking about how the delivered comps or sales end up tracking, relative to your sales over the next couple of quarters?.

The backlog is roughly $3 million lower than it was a year ago. And we are able to deliver faster. I hope that continues. We [indiscernible] too. We got an inventory that's good stock and the best sellers and they are responding faster, and also we are moving special orders through them.

So you'd like to keep your backlog as small as you can and push through it. But we have had better delivery sales last five, six months, seven months, than we had written and finally in April, that looks like a percentage increase and returns a little better than delivery.

So if we are really relying on the backlog, we will be going into the next couple of months a little weaker, but we are able to continue to turn the orders out, it won't be an issue, and in fact, it will be a positive for service and sales growth..

Very helpful. Well good luck keeping up the strong momentum here to the second quarter..

Thank you, Brad..

[Operator Instructions]. And I am showing no further questions. I will turn the call back for any closing remarks..

Thank you so much for joining us on our call. We appreciate your support of Haverty's..

Ladies and gentlemen, thank you for your participation. You may now disconnect..