Clarence Smith - CEO Dennis Fink - CFO.

Brad Thomas - KeyBanc Capital Markets David Vargas - Raymond James Anthony Lebiedzinski - Sidoti & Company.

Good day, and welcome to the Haverty's Fourth Quarter and Full Year 2016 Financial Results Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Dennis Fink, Executive Vice President and Chief Financial Officer. Please go ahead..

Thank you. Good morning, everybody. This conference 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 of the date they are made and which we undertake no obligation to publicly update or revise.

Factors that could affect actual results to differ from our comments include economic and competitive conditions and other uncertainties as 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 progress.

Clarence?.

Good morning. Thanks for joining our 2016 full year and fourth quarter conference call. We're pleased to report a strong fourth quarter performance, which allowed us to beat the full 2015 and record our second best earnings per share ever. Net sales increased 2.2% for Q$ four to $220.6 million with comparable store sales up 2.5%.

We had a good performance in written sales, up 5.3%. Earnings per share for Q4 2016 were $0.51 cents compared to $0.41 last year. Earnings for the full year 2016 were $1.30 per share compared to $1.22 in 2015. Sales began slowly in the first quarter of 2016 as consumer spending weakened. As the year progressed, we began to make up ground.

Throughout our year, the business became more concentrated around major holiday sales. Accordingly, we have adjusted our advertising cadence around those events during this year and last year. A key sales driver continued to be increases in our average sales ticket, up 2.3% to $2,048, the ninth consecutive quarter that number has increased.

Our in-home designers were instrumental in approximately 20% of our sales and were a factor in these increases. We had an increase in gross profit margin to 54% in 2016 compared to 53.5% in 2015. We had good execution on product mix and pricing, which contributed a 40 basis points improvement.

Our Haverty’s branded merchandise provides a strong value and fashion statement to our customers. We did have a positive LIFO impact in 2016 over 2015. We generated strong free cash flow of $30 million dollars in 2016, which allowed us to pay a $21 million special dividend in December and to buy back $21.3 million in share repurchases during the year.

We have an ongoing commitment to providing good returns to our shareholders, while maintaining a strong balance sheet. We ended 2016 with 124 stores serving 83 cities in 16 states with approximately 4.5 million square feet.

The investments in store upgrades and the technology and warehouse investments we made over the past several years, are important to present our products beautifully and to better serve our customer. In almost every case, these investments of over $100 million have made us sharper, stronger and more fashion oriented.

We have an exciting presentation backed up by the industry's leading state of the art operating systems, our dedicated top drawer delivery and operation teams. Almost all of our stores have undergone a major refresh or are newly opened. As part of the store improvement, selling space for clearance items was removed or reduced.

We opened a larger, dedicated clearance store in Atlanta in late December 2016. This is in Gwinnett County, closer to our distribution center in Braselton, Georgia. Total written sales for the past eight weeks, including our full New Year's weekend event, are 3.5% higher than the same period last year. And written comparable stores are up 1.5%.

The last three weeks written sales, including the President's Day holiday, were up 7.5%. We were pleased to see the recent strong sales help us recover from the softer New Year's event. We will open a new store in Greensboro, North Carolina and move back into a completely rebuilt store in Lubbock, Texas in the second quarter this year.

We relocate to a new store in Columbiana Mall area of Columbia, South Carolina in mid-year. We have four major remodeling projects underway that we expect to complete by early in the third quarter. We expect that our retail square footage will remain relatively flat for 2017.

We completed the expansion of our Florida distribution center in 2016, allowing us to reduce inbound freight and to better serve the 29 stores covering the state. We will begin shortly a major expansion of our western distribution center in Coppell, Texas just outside of Dallas, which will finish in the first half of 2018.

Both of these are our own facilities. We continue to invest heavily in the latest IT operating systems to make store management and distribution and delivery operations easier for our associates. We want to make sure that our teammates have the latest tools to serve our customers better than any of our competitors.

In 2017, we're concentrating on making improvements throughout the entire company with a focus on improving the interaction with each and every customer. Home furnishings can be a very emotional purchase. It closely reflects on the personality of the homeowner and we have to fully understand that powerful tide of the customer.

We are dedicated to making the entire process of shopping and buying easier, smoother and genuinely enjoyable for our customer. This is the strength of the Haverty’s brand.

We made major improvements in our website and the buying process with an emphasis on improving mobile transactions to make it easy to engage with us in any manner our customer wants. We offer an upgraded 2D and 3D planning system readily available to all of our customers, either online or in store.

Our fully transparent and integrated system allows the customer to have complete information all the way to a delivery date and time on our full merchandise line. For 2017 we believe our business will benefit as the housing strengthens in our regions and as the general economy improves.

We're confident that we have a strong connection to our customer with the upgraded stores, appealing and very value oriented merchandise and excellent personal service. These will be the important drivers of our 2,000 sales results. Helping our customers’ vision of their home come true is a compelling mission for each of us.

I personally want to thank all of our associates for the continued dedication to our customers and to Haverty’s. I have never felt so strongly about how well positioned we are to serve and succeed at Haverty’s. And as our new marketing theme reflects Haverty’s Life Looks Good. I'll now turn it back over to Dennis..

Thank you. I'm going to expand on just a few of the financial highlights mentioned in the press release last night and then we'll begin taking your questions pretty soon. First of all the diluted common stock earnings per share for the full year of 2016 reported is $1.30 as correctly stated in the press release last night.

Please do take note that the actual common stock diluted weighted average shares outstanding for the year were 21,847,000 rather than the 21,506,000 shares that was shown near the bottom of the statement of income page. So again the correct number is 21,847,000 that allows you to compute the $1.30 per share fully diluted earnings.

We made that correction last night to the press release we've displayed on our webpage and in the filing we're making today. So be aware of that please. I wanted to only point out a few things.

One, the timing of our written revenue is, I believe most people in the call will know we rite business at point of sale when the order is placed, the sale is placed by the customer and we recognize revenue upon full delivery of the items when that takes place on an average two to four weeks later with probably a wide variation in that time, but that's an average.

So we're also on a calendar, regular calendar monthly basis and we report the regular calendar for our quarters and also periods to date.

So when you look at this, you have sometimes different number of weekends in a period and as we report interim results on sales, we try to put that on a basis where there's a similar number of weekends so that the trend can be determined and that is the best indicator.

The trend in business is our written sales since there is the lag in delivery and although that's the more important number, the earlier number of written sales is more meaningful to analysts sometimes. In any event, as you look over the last 20 weekends going back to October 1, the total written sales for our company are up 3.9%.

That's the total number. And as Clarence pointed out, for the last eight full weeks, our total written sales are up 3.5%. So for that purpose we have included the weekend of New Year’s in that 3.5% and it makes the whole period more comparable. So that is as informational and it tells you the trend since basically after Christmas is up 3.5%.

And as Clarence also mentioned, the pattern of business since right before New Year’s has been improving after a two week period where around the holiday, around the New Year's holiday, we were actually down about 4.2% in written business and then have built since that time to be where we are today.

I also wanted then to clarify, in our press release we spoke of the other income for the 12 months $3.3 million from insurance recovery related to the destruction of our Lubbock, Texas location by a winter storm and the $3.3 million is all showing in other income.

The way we look at it is about $1.1 million, almost $1.2 million of that gain is really offsetting the operating loss in the store in this, the market that we have actually opened a temporary store while the new store was being constructed.

So whereas that is classified in other income, we look at it like $1.1 million of that gain really directly offsetting and including our operating income for all purposes. The other thing to point out is just the guidance on LIFO.

We have suggested that the gross profit, although running very well so far for the year, we're expecting that the LIFO reserve will basically flip back the opposite direction from what it was in 2016.

In 2016 the credit that we got from LIFO was largely from lower inbound freight rates that we had locked into in the middle of the year and we believe just with the turmoil in the steamship lines, that that advantage of lower rates will be turning around and that will impact the - possibly impact the LIFO reserve in the opposite direction this year, something like 17 or 18 basis points as a negative this year versus a similar number that was a positive in 2016.

So we’re pointing it out. That's primarily the reason we are guiding for a lower gross profit margin. That is really a very rough estimate on our part and we’ll have to see how the year plays out. The LIFO charge or credit is typically more heavy in the third and fourth quarter as we again measure the inflation year over year.

Operator, that's all I have for now. We’ll be glad to take questions. .

[Operator Instructions] We’ll take our first question from Brad Thomas with KeyBanc..

Good morning, Clarence and Dennis. I first want to follow-up on one of the comments that you made, Clarence, about seeing more of your traffic around the holiday weekends. Is that something that you’d expect to continue here in 2017? And then you talked about adjusting your advertising.

I guess more broadly, how do you see your advertising continuing to evolve this year?.

Well, I think that will continue. We are seeing a little more concentration of business around holiday events. Some of that self-fulfilled expectations, not only for us but the industry and not only our industry, but the retail industry. I think more people are promoting around the holidays and that just stirs business up and we will stay with that.

So we're looking market to market about how we present ourselves and what kind of intensity we do around those events, and we adjust individually by markets based on our potential and what our coverage currently is. So we’ll continue to look at that. I don't think that's going to stop. I think the holiday events are more important every year. .

And within your gross margin guidance, what are you anticipating in terms of sort of the competitive landscape for this year?.

Well, I think we've given some guidance on margins there. Dennis just commented that LIFO is going to be a reversal for us. We want to keep our inventories very clean. I think there's a little bit of room, but we're not anticipating margins to go up from where they are right now..

And then on the margin side, again on the variable line, it looks like you expect you will be able to reduce that a little bit from where it had come in, in 2016.

What are some of the puts and takes and what's the opportunity you see to bring that variable line down in 2017?.

It's largely related to the efficiency we get as volume would go up and that number will be high in the first half and hopefully we can see it coming down in the second half. The biggest single component of it is commissions which do tend to vary directly with sales.

We have some new markets where there are some guarantees for sales persons and as they are able to earn their way out of those minimum monthly amounts, we get a reduction in the total cost. But the bigger part is really the warehouse and delivery operations.

As they fill up the trucks more and as they - the more they're challenged to keep up with business, the variable expense actually is lower as a percent of sales because deliveries get bigger. People just, frankly just are working to keep up with the volume and that is the primary place. It's in the warehouse and delivery functions.

Also what we call transportation, which is just moving the boxes with the prepped merchandised to the point of delivery. And again as you fill up the trucks with higher volume, you get - the loads move at a fixed cost per load. We have that in variable, but it just gets more efficient as that happens.

So it's largely a - answer is really it's largely a volume and efficiency issue. There are more regulations about how drivers are trapped in terms of their hours, working in consecutive hours and driving and that sort of thing such that we've staffed up a little more and if we get the volume, we’ll see a reduction.

It's really in the second half of the year, not the first half..

Very helpful. Thank you so much..

And we’ll move to the next question from Budd Bugatch with Raymond James..

Good morning, Clarence and Dennis. This is David on for Budd. Thanks for taking my questions. I was hoping I could get a little bit of clarity on the written numbers - the written sales that you mentioned in your comments, Clarence.

For the last three weeks, was it total written or written comparable sales that were up 7.5%?.

That’s total written was up the last three weeks 7.5%, which includes - the President's Day week was a bit - a week later this year. That's why you almost have to go back that far to see how the real tone, current tone of business is..

Yes. That was going to be my next question.

So that encompasses the one week shift between the holiday between last year and this year (indiscernible) comparable?.

Yes, it does. Yes, it does. It encompasses when we start promotions on both - for both years..

Got it. Got it.

And do you have a comparable written number for that same time period?.

I don't have it exact, but it's - the number would be about 1.6% or 1.7% lower versus the 7.5% total..

Okay.

And that three week period is also in the total written sales for the past eight weeks that you mentioned in the release as well, right?.

Yes. Yes it is..

Just want to make sure of that..

Absolutely..

Okay. Great. Thanks. And then to follow up on the advertising question, you mentioned that it's getting more expensive for retailers to advertise.

How are you thinking about the dollars spent? Are you planning on that total amount spent on advertising going up or is it going to be more of a reallocation to different channels?.

Well, the dollars will go up and it'll be - there’ll be some reallocation, but as far as percent to sales, we're not expecting that to go up. So the dollar - we expect the sales to go up based on how we're advertising, but we are constantly re-evaluating our mix and are making sure that we do that the best possible in every market.

So we're able to look at each market and analyze the mix there. So it's a game we play non-stop. .

Okay. Thanks. And one last question on the Presidents' Day holiday.

Can you tell us what the strongest categories were for the holiday?.

It's the same as the mix has been. Upholstery is still growing and betting has been good. Those were the leading candidates, but that's what we've been seeing recently too. So not any change in our overall mix there. .

Okay. Great. Thank you very much for answering my question..

And we’ll move to the next question from Anthony Lebiedzinski from Sidoti & Company..

Good morning. Thank you for taking the questions. So just wanted to see if you could answer a couple of things here.

So first, when you look at your market area, where did you see the best results and where perhaps maybe results weren't as good as you might have hoped for?.

Anthony, we don't want to give a lot of detail on that, but I would say that we had a better performance where we had weather issues last year. So we did have some weather issues in the east that we didn't this year in particular around the holiday, which made that perform better.

But with the sales increase we saw that I mentioned for the last three weeks at 7.5%, we had good mix across our regions. Nothing that really stood out opposite. We’re still seeing a little bit of drag in the oil parts of our regions, which is mostly West Texas..

Got it. Okay. And last year was a leap year so I was wondering with 2017 not being a leap year, what's the expected impact of having that one less day in Q1? It is - it’s one day out of 90 and it happens to be a Saturday. So you'll be hearing me again talk about the calendar in the next conference call.

So if it was just one out of 90, it’d be 12% maybe, but if it's a - it is a Saturday so it can be close to 2%. And I - we’ll probably comment on that when we release our sales like a week into the month of April. We also have another anomaly just to go ahead and mention it, which impacts us quite a bit is just the Easter shift.

Again, we have a - last year Easter was in late March and we don't write any business on Easter Sunday and it's a poor weekend for us. And then this year it's an April so we'll have to back out that positive impact. And the leap year is real. We're going to miss the day because we are on a regular calendar, not a 52 ….

And that's not only written, it’s deliveries. .

Deliveries after ….

Delivery day, yes..

Deliveries after that. So just to put that on the table. The delivered sales written - excuse me, written sales for the quarter will be impacted, but the deliveries, they get impacted - fall into April - fell into April last year. So if it's comparable. On a delivered basis, you don't have to mess too much with the two quarter comparison. .

Got it. Okay. Thanks for the color.

And then also what are the trends that you're seeing within the bedroom furniture?.

Well, bedroom was a weaker category for us last year. We have beefed it up. We have a lot of new product coming in. We're more optimistic about it this year. Bedroom is also influenced by the bedding business and obviously there's been a lot happening in the mix in the bedding world.

We hope to have good performance there, which also could be a catalyst for the bedroom category. But primarily we've been working a good deal on new product and new mix, which we're excited about which is coming in now and over the next several weeks that we feel good about in the bedroom case goods category. I.

All right. Thanks very much..

And it appears we have no further questions at this time..

Okay. I want to thank you so much for joining us on the conference call and for your interest in Haverty’s..

That will conclude today's conference. We appreciate your participation. You may now disconnect..