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 First Quarter 2017 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, Sir..

Thank you, operator. During 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 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 some insights about our direction plans..

Thanks Dennis. Thanks for joining our 2017 first quarter conference call. We're pleased to report a solid first-quarter performance. Net sales increased 3% to $200.4 million with comparable store sales up 1.6%. Total written sales were up 2.5% with written comp store sales up 1%. Net income was $5.98 million versus $4.76 million last year.

Earnings per share for Q1 were $0.28 compared to $0.21 per share last year. We had an increase in gross profit margin of 54.7% in Q1 up 100 basis points compared to 53.7% in 2016. Along with reduced ocean freight, we had strong execution with pricing and promotion and reduced markdowns due to better handling and lower closeouts in the line.

Our Haverty's branded merchandise continues to demonstrate a strong value as well as a desirable fashion statement to our customer. Total delivered sales for the second quarter to-date 2017 are up 2.2%, while comp store sales up 1.3%.

In order to equalize the impact of Easter on our sales, we believe that the appropriate comparison for written sales includes the last week of March plus the month of April, which shows sales up 2% for the same period with comparable store sales up 0.9%.

We're in the midst of opening some exciting new stores, relocations, major remodeling projects, system upgrades and a major warehouse expansion. In the first quarter, we moved back into a completely rebuilt and spectacular new store in Lubbock, Texas.

The Lubbock revival was like a Phoenix rising from the Ashes and resulted in what we now believe is the best-looking store in Texas. We have for years wanted to find a store in Winston-Salem's bigger sister city. Last weekend we fulfilled that need and opened a new store in Greensboro, North Carolina.

In one of the more creative projects we've taken on, we will relocate to a new store in the Columbiana Mall Area of Columbia, South Carolina. This two-story store is another long-desired repositioning strategy that will come to fruition and help us better serve and reach our customer in that key city.

We also have four major remodeling projects underway that we plan to complete by early in the third quarter. We expect that our retail square footage will remain relatively flat for 2017.

This month, we break ground on a major expansion of a major expansion of our Western distribution center in Coppell Texas, just outside of Dallas, to finish in the first half of 2018. This addition will provide over 50% more storage capacity and allow us to provide quicker and better service to our Western stores.

We expect the CapEx spend of $27 million in 2017. A key sales driver continued to be the increases in our average ticket up 2.9% to $2,040, the tenth consecutive quarter that number has increased on a comparable quarter basis. Our in-home designers were instrumental in approximately 20% of our sales and were a significant factor in these increases.

We continue to gain expertise and develop more products and services to better serve the design-oriented customer. Our merchandise team just turned from the April high point furniture market and we're excited about many new additions and major projects that we've developed with our key suppliers, which are coming in the next several months.

As we've developed and grown our H design business and increased our special-order mix, we've seen an improvement in the sales of our upper end merchandise in these new collections or real enhancements to that lineup. We've upgraded our quality control team both in the U.S.

and in Asia and enhance procedures to assure that our suppliers are producing and packaging our goods properly by having our staff on the production lines. We've also significantly improved our handling procedures in our distribution centers and on our delivery trucks, reducing damages and delivering high quality products the first time.

I'm very proud of our teams for improving our product returns and helping reduce damages in markdowns, which is now showing in our increased gross margins, but more importantly, we're providing a better service to our customers and enhancing our top-drawer delivery service.

This year we're concentrating on making improvements throughout the entire company with a focus on improving the interaction with each customer. We're dedicated to making the entire process of shopping and buying easier, smoother and genuinely enjoyable for our customer.

We just finished shooting a new series of television commercials directed by Academy Award Nominee, Ted Melfi, Writer and Director of Oscar-nominated movie, Hidden Figures. This terrific series of new life looks good commercials is very entertaining and we believe it will help separate us from our competition when it begins airing in the next weeks.

Later this Spring, we began installing a new human resources information system called Success Factors. We'll be automating and standardizing many manual functions. This is a significant collaborative effort between human resources, IT and our operations team.

This is an important company-wide implementation that will impact every associate and provide efficiencies to our HR processes. We're now heading into the strongest midyear sales events, with the Memorial Day sales and the major summer holidays that follow leading into Labor Day.

As we remember the adage betting sales rise with the temperature, we'll not only be promoting our strength in betting lines, but also our entire enhance merchandise line. Our stores as well as our team members are well prepared to serve our customers in these coming months.

For 2017, we believe that our business will benefit as the housing strengthens in the region and as the general economy improves. We're confident we have a strong connection to our customer with upgraded stores, appealing and value-oriented merchandise and excellent personal service, these will be the important drivers of our 2017 sales results.

I'll now turn the call back over to Dennis..

Thank you, Clarence. I am going to recap and expand on some of the financial highlights mentioned in last night's earnings press release and then we'll take your questions. Total SG&A dollars increased $4 million or 4.2% for the three months ended March 31, '17, compared to Q1 last year.

Our selling cost increased $0.8 million in 2017 and step with higher sales except for additional staffing in our new stores and increased bank card usage costs. Occupancy expenses rose $0.8 million, primarily due to increases in depreciation for new relocated and renovated stores.

Our warehouse and delivery expense rose $0.5 million in the first three months of '17 compared to the prior year, due to -- partly due to -- excuse me, to higher personnel costs and warehouse material costs. Advertising and marketing costs as planned were up $0.8 million in the first quarter of '17.

Administrative costs rose $1.1 million or 5.1% over 2016 due to higher compensation costs and increased insurance costs for Workers Comp, partly offset by lower group medical costs. Other income includes a $1.2 million gain from the insurance recovery upon rebuilding our Lubbock Texas location.

We aren’t expecting any further such gains for the rest of the year. Looking forward, our expectation for annual gross profit margins for the full year of 2017 is approximately 53.9%.

The cost for inbound ocean freight decreased in the second half of 2016, but those costs are anticipated to increase in the second half of 2017, tempering the recently higher gross margins.

Last year there was a change in the LIFO reserve that generated a 35 basis point positive impact in the second half, but this year we expect the negative impact of around 25 basis points in the third and fourth quarters of 2017.

Considering those swings, second half gross margins this year is expected to be approximately 40 to 50 basis points lower than the 53.9% full year average. Our estimate for fixed and discretionary type SG&A expenditures for 2017 are now $259.0 million.

That's a $1 million reduction of our previous estimate and it compares to a $250 million spent for those same costs last year. The increase is largely due to depreciation and occupancy costs for new and relocated stores, overall compensation, including staffing increases and inflation.

The fixed and discretionary expenses were $63.9 million for the first three months of 2017 versus $61.1 million last year. The increases in these costs for the rest of the year will fluctuate with store expansion and with marketing activity, which is expected to be at its highest level in the third quarter.

The variable type costs within SG&A for the first three months of 2017 were 18.2% of sales compared to 18.1% for the same period last year. For the full year of 2017, we anticipate those costs to be 18.1% compared to 18.2% for the full year of 2016. Operator, at this time, we'll take questions from the audience..

[Operator instructions] And we'll take our first question today from Brad Thomas with KeyBanc Capital Markets. Your line is open..

Thank you. Good morning, Clarence. Good morning, Dennis..

Good morning, Brad..

A couple of questions if I could. Wanted to start just with margins and I think it's pretty straightforward that the freight is more a function of its obvious factors, but it seems like you did a good job with markdowns in the quarter.

I was hoping you could talk a little bit more about that and how much of a function that if the customer is liking what they're seeing in your stores versus perhaps the environment improving or maybe some structural opportunities that you're seeing?.

I think it's more structural. I believe we really address. We've beefed-up our quality control teams here in our distribution centers really focused on handling the product properly, making sure that it was manufactured right to begin with.

We last year began putting our folks into every plant in Asia, eat not only the ones that we're directly working with, but the third-party vendors also, working with them on first cuttings, making sure the product is packaged right, handled right and then when we handle it, that we're not having damages that we're creating.

So our return percentages are lower. We're having fewer markdowns and I also think we're probably doing a little better job of flowing product and not overreacting before we know rate of sales so that we don't have to have larger markdowns. So, it's operationally across everything we're doing I think has helped us reduce those markdowns..

Great. And then I'd love to hear your thoughts Clarence on the outlook for written same-store sales. The company has done a great job of posting positive comps for the last four quarters. The comparison will get a bit tougher here in your June up six last year, but it sound like you're off to a good start here.

How are you feeling about the environment and the outlook for comps?.

Well we don't give guidance on sales, but we feel pretty good about our position certainly a key to this quarter is what happens in the next three or four weeks around Memorial Day. That is the big event and then the summer holidays I mentioned for 4th July is important. Labor Day, we're prepared for all of that. I like our marketing.

I think we've got a better in-stock position on our bestsellers, but it all depends on what happens in the next several weeks. We feel based on where we are right now, pretty good about it..

Great. Great. And lastly, I just wanted to follow-up on some comments you made about the mattress category. I know it was a good category for you in your first quarter, but obviously the U.S. retail industry for mattresses is about to undergo bit transition.

What have you changed in terms of your offering and how is your marketing and go-to-market strategy changing here?.

We're reworking our line right now, some of which was necessary by the vendors Celi and Temper. We're adding some new product to our mix. We're adding some private label branding for the first time that we're excited about that we put a great deal of effort in making sure we have the right mix on our floors. So, we're going to rely on the key brands.

We're a big player with tamper ceiling. You know that, but also with the Simmons floats and then that's going to be enhanced with some of our own private label marketing. So, it's some of the biggest efforts that we've ever put into the betting category that's being rolled out right now. So, we feel pretty good about it..

And I guess the big question everyone has is asking the industry is what happens in a row where Masters no longer sales timber products? Have you seen any uplift in that brand in particular since that….

In several of our markets, matt firm has hundreds of stores in our market and literally in our big markets they might have 100 stores or do. So, when they don't sell that product right across the street from us, it does help us, we do sell it and we do show it and when they have salespeople that understand the product.

So, I think it opens a great avenue for us..

That's great. Thanks for all the detail and Dennis we wish you all the best as well..

Thank you very much..

Thank you, Brad..

Thank you. And we'll take our next question from Budd Bugatch with Raymond James. Your line is open..

Good morning, Clarence and Dennis. This is David on for Budd.

How are you doing today?.

Hey David. Good morning..

Wanted to follow-up on some questions on mattress. If you could, could you give us the growth rate in mattresses for the quarter the revenue dollars..

I don't think we like to give those kinds of percentages out. It was up, we felt good about it. That's not something we usually give out David..

That's fine. Okay. And you talked about private label going into private label mattresses for the first time.

What price points are you going to be at for that private label offering?.

Well, the main lineup is going to be the hybrid and so it's going to be below what the hybrid product is off the name brand vendors, but not a lot lower. It's going to be a great quality product, we learned a long time ago in branding for our own brands and furniture, that we don't want to go low. We want to go to the heart of where our customer is.

So, it's a better product and a higher quality product that we feel [carriers the price] quite well. It'll be under the branded players and a lower price than the branded products..

Okay. And is that on the floor now and will….

No, it's not. It's coming later this month..

Got it, but in time for the major holidays..

Some of it. We want to make sure that for the major holiday, we don't disrupt our floors too much. We do have a change going on right now, but for the major -- some of it won't be on the floors for Memorial Day, but some of it will..

I understand. Okay. Thank you. And you talked about the in-home designers now touching about 20% of sales.

Where do you see that number ultimately getting to and is there an opportunity for that to have for growth in that category to have a significant impact on gross margin given that there's probably a higher attachment of accessories and other higher gross margin type products when you get an in-home designer involved?.

We came up with a target of 25% that's now 20%. We came up with a target of about 25% when we started it. I think that's a pretty good number. We don't want it to get too high. We pay a little bit more for it as you know, but it's going to be driven by not only how well we execute, but what our customers need and not everybody needs a designer.

We sell a lot of people who just want to but a sectional sofa. So, it's going to be driven by how we do a good job and what the customers want. I think 25% is a pretty good target. It may go higher than that. It has helped us drive our average ticket. I think it will continue to do that..

Okay. Thanks for taking my questions and Dennis to you, best of luck and we'll miss talking to you, but best of luck in your ventures going forward..

Thanks David. Appreciate it..

Thank you. [Operator instructions] We'll go next to Anthony Lebiedzinski from Sidoti. Your line is open..

Hi. Good morning and thank you for taking the question. So, Clarence just a follow-up, as far as the improved delivery procedures, the lower returns it sounds that certainly like that's paid off well for you.

Is there any way that can perhaps quantify what impact that had on your margins and if you could just give little bit more color on that, that would be great?.

I am going to let Dennis get into this a little bit..

I think it's going to have more impact going forward than it has already and we have -- we sold off more of the product that we would know that's in our warehouses.

We added an outlet here in Atlanta and in doing that, it has had more exposure just to our executives and our management team the kinds of things that we're ending up in a category to be closed out.

And I think that the impact so far is that we are moving out more of what's in the warehouse and then we're finding out more and taking action and improving procedures that have helped our overall cost of merchandise that's basically wasted or that has to be disposed off.

We're not looking for huge numbers there, but somewhere into 20 basis points probably, but we've already realized some of it and it's an important thing not just with cost, but with the service to the customer and having the brand reputation where it needs to be without hassles because that's one of the reasons you go to a four-line retailer is they take care of everything and it interrupts that good vibe in choice -- reinforcement of the choice to make if you have any delivery issues or merchandise issues.

So, it's very important more so probably than just the P&L impact..

Got it. Okay. That's definitely very helpful color.

And also, you highlighted upholstery mattress and accessory groups are doing well for you, left out the case goods, can you give a comment as to what happened in the quarter and also your outlook going forward for case goods?.

Well case goods have been a challenge for the industry for a while now, but we believe we're good players in that. We understand the category. We've grown up in the category and we’re improving it.

So, we coming back from this market, our team has been working for months on a number of new collections that we're excited about in the bedroom and dining room that are coming in, in the next several months and that will be coming in into next year that we think will enhance our growth there.

There are not a lot of players who understand case goods particularly in the better end of the goods and we think that we've got an opening there. So, I would see bedroom and casual dining with growth opportunities as not only in dollars or as a percent of sales and it's a real focus of ours right now.

But the homes have changed and not many people have formal dining rooms anymore. Not many people have entertainment centers anymore. So, we have to go to where the opportunities are there and we think that we've got several new collections and focuses they're going to help us there..

Got it. Yeah.

Thanks for that color and also just broadly speaking, do you anticipate that you'll be able to still drive the average ticket higher and I guess partially offsetting that would be lower traffic, is that fair to say as far as how you think about?.

It is. Traffic has fallen off and we don't see much improvement there. We certainly would like to see it. What has been driving our business is an improved close rate, but more importantly is the average ticket and I do think that will continue to go up..

Thank you so much and best of luck Dennis..

Okay. Thanks a lot..

And I am showing we have no further questions at this time. I'll turn the call back to you for closing remarks today..

Okay. Well thank you. Before we end the call, I will recognize what the analysts have all mentioned that after conducting these calls for the last 24 years, this may be Dennis's last call as CFO.

We announced earlier that Richard Hare will be taking over as CFO later this week and he comes us after 11 years as CFO for Carmike, which sold to AMC last year. Dennis will be retiring later this summer and will be here to help with Richard's transition.

Dennis has been my wing man and partner these past decades and taught me more than I can say, but he definitely taught me all I know about Wall Street and running a public company.

He's been a real strength for Haverty's and has been made tremendous contributions in every part of our company, but possibly his largest contribution has been his insistence that we treat everyone associated with the company fairly. This means full transparency with investors, team members, customers and suppliers.

He's taught us the real meaning of always play it straight. So, thanks Dennis and good luck..

Clarence, I appreciated it. It's been a privilege. Thank you..

So, thank you for joining us on our conference call and for your interest in Haverty's..

This does conclude today's program. Thank you for your participation. You may disconnect at any time..