Richard Hare - Chief Financial Officer, Executive Vice President Clarence Smith - Chairman of the Board, President, Chief Executive Officer.

Brad Thomas - KeyBanc Budd Bugatch - Raymond James Anthony Lebiedzinski - Sidoti.

Good day and welcome to the Haverty's second quarter financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Hare, Chief Financial Officer. Please go ahead, sir..

Thank you operator. 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 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 provide commentary about our business..

Good morning. Thank you for joining our 2017 second quarter conference call. We are pleased to report a strong second quarter performance. As we previously announced, our net sales increased 1.1% with comparable store sales down 0.2%.

Our improvement in gross margins and reductions in our SGA expenses helped drive our profits to a record second quarter performance. Q2 pretax earnings were $9.69 million versus $8.76 million last year, or $0.29 per share versus $0.24 last year.

Last year's earnings included $1.9 million in other income from insurance recovery on a demand damaged store loss. Our second quarter sales were driven by increases in average ticket and closing rates, which were both up approximately 3%, offsetting lower store traffic.

Our H design business is continuing to help drive our sales with an average ticket over double the store average sale. Custom upholstery is up 6.2% and we continue to see significant improvement in our accessory program closely tied to the H design success.

We believe that the improvement in our closing rates are due to our enhanced website, which helps presell our products and to better training, higher performance and lower turnover of our sales and H design teams in our stores. As mentioned in our press release, our July sales were a little lower than last year.

Promotional offers during the month weren't as effective at building our average ticket which has been a key driver of the sales increases. Our messaging and offers for the remainder of Q3 should be stronger in supporting this team effort.

For the first half, we have had strong execution with pricing and promotion helping lead to improved gross margins. In addition, we are quite pleased with the improvements that our teams for merchandising, quality control, warehousing and delivery have shown.

Combined with the upgraded product from our suppliers, we are making tangible enhancements which are paying off with improved service and in reduced market bounce. Handling and delivering quality furniture is a difficult process. Our efforts in the last year to upgrade our product standards by increasing the QC teams, both in the U.S.

and in Asia, combined with better handling procedures in our warehouse and delivery were significant factors in the gross margin improvement. This focus has not only reduced our cost and eliminated double handling, but is satisfying our customers by getting it right the first time.

Our dedicated distribution and delivery teams are a major strength and advantage that we have in our markets. Our merchandise team is very excited about the major rework of our important leather motion upholstery program hitting our floors within the next several weeks. The addition of upgraded bedroom and dining collections is also in process.

The exclusive Havertys branded merchandise continues to demonstrate a strong value as well as a desirable fashion statement to our customers. We are pleased with the recent strong performance in July of our expanded and enhanced mattress programs.

We have added several new product lines, which are beginning to get good traction since the recent introductions. We are promoting expanded category more consistently and developing more awareness as betting experts in our markets. We see mattresses as a growth category for the second half.

The largest CapEx project for the next year is the planned expansion of our Western distribution center in Coppell, Texas.

This expansion will allow us to more quickly serve customers shopping in our Western footprint with lineups that are more specifically oriented to the Western styles, use less cross region transfer trucks and allow for more growth. Our top operating priority is to continue to increase our sales per square foot in our existing distribution footprint.

We plan to end the year with a small increase in standard selling square footage in 124 stores. We are evaluating a few existing locations and fill in markets overlapping our existing advertising umbrella for 2018. 2017 CapEx is expected to be approximately $28 million and to be significantly lower next year.

We have invested well over $100 million to separate Havertys from the promotional players in our markets and for Havertys to clearly be known as the better furniture store.

Our campaign with the message, Havertys can make your home look perfect even when life isn't, hits at the heart of our mission to help our customers' vision of their home come true. We believe that we do this better than any competitor.

We strongly believe that our upgraded stores, expanded merchandise and accessories program, the fully implemented H design teams in every store and the focus on providing the best overall service levels with Havertys' dedicated team members provides a powerful combination which will grow our profitable market share in the coming months and the long term.

I now would like to turn the call back over to Richard..

Thank you Clarence and good morning everyone. In the second quarter, sales were $196.8 million, a 1.1% increase from last year. Our comparable store sales were down 0.2% for the quarter.

After adjusting for the holiday show for Easter, with the holiday occurring in April of this year versus March of last year, our total written sales for the quarter were up 0.6% and written comparable store sales were down 0.7%. Our gross profit margin increased 90 basis points to 54.4%.

During the quarter, we continued to see lower inbound freight on imported products versus last year, a fable pricing and product mix, as well as a reduction in product markdowns. Selling, general and administrative expenses were $96.8 million or 49.2% of sales which reflect a 40 basis point improvement over the prior year quarter.

Our advertising cost and group medical expense reductions were partially offset by increased depreciation and other occupancy costs associated with the new stores and renovations. There was no significant other income recorded in the second quarter of 2017.

In the prior quarter, we recognized a gain upon receipt of an insurance claim related to storm damage at our Lubbock, Texas location. Our interest expense was essentially flat at $600,000 and pretax income increased 10.6% to $9.7 million during the quarter. Our effective tax rate declined 250 basis points to 36.2% in the second quarter of 2017.

The year-over-year change in our effective rate was driven largely by a $200,000 benefit from a new FASB stock compensation accounting standard that we adopted at the beginning of year. For the year, we expect our effective tax rate to be approximately 38.4% before the Q2 benefit from vested stock awards.

Our net income and our earnings per share increased 15.1% and 20.8%, respectively. Our net income of $6.2 million and earnings per share of $0.29 were record second quarter levels for Havertys. Now turning to the balance sheet.

At the end of the quarter, our inventories were $103.8 million which was slightly up from our balance at the end of the 2016 calendar year. Our inventory turns improved slightly to 3.5 times on a trailing 12-month basis. We ended the quarter with $65.9 million of cash and cash equivalents and our $60 million revolving credit facility remains untapped.

And as a reminder, we have no funded debt. Looking at some of our uses of cash flow. Capital expenditures were $10.5 million for the first half of this year. We anticipate spending a total of approximately $28 million of capital expenditures for the calendar year ending December 2017.

Also during the first six months this year, the company paid a total of $5 million of cash dividend to the holders of common stock and Class A common stock. In terms of our store count, we end the quarter with 124 locations which included the opening of our Greensboro, North Carolina showroom.

We also plan on opening a replacement store in Columbia, South Carolina in October for the one closed in March. At the beginning of the third quarter, we temporarily closed our Wichita, Kansas location due to flooding caused by a rupture of the water pipe. We expect to reopen that location by mid-November.

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 the full year 2017 will approximate 54.2%, which is an increase from the 53.9% prior guidance. We continue to forecast second half 2017 gross margins to be approximately 20 to 30 basis points lower than the full year average.

Our estimate for fixed and discretionary type SG&A expenses for 2017 remains at approximately $259 million, which is weighted more heavily in the second half this year and the variable type expenses within SG&A are expected to be approximately 18.3%. So I will wrap up the commentary on the second quarter financial results.

We are very pleased with improvement in our gross margins and the reductions in SG&A expenses. This helped us generate record level net income and earnings per share in the second quarter. So we thank you for your participation in today's call and operator will now open up the call for questions.

Operator?.

[Operator Instructions]. We will take our first question today from Brad Thomas with KeyBanc..

Yes. Hi. Good morning, Clarence. Good morning, Richard. And congratulations on the strong earnings in the first half of the year here..

Thank you Brad..

I was hoping to talk about the outlook for the second half and the margins in particular. Your press release is pretty self-explanatory.

Could you maybe help us think through the timing in terms of some of the changes that you are getting on the gross margin side? How much of that will hit in 3Q versus 4Q? Similar dynamics or a similar question for the SG&A side as well. Thank you..

We feel pretty good about our margins. We were expecting some hit, a larger hit, from inbound freight and that has not hit us like that. So we feel pretty good about that. Our markdowns are less and I think that will continue.

And I think we are getting a better mix of our product and getting better margins in some areas where we were having some difficulties in the past. So we feel pretty good about that.

And rich, you want to talk about this?.

Yes. I would just add to that as well. So we don't anticipate the freight to have as much of an impact as we had in the past. So that's one of the guidance was about somewhat. And that also flow through to our LIFO impact. So that was very helpful..

And then on the G&A side, for the back half of the year, we remained the fixed piece at $259 million. We don't really anticipate our group medical costs to continue and we had a big reduction in the second quarter. So we kind of see that going back to more normalized levels in Q3 and Q4.

And we also expect to continue to add a little bit more advertising and marketing spend in the back half of the year, which was already an original $259 million estimate..

And Brad, I don't think there is going to any real difference between the two quarters on the SG&A. For gross margin, we are seeing that as fairly steady for both quarters..

Got you.

So the margin dynamics for both 3Q and 4Q, you think would be pretty similar?.

Right. Yes..

Perfect. And then just more broadly, I am actually out at the Las Vegas market here today. There was a show yesterday. It sounded like the industry has been getting a little bit better in recent months.

What are you seeing out there? And how much optimism do you think we should be baking in as we look ahead to the second half here?.

Well, you see our sales. We are a little disappointed with the end of the last month. We feel pretty good about our position and the promotions we have lined up, particularly the merchandising we have lined up and I feel pretty good about it. But you know, we haven't seen significant increases, as you are saying, without result.

So we feel pretty good about it. We feel that we will have a pretty good second half for all of the reasons we just discussed..

Great. Thanks so much and good luck..

Okay. Thanks Brad..

Thanks Brad..

[Operator Instructions]. We will now move to Budd Bugatch from Raymond James..

Good morning Clarence. Good morning Richard..

Good morning Budd..

Can you talk a little bit about what's going on in the stores, traffic, maybe the penetration of the H design program, what percentage of your transaction senior sales has had become and talk just a little about that because one of the issues that faces most legacy retailers is the traffic in the store from customers now that the e-commerce and the online business is such a prevalent thought process to most investors?.

Well, yes. Traffic is off. We are making it up in the average ticket and the closing rate. As I mentioned, both of those up and we feel good about that. Our H design program is super important to us. It's of around 20% of our business. We think that will continue to go up.

I am not sure how high, but I think it will continue to grow because we are getting better at it, people are better at it and we are getting more credit for it. So I think that will continue to grow and as our merchandise program aligns with that more and more, we are doing a better job.

So certainly, we want to do everything we can to get our traffic up, but people are going to the sites first and deciding from that where they want to shop. And you have got to be in the top considerations to have them in your stores or to have them buy from you.

So we want to be in that one or two in consideration set in our markets and that's our objective to make sure that our website attracts some of the people know about us to go there. So you know, if overall business gets great, people start coming back to the stores and traffic increases then we will have some real upside.

But that's not what we see happening right now. So we are focusing on closing rate and making sure our average ticket keeps going up to reach the right people and appeal to that..

Okay. You also did say about, you expect the mattress business to be an important part of your results going forward. Can you talk a little bit about what you are saying in that? That's been an area where your geographies have felt a bit of the turmoil that's going on in the industry.

What are you seeing in that?.

Well, I think that yes, there has been a lot of turmoil, certainly with the matt firm issue and that's pretty well played out. So we are seeing more people consider us for bedding. I mentioned that we want to known as the mattress experts. Our stores are set up such that people see that when they come in our stores.

We are more consistent with our advertising letting people know we are in the mattress business. And it is s plus. And I think it will continue to be a plus for us. There is an opportunity because of what happened with matt firm but also we have just improved our program and improved our lineup and making sure we get credit for it..

Thank you very much. Good luck..

Okay, Budd. Thanks so much..

[Operator Instructions]. We will now take a question from Anthony Lebiedzinski from Sidoti..

Hi. Yes. Good morning and thank you for taking the question. So one of the reason that you cited for your gross margin increase is that you are working with your suppliers to develop great products.

So I was just wondering if as far as the supplier mix, has there been any notable changes to your supplier mix? Or is that more or less consistent with prior years?.

I would say, nothing significant. Every year we change our lineup slightly and some vendors get stronger and we emphasize them over others, but there are some areas that we have done a better job that significantly have improved the margins in those categories.

An example would be our entire accessories program which is complicated and extensive and now helping drive our H design business and serve the customer better there. We are getting a better lineup. We are flowing it better and getting more credit in that area, which was an area in the past that was difficult for us.

So that's just one example of an improvement that has had some impact. And we are doing the same thing with our whole merchandise lineup making sure that we got the right vendors, that the product is coming in good condition, that we don't have to market down, we don't have damages as much.

All of those things are important across all of the categories. We have put a lot of emphasis on it in the last year and we are finally getting some credit that's coming to the bottomline..

Okay. That sounds good.

And as far as the increase in the variable SG&A expense outlook from 18.1% to 18.3% of revenue? What's driving that primarily?.

Yes. Anthony, just a little increase in our delivery and bank card fees were the two bigger areas in that caused us to go from 18.1% up to 18.3%..

Got it. Okay.

And lastly, so after the somewhat soft July, what changes are you making to your marketing and merchandising plans on a going forward basis?.

I don't think there is really any significant changes. We were spending more dollars on television and on the Internet as we have been all year. But I think it's more a calendar fall of where particular promotions hit. And we feel really good about the alignment now for the rest of the year for our promotional efforts.

We had the different holidays hit in different times, not only Memorial Day, but Fourth of July and that's now behind us. So we feel good about how it's set up going forward..

All right. Thank you very much and best of luck..

Thank you Anthony..

Thanks Anthony..

It appears there are no further telephone questions..

We would like to thank you for joining our conference call and we greatly appreciate your interest in Havertys..

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect..