Richard Hare - EVP and CFO Clarence Smith - Chairman, President and CEO.

Brad Thomas - KeyBanc Capital Markets Anthony Lebiedzinski - Sidoti & Company.

Good day everyone, and welcome to the Haverty's Fourth Quarter and Year End 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Hare. 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 Securities and Exchange Commission. 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 full year and fourth quarter conference call. As we released earlier, fourth quarter net sales were down 2.6% with comparative store sales down 3.5%. Total written sales were up 0.3% and written comparable store sales decreased 0.7% over last year.

While we were disappointed with the close to the year, we feel that we're well positioned to build positive momentum in 2018. The earnings per share for the full year 2017 were $0.98 compared to $1.30 in 2016. The Tax Act resulted in a reduction in diluted earnings per share for Q4 and the full year 2017 of $0.27.

The most important sales driver continues to be increases in our average sales ticket up 2.2% to $2030. This is 13th straight quarter the average sales has increased compared to the previous year period. Our in-home designers were instrumental in 20% of our sales, and when our designers involve our average sale is twice the overall average.

We continue to see a decrease in store traffic but our closing rate is increasing, which we believe is related to our improved sales training and customer engagement, as well as customers pre-shopping on our website. Over 80% of our customers have searched our website before coming in the store.

We believe that havertys.com is inspiring our customers and we’re working to make it as transactional and easy-to-use as any in the industry. Total written sales for the first quarter to-date are up 1.7% over the same period last year with written comp store sales up 0.9%.

Total delivered sales for Q1 are down 1.7% and comparable store sales decreased 2.4% over the same period last year. We began the year with a softer New Year selling event, and experienced an actual winter in our regions which helped us start weakly.

We're pleased to see that the recent Presidents' Day holiday sales were strong enough to help reduce the positive year-to-date written numbers. This year, we've implemented an omni-channel solution to make sure we're meeting the customer where she wants to meet.

We've added a Pay Now link to our sales tools, which has been very well received by our customers and sales team. This allows customer engagement started at the store to be completed online while in sending the sales team member.

We've added a much improved idea board for the customers, as well as My Design Center, so that customer can have full access to our 3D and 2D design tools whether in-store or online. My Design Center allows customers to utilize Havertys website on her terms.

Our team members and stores get credit for online transactions when they have established a working customer relationship. We're seeing a 10% increase in our Internet sales and is currently running at 2.2% of total sales. We've been successful in adding higher quality product across all our categories.

We've recently seen a nice improvement in our leather upholstery lines and in our revamped youth bedroom categories. We know that our customers expect fashionable better quality merchandise from Havertys and our H Design Associates have helped us grow special orders and custom products assisting our customer make the vision of their home come true.

We've recently heard many customers comment about our stores that look younger. We think that means that the major remodeling of our stores with LED lighting, open and easier to shop floor layouts, and more fashion oriented products, we now have a feel that relates better to today's shopper.

Our significantly improved accessory program of wall to core lamps and area rugs has been a real factor in completing the rooms look and building the average ticket. We're seeing more interest in casual rustic finishes in our case goods and entertainment areas.

The new bedding lineup rollout which is underway will be important in helping us gain share in that important department. We recently commissioned an in-depth survey of 1500 customers and potential customers which question brand awareness and key drivers in the shopping process.

Among all respondents, Havertys received the highest ratings in almost all categories.

Havertys rates highest on a trustworthy brand, comfortable product, durability, superior craftsmanship, professional knowledgeable and friendly associates, a wide selection in a style I prefer, staying on top of trends, good value for the money, and available in a timely manner. We also rated highest on free-in-store design in customized furniture.

An area where we rated third was in the sales promotion area. We've begun a deep dive on how to best reach and appeal to our core customer and to attract new younger customers. In 2018, we're investing additional dollars in more specific focus marketing in the digital space and with a targeted television program in most of our important markets.

We are enthusiastic that this effort will help us gain positive sales momentum this year. Just this month we have shipped industrial-strength Android tablets for our stores and our sales teams to better serve our customers in the stores. This replaces our former BYOD program of iPads that we built several years back.

I saw these tablets and used this past week and our sales team is very enthusiastic about the ability to complete any transaction and show all our products without ever leaving the customer. With all our H Designers having easy to use laptops in the store and homes, this technology combination is changing the customer engagement process.

We feel that these two devices with the sales and H Design team may significantly strengthen the sales culture by allowing an uninterrupted customer engagement through the entire sales process.

This year we have modified our management incentive programs for all our executive officers as well as our regional and store managers to more closely align with our monthly and quarterly sales goals.

We will always be disciplined in controlling cost and maintaining gross margins but this year there is stronger financial incentives to make sure that we do everything to help serve our customer and to grow the company's sales. We ended 2017 with 124 stores serving 84 cities in 16 states with approximately 4.5 million square feet flat with last year.

After opening one store in a new market late this year, we expect to see a slight decline in the store count in sales square footage by year-end 2018. Our ongoing focus continues to be the drive for higher sales per square foot reaching our previous high watermark goal of over $200 a foot. We ended 2017 at $185 per square foot.

By early summer we will open the 150,000 square-foot expansion of our Western Distribution Center outside Dallas, Texas. This will feature state-of-the-art furniture handling processes and equipment and will allow us to better serve and grow our business in that important region.

We will reduce double handling of product and excess transfers while allowing for more regional selection and faster delivery to our customers. In 2018 we're concentrating on maximizing our investments in tools and continuing to make the process improvements throughout the company.

Our ongoing top priority is improving the interaction with every customer. We know that we must make the shopping and buying process smoother and genuinely enjoyable for our customer. We are driven to delight our customers and this is the Havertys mission. And I will turn the call back over now to Richard Hare..

Thank you, Clarence, and good morning. In the fourth quarter of 2017, sales were 215 million, a 2.6% decrease over the prior year quarter. Our comparable store sales were down 3.5% for the quarter. As expected our gross profit margin decreased 80 basis points to 54.1%. The $800,000 decline was primarily due to the increase in our LIFO reserve.

There was a $700,000 increase in this reserve in 2017 versus $800,000 decrease in 2016 which resulted in $1.5 million change over the prior year quarter. Selling, general and administrative expenses declined $900,000 to $103.6 million or 48.2% of sales.

This decline was largely driven by a reduction in administrative costs, primarily reduced medical benefit costs and employee incentive compensation which was partially offset by increased advertising and marketing expenses and occupancy costs due to new store openings and renovations.

Other income of $1.9 million includes gains from insurance recoveries related to our Wichita, Kansas store and our Florida, Alabama and Georgia stores that were impacted by Hurricane Irma. If you recall early in the third quarter of this year, we temporarily closed our Wichita location due to flooding caused by ruptured water pipe.

This location was reopened late in the fourth quarter of 2017. Interest income was basically flat at $0.5 million and pretax income decreased $3.3 million to $14.1 million during the quarter. Our tax expense was $11.1 million during the fourth quarter and it was impacted by $5.9 million charge related to the Tax Cut and Jobs Act of 2017.

The reduction in the corporate tax rate required us to re-evaluate certain tax related assets based on the new statutory rates. Including the impact of this charge, our effective tax rate was 79.2%. If you exclude the $5.9 million charge, our effective tax rate was 37.5% in the fourth quarter.

Net income for the fourth quarter of 2017 was $2.9 million or $0.13 per share, excluding the impact of our tax charge, our net income in Q4 was $8.8 million or $0.40 per share. Now turning to our balance sheet, at the end of the quarter our inventories were $103.4 million.

We ended the quarter with $79.5 million of cash and cash equivalents and our $60 million revolving credit facility remains untapped as we have no funded debt. Looking at some of our uses of cash flow, capital expenditures were $9.1 million during the fourth quarter of 2017 and $24.5 million for the full year 2017.

We expect to spend approximately $20 million in capital expenditures in 2018. During 2017, the company paid a total of $11.4 million of cash dividends to the holders of its common stock and Class A common stock. As Clarence mentioned in terms of store count, we ended the year with 124 locations.

Our earnings release list out several additional forward looking statements indicating our future expectations of certain financial metrics. I'll highlight a few, but please refer to our press release for additional commentary. In 2018 we expect our gross profit margin for the full year to be 54.7% compared to 54.3% in 2017.

Gross profit margins for the first half of 2018 are projected to be 20 basis points lower than the average for the year, with the second half running approximately 20 basis points higher.

Fixed and discretionary type expenses within SG&A are expected to be in the $258 million to $260 million range for 2018, up approximately 2.3% over those same costs in 2017. Variable SG&A cost for 2018 are expected to be 18.5% as a percentage of sales.

After review of the recently passed legislation known as the Tax Cutting Jobs Act, we expect our effective tax rate in 2018 to be 25%, excluding any impact for the vesting of stock based compensation awards. This concludes our commentary on the fourth quarter financial results. Thank you for your participation in today's call.

Operator, we would like to open the call for questions at this time..

[Operator Instructions] And we'll go first to Brad Thomas with KeyBanc Capital Markets..

I wanted to ask a few questions here about the financial outlook. I guess starting first with the gross margin line item.

I'm hoping you all could talk a little bit - about some of the puts and takes that are going to help you to improve gross margin here this year?.

We came in right about we're expected in 2017, we're expected it to go up as I mentioned into 2018. And primarily it's a continuation of less markdowns and more favorable pricing and product mix in general for 2018 on the gross profit line. On the G&A side, we've got some higher occupancy cost and inflationary increases in salaries.

We talked a bit in our press release about enhancing our 401(k) Plan and things of that nature. So we've got about a 2.3% increase in our fixed G&A costs, are going from 253 up to 258 to 260.

And then our variable G&A component we're projecting it to go from 18.3 up 18.5 and that's primarily more increased personnel costs and related to delivery and warehousing. Those were the kind of the big categories for next year..

And we're obviously hearing a lot of companies talk about higher transportation and freight costs.

Is that much of a headwind for you all here, this year Richard and if so, any ability to quantify it for us?.

We certainly are keeping our eye on it, it's top of mind. At this particular point in time, we don't anticipate a huge impact of freight in terms of on our LIFO as we saw last year but that's something that we are monitoring very closely in if that viewpoint changes we'll let you know..

And then obviously in the release you call out expectations that the square footage will decline 1.4%. I guess the math implies that that might be about two fewer stores that you end the year with. I guess just big picture Clarence, I'd be interested.

How are you thinking about your current retail footprint and adding new doors versus pruning underperforming ones?.

Well, I think the main thing is that, we want to consolidate and use our best stores and make sure that we’re focusing there. We do have some leases that are terming out this year in markets that we already feel we have good coverage. And yes, they would be underperforming stores.

A few of them we haven't announced them, but they're really overlapped in several of our markets. So an example would be, we just opened a magnificent new store in Columbia, South Carolina and closed two smaller under-producing stores. And in Birmingham we closed a store and consolidated into two.

So it's helping us be more productive and ultimately the objective is to be more profitable in serving these markets..

And then just lastly on cash flow, I mean my math suggests that you all maybe able to do 40 million in free cash flow this year when you consider the tax benefits that you get in the lower CapEx.

I guess as you all think about this the business this year any areas that you may be investing in a little bit more in terms of OpEx or marketing because of tax reform and any changes in how you think you might utilize some of this excess cash flow?.

Well, we are going to give some back to our employees and we haven't detailed that, but we will. I do believe that we plan to invest more in marketing in our major markets. So, those are in the numbers that Richard gave you. So we feel pretty good about that.

I just think, there are some opportunities to also look as we do every year at our quarterly dividend that could be something that we would look at and we also have the ability to do some stock buybacks which depending on how the market reacts. We could be doing that also.

So, we've got a lot of visibility, a lot of possibilities to what we do with the cash. We're looking at some other opportunities. But our whole focus, I've just outlined is getting our existing markets producing better and existing stores, covering that and getting more sales per square foot..

And next we’ll go to Anthony Lebiedzinski with Sidoti & Company..

First I was wondering if perhaps you could quantify the impact of the weather on your sales. And your commentary, obviously you mentioned that you know Q1 was affected by the weather.

So I don't know if there is any easy way for you to perhaps quantify that, but if you could that will be very helpful?.

We started slow because of it. It is winter and weather is a factor every winter. I would say it impacted the east - our coastal stores, Atlantic Coast stores more significantly than anywhere else. And I have pointed out we were behind going into this past holiday event and we did very well there which brought us positive.

So, it did impact everywhere mostly. Well it didn't impact Florida, but it mostly the Atlantic Coast stores up to D.C., where it just came week after week and as it tends to do up there. So I don't think we have any specific quantification for that..

So where are you nowadays with your penetration of your in-home design or H Design?.

It's about 20%, but it's increasing in some of our better markets and I think we will get close to the goal I outlined several years back or be in about 25%. We are not a decorator house. So a lot of our customers come in and just need to be served on something specific.

Our sales team I think with these new tools and the training is more qualified and adept in doing that. We don't have to get in everybody's home. We would like to, but that's not how our customers want it. So we provided however she'd like to do it. And I think somewhere in the mid 20s percent is where it will level out..

And also Clarence you had mentioned that you've implemented some stronger financial incentives recently.

Can you share with us a little bit more details about that?.

Well, I will say that everything for corporate officers not everything, but a major portion of our corporate officers incentive pay and LTI is related to performance. I've been on that for quite a while, Richard and I have been, we made sure that is going all the way down and specifically to seeing increases in sales.

We've also changed the percentage mix for all of our store operators and general managers and individual store managers where they might have been related heavier on pre-tax profits. They're going to be more incented on hitting monthly and quarterly sales numbers because we have pretty good control over the expenses now.

And I think their main energy and effort needs to be in making sure that we serve our customers and generate sales at each location..

And also as far as the question about access cash flow, would you perhaps also consider doing a special dividend as you've done - last few years you've done those typically every two years or so....

So, that's a board decision. We have done several when we had excess cash. It's certainly an option. That's a board decision and they review that every quarter..

[Operator Instructions] And it appears we have no further questions..

Great. Thank you. Thank you everyone for your participation in today's call. We'll talk to you again in early May when we release our Q1 2018 results. Thank you..

And that will conclude today’s conference call. Thank you everyone for your participation. You may now disconnect..