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

Brad Thomas - KeyBanc Capital Markets Budd Bugatch - Raymond James & Associates, Inc. Anthony Lebiedzinski - Sidoti & Company.

Good day everyone and welcome to the Haverty's First 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. Mr. Hare please begin..

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 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 first quarter conference call. As we released earlier, Q1 sales decreased 0.5% to $199.4 million with comparable store sales down 1.1%. While our sales decline was disappointing, our earnings for the quarter were in line with our expectations.

We had a few store closing, which, along with promotional timing shift, help cause a slightly lower gross margin. Our average ticket increased 1.8%. We continue to see that our H Design program gains in importance and is the key driver of our average sales increases and helping to complete the home for our customers with expanded accessory sales.

Our online engagement on havertys.com is growing with improved number of sessions, conversions, and sales increases. Sales for the 2018 second quarter-to-date were down approximately 1.3% with comparable store sales down 1.9%. Our total written sales were up 0.1%, with comparable written sales down 0.3%.

We're in the final phases of rightsizing our store positioning in several of our markets, with the process -- the planned closing of two Texas stores, which overlap with new and expanded nearby locations. For the full year 2018, we will close four stores, most have sister stores where we expect to pick up a significant part of the sales volume.

Our recent experience in the last three markets where we repositioned with upgraded stores, but fewer locations have resulted in higher sales and more profitable operations. Store productivity is a key focus for the company with a constant emphasis on driving sales per square foot and comp store sales.

We're pleased to finalize a lease on a former hhgregg location in Chattanooga, Tennessee, a market in the heart of our strongest regions and one that we've been out for over 20 years. We expect to end 2018 with 121 stores and approximately 1.6% less retail square footage.

We have several merchandise initiatives and new promotion planned for the second quarter, which we expect to help us regain positive momentum and grow our share in our markets. We have aggressive promotions for the major holidays and our team is very excited about the new merchandise hitting our stores.

Several of our new contemporary upholstery collections have moved to the top of our best-seller list. These groups include significant special order options and configurations. Our special order upholstery business is very good and most of that is with domestic suppliers who can respond with full week delivery.

First quarter custom upholstery was 26% of total upholstery sales, which was a 15.1% increase over last year. Leather sectionals with triple power, featuring power headrest, footrest, and lumbar have been very well received by our customers. Our improved accessory presentations tied our H Design program continues to show very good sales increases.

Our combination of private-label bedding and adjustable basis combined with the major name brands has built a solid mattress program, which we expect to gain share this quarter. The Haverty Skye memory foam mattress and pillow line has significantly improved the overall category gross margins, while helping us penetrate specialty bedding market.

We have a major refresh of our bedroom and dining room line up underway. Several collections feature updated close-to-the-wood finishes in grays and lighter finishes. Most of these groups have been in the planning stages for months.

Our team is encouraged by this major update of about one-third of our case goods program, which should be in our stores by Labor Day. We're in good position for deliveries for the rest of the second quarter, recovering from some out of stock issues due to over sales for a few groups and delays from Chinese New Year, which was 19 days later than 2017.

Along with the new collections hitting the floors this quarter, we should be in good stock position for Memorial Day and completing deliveries this quarter. The Android tablets that we introduced to our team in the first quarter have been extremely well accepted by our sales staff, H Designers, and our management team.

These give full real-time access to all the product information and inventory without having to leave the customer. These tools allow us to fulfill our mission of delighting our customers. We have new advertising, Creative, beginning this month and a higher investment in electronic marketing plan for the second half of 2018.

The Creative message coordinates with our merchandise changeover with HAVERTYS LOOKS GOOD tagline. We're showing specific product savings and credit promotions for the most important summer holidays. We've built a very strong quality team both domestically and on the ground in Asia.

We are in every factory for preproduction and production for all of our merchandise, whether developed by third-party companies or produced by our direct factory relationships.

We're dedicated to making sure that all Haverty's products meet our quality standards for immediate delivery and can stand up to the style, finish and use that our customers demand. We feel that our quality control team is a significant factor that separates Haverty's quality from the competition.

The major capital expenditure for this year is 154,000-square foot expansion of our Dallas, Texas Western Distribution Center. The opening has been delayed to late summer due to the rains this past winter and spring, but will be fully operational for the important fall selling season.

This will allow us to provide more regional-specific product and for quicker delivery in the Western region. We had strong cash flow this past quarter and projected for the full year. For the first quarter, we purchased $3.5 million of common stock out of $10 million authorized.

Our Board meets at our Annual Meeting next week here and we will review our options for utilizing our cash position going forward. We are encouraged by the strong acceptance of the upgraded product mix, the increases in custom upholstery product and the incoming new designs and collections.

We feel that we'll be in an excellent inventory position with the right styles and product mix, which can be delivered quickly. We've seen positive trends the last four weeks, with our undelivered backlog up mid-single-digits, which is a product already scheduled for delivery.

This May, we celebrate our 133rd anniversary and our excellent team is excited about serving our customer and growing market share throughout our 16-state footprint. I'd now like to turn the call back over to Richard Hare..

Thank you, Clarence and good morning. In the first quarter of 2018, sales were $199.4 million, a 0.5% decrease over the prior year quarter, and our comparable store sales were down 1.1% for the period. Our gross profit margin decreased 10 basis points to 54.6%.

The decline was primarily due to a slight shift in our promotional activity during the quarter and markdowns related to store closures. Selling, general, and administrative expenses increased $600,000 to $101 million or 50.6% of sale.

This increase was largely driven by higher occupancy costs, partially offset by reductions in administrative and employee benefit costs. Other income of approximately $1 million includes gains from the sale of our two-night store location in Columbia, South Carolina, and the final insurance payment related to our Wichita, Kansas store.

If you recall, earlier in the third quarter of 2017, we temporally closed this location due to flooding caused by a ruptured water pipe. This location was reopened late in the fourth quarter of 2017. Net interest expense was slightly down, $100,000 to $470,000 and pretax income decreased $1.3 million to $8.5 million during the quarter.

Our tax expense was $2.1 million during the first quarter of 2018, which resulted in an effective tax rate of 25.4%. In the prior year period, the effective tax rate was 38.5%. The Tax Cuts and Jobs Act of 2017 became effective in the fourth quarter and significantly reduced the company's federal tax rates from 35% to 21%.

Net income for the first quarter of 2018 was $6.3 million or $0.29 per diluted share compared to $6 million of net income and $0.28 per diluted share in the first quarter of last year. Now, turning to our balance sheet.

At the end of the quarter, our inventories were $109 million, which was up $800,000 over the same period last year, but up $5.6 million from the fourth quarter of 2017. We ended the quarter with $72.1 million of unrestricted cash and cash equivalents and our $60 million revolving credit facility remains untapped. As a reminder, we have no funded debt.

Looking at some of our uses of cash flow, capital expenditures were $7.1 million during the first quarter of 2018 and we expect to spend approximately $20 million in CapEx this year. During the quarter, the company paid a total of $3.8 million of cash dividends to the holders of its common stock and Class A common stock.

We increased our dividend 20% to $0.18 per common share in the first quarter of 2018, which followed a 25% increase in the third quarter of 2017. We purchased $3.5 million of common stock, equating to 171,600 -- 171,000 shares of -- during the quarter and have $6.5 million remaining under our current authorization.

In terms of store count, we ended the quarter with 123 locations. Our earnings release lists 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.

In 2018, we expect our gross profit margin for the full year to be 54.5% compared to 54.3% in 2017. We are revising our previous 2018 estimate due to anticipated increases in our LIFO charge, driven by higher expected freight cost.

Gross profit margins for the second half of 2018 are projected to be 10 to 15 basis points higher than the average for the year. 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 costs for 2018 are expected to be 18.5% as percentage of sales. We expect our overall effective tax rate in 2018 to be 25%, excluding any impact from the vesting of stock-based compensation awards. Our federal tax rate is expected to be 21% and state and local taxes will make up the remaining difference.

This completes our commentary on the first quarter financial results. Thank you for your participation in today's call. Operator, we would like to open the call up for questions please..

Thank you. [Operator Instructions] Our first question comes from Brad Thomas..

Hey, good morning, Clarence, good morning Richard..

Good morning..

I wanted to ask couple of questions, if I could, on just consumer backdrop and then some modeling and business questions. I guess, just to start with from a sales standpoint, the first quarter seemed to be a tough one for a lot in the furniture and mattress industry. I guess I was wondering, what have you been seeing more lately in the business.

And any signs of maybe an uptick in trends as we move into 2Q?.

Well, we mentioned in the call a minute ago that the last four weeks have been up and we feel better about it. We do have some inventory challenges to get the right product in, which is coming in now.

The timing of Chinese New Year was -- is really interesting how it's almost a month later this year, which caused us to not be able to get some of the product that we would've gotten in time for delivery in the first quarter or even delivery into the April month. So, much of that -- most of that's coming this month, next month.

We feel good about that. So, I think our product mix is better. Our backlog is up. We feel a little better after what has been a couple of tough quarters here..

Got you. And at the start of the year, we'd known many of the furniture industry and some in the mattress industry were raising prices kind of at the end of 1Q. At the High Point market, it did sound like there are more price increases that may be coming this summer due to the raw materials going up so much.

What are you guys seeing in terms of the prices that you're needing to pay?.

Well, there are pressures for that. Our buyers don't accept prices increases. It's pretty much the case. We're pretty good at it. So, if people are trying to raise prices, sometimes we just drop that group, move to something else. So, there are pressures. We are resisting pretty heavily..

Got you. Okay. And then the world is, obviously, changing with interest rates starting to move up. I know Synchrony is a big partner for you.

What changes, if any, do you think you may have to make in terms of the promotions that you're running and if your cost to run some of that 0% financing goes up? How are you able to mitigate any headwinds on that front?.

Well, we're very pleased with Synchrony and our contracts in place. We monitor those promotions on a monthly basis. And so if there was a strong increase in interest rates, we'd have to adjust some of the promotions that we have. But we're very pleased with how those programs have worked out.

I will like to echo something back on what Clarence said earlier, although -- on the price increase side, I just want to point out something on the freight because we did mention that in our previous remarks. But we do expect to have some higher freight costs this year and we've kind of baked that into our modeling.

And that's why our gross margin projections, we assumed and projected out. We had a slight decline there. I do want to make that point..

Right. Great.

And then, Richard, I apologize if I missed it, but would you happen to have the number for the fixed expense dollar value that you spent in 1Q?.

Yes, I can get that for you after the call..

Okay. We can circle back on that. Great. Thank you so much. Thank you for taking my question. Great..

Thank you..

Thank you. Our next question comes from Budd Bugatch..

Good morning Clarence, good morning Richard..

Good morning..

Good morning..

Question for you on store size today. You were talking about rightsizing the stores.

Talk to me about your thoughts on the prototype size of the stores today and where you would be? And which -- and the size of this hhgregg store?.

It's in the 31,000, 32,000-square foot range as the Circuit City stores were that we did well with some of them. Most of our new stores are in that range, Budd. The building itself might be 35,000, but it nets to 31,000 or 32,000. Ideally, in a bigger market, you might like to have a bigger store like in the 40,000 range. But these come available.

We can get good leases on them. They give us good position and presence and with the digital world and the fact that we've got these tablets, we can show a lot more product that's virtual versus physical. So, our special order business is growing. More people are comfortable with that because we can show them what that product looks like.

So, we don't have to actually show everything, even though, yes, we would prefer to do that. Our old model, as you know and we have a number of legacy stores which are our best are in the 50,000 range, the ones here in Central Florida, the ones in Dallas.

But it's very hard to be able to afford that and particularly coming out of the ground, building a 50,000 to 60,000-square foot building and running a furniture store. It's tougher to support it. So, we're comfortable with the mid-30,000 range and our average today is right in that number. Right around 34,000 to 35,000 square feet..

Okay. The singular biggest challenge, I think, facing all retailers, certainly furniture retailers, is getting more bodies, more feet in the door. And that's been an area which -- we've seen decline in traffic for now several years.

Talk to me about what your thoughts are on that and how we get more traffic in the stores? And if you have this over a bullet, I'd love you to fire it at some point in time.

But tell me how you're thinking about it?.

I'll start, but I don't have a silver bullet. Budd, the way the -- that the customer used to shop before they had access to everything on the internet is she had to go physically into the stores. So, the old model was they would shop five places in order to find out what product they wanted and where she wanted to shop.

Today, you really need to be in the top two, no more than the top three. And in many cases, she's already decided where she wants to go because she shopped online and found out what you offer versus what others offer. So, I think that world has changed dramatically and continues to change.

So, we've got to be the best with our website and our presence and the ability to show the product virtually. We're working on that. I think we have a terrific website. But I don't think that it's going to go back to the point where we're seeing big increases in store traffic. As you -- our traffic is not up.

Our average ticket is and we're doing more custom and special order, which is driving our business. So, our strategy is to separate from the real promotional player and to be offering the better product and better service and I think that's continuing to be our focus..

That's just not new news that we've been -- we've known this now for at least five to maybe even seven years that it's -- that the consumer is shopping fewer and fewer. She's doing more shopping off hours and online before she walks into a store. At some point in time, that has to asymptote down to a level where it can start to increase.

Are we anywhere near that point? Or is it just going to continue for how -- for the foreseeable future?.

Well, we're not seeing a change. We feel we're doing pretty good, if a store traffic is flat, but that's not what's happening right now. So, I think it's also why in a market where we have more stores than we need; we can do more business out of one store than we do out of two.

And that's why I talked about when leases come up, when we can sell off our stores that's under-producing in the same market, that's what we're doing. So, you have to be positioned in the right place in the market to make sure that those who are shopping digitally can find you easily and see the product.

Growing stores doesn't -- in a market doesn't necessarily -- it isn't really the answer..

I got you. I don't disagree with you on that. I actually completely agree, but just would love to start to see traffic start to -- at least, start to bottom out and start to increase even if modestly..

We'll look forward to your idea on a silver bullet, Budd..

Okay. Your -- I'm interested to hear your major update by Labor Day, particularly of case goods. As you may have read something I wrote, I thought that what I saw at High Point in the last couple of markets has been some of the best new introductions I've seen in maybe a decade, if not more.

So, tell me about what you're thinking about in that major update?.

Well, we've got a lot of new product that we've been working on for a long time that we would -- some of it; we were hoping to get in last year. We didn't get in until after Chinese New Year, and it's coming in now. So, we have worked our buying team differently in merchandise and case goods.

We have -- we've placed in some different talent and we feel very good about the new program. And I think we're going to be in better stock. It's coming from factories that we're more comfortable with. We're looking at the quality more. So, yes, I think the new styles coming in are more exciting.

We have historically been known as kind of a traditional store and I think we're moving to where the customer wants us to be; more fashion, more contemporary, more stylish, I mentioned the lighter finishes and that type of thing. So, we're really excited about what we have on the water and in our stores right now..

Okay. Just a couple more from me. The freight costs rising, obviously, we're seeing a lot of movement in the cost of transportation domestically because of shortages of drivers, the new electronic rules on keeping -- record keeping.

Is It incoming freight costs that are going up? What about delivery to consumers? Is that also a cost rise? A cost pressure you're seeing? And how much is it? How do you quantify it?.

Yes, well -- as I said, we do expect higher freight costs. We've locked into our ocean cargo rates for the remainder of the year and that's basically why we increased our anticipated LIFO impact and reduced our gross margin percentage for the year. Yes, the ocean rates are locked in..

You're seeing higher freight rates on the containers?.

Not -- very slightly, not much. But on the other side with the inbound freight, we're seeing a little bit of increase on inbound freight. And we got to see how the rest of the year plays out, but it's a low inflationary type. It's not -- at this point, it's not significant..

Got you. Okay. All right. And one other -- just a housekeeping question.

Where is special order now as a percentage of your overall business? And can you maybe give that too a spike either by upholstery or -- and case goods?.

Well, it's mostly upholstery. I mean, that's where our special order businesses is. I mentioned that 26% of our total upholstery business right now is custom -- what we call custom or special order..

I got you. And not much -- you're not seeing much special order in terms of case goods? I would think very little there..

It's not -- that's correct. It's not a big factor. We don't custom order a lot of different finishes and different colors on groups. It's mostly what we carry or have available in stock..

Thank you very much. Good luck on the year..

Thank you, Budd..

Thank you. [Operator Instructions] Our next question comes from Anthony Lebiedzinski..

Yes, good morning gentlemen. Thank you for taking the questions. So, just for us a quick housekeeping item.

Any way that you could guys quantify the out-of-stock issues that impacted you in the first quarter?.

That's tough to do. I will tell you that the -- two of our best-selling groups are the ones that are not in stock that are coming in right now. So, -- and the -- and part of it was because we -- they were more successful than we thought and they're coming from China, so we were dealing with the Chinese New Year.

And we underestimated their success, and so we're catching up on that. And both of them, frankly, their Chinese product that did quite well. And it's -- they're significant numbers, but I don't have a percentage of what -- how that would've impacted our sales. It happens all the time, but it's been a little more significant this time..

Got it, okay. Thank you for that. And also, Clarence, you previously talked about the, I think -- as far the in-home design program, I think you guys previously communicated that you expect that to probably eventually rise up to, like, 25% of your overall sales. It's now at 21%.

Do you still think that's the case? Or could that number go higher? How should we think about it?.

I think that's a good number. I think it could get higher and it is higher in a number of our markets. But I think, overall, that's a pretty good number still. I feel like its growing. It's in the, probably, mid-single, like, 23% range. So, we're getting there. It could keep growing.

And I would think with our recent experience on this special order upholstery that's come off so well, I would guess it would go higher..

Got it. Okay. And also, obviously, you've done a tremendous job with repositioning the store base and are continuing to do so.

So, longer term, when you think about the business three to five years from now, would you expect the total number of stores to be up or flat or perhaps down from where you think you'll finish 2018?.

Five years from now, wow. We're -- what we're doing is rightsizing where we are now. We are looking at other markets. When we go into a big market -- let's just say, look at Atlanta. For instance, in Atlanta, we have 12 stores. Would we have 12 stores if we went to Atlanta now? No. We'd probably have half that amount.

So, as you look into -- it's the same thing we talked about with Budd. You don't have to be in every neighborhood to serve it. We -- a lot of these legacy stores, we're already positioned in. So, it depends on how many markets we go into. I don't see us growing a lot of square footage, and frankly, we haven't grown a lot of square footage.

If you look back 10 years, we have about the same square foots as we did 10 years ago. We've repositioned, relocated, consolidated, all in the regions we're in. And so I don't see us shrinking much. I mean this -- what we're doing right now is really balancing where we are now. And I think that there won't be many more that happen.

We're closing the ones that we've planned to do for quite a while in markets that are important to us. So, five years from now, we'd have to be in another region to have more stores, to be frank..

Got it. Okay. Well, thanks for that. Best of luck..

Thank you..

Thank you, Anthony..

Thank you. At this time, there are no further questions..

Well, we want to thank you for your participation in today's call. We look forward to talking to you in the future when we release our second quarter results. Thanks again..

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect..