Good day and welcome to the HVT's Second Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Hare, Chief Financial Officer. Please go ahead..

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..

Thank you for joining our 2021 second quarter conference call. We're very pleased with the record results the second quarter with sales at $250 million.

We've done a good job in our expense controls across the board and combined with pricing disciplines from the merchandising teams and stores, we achieved solid gross margins and 11.7% pretax operating profits. Our ongoing objectives are to grow market share and our existing distribution footprint and maintain double-digit operating margins.

We believe that the increased importance of home that was jumpstarted with the impact of COVID last spring is a longer term trend. While we don't expect the rush that impacted our industry to be at the elevated levels we experienced in recent quarters, we do believe that home is a priority and a sustainable trend for the near future.

The strong desire for homeownership combined with already strong positioning and Florida, Texas, and the Southeast puts us in an ideal position for the day and for the future. Our supply, merchandising, and distribution teams are working with our factories and shippers to bring in product to fill orders and reduce our record backlog.

The shipping challenges that home-related industries are experiencing have caused major delays for furniture which we believe will be problems until the spring of 2022. We're working to increase our inventories as the production and product flow improves. We're investing in our distribution capacity to support growth over $1 billion over our regions.

We just completed additional racking to our mothership, the eastern distribution center in Braselton, Georgia, which adds 20% more storage capacity. We'll evaluate potential expansions to a network to better serve our plan growth.

Our current focus is on building market share in our key markets with store positioning and target marketing to our core customer and new homeowners.

Examples of this were the opening of Myrtle Beach earlier this year, the opening of a third store in Austin, in the fast-growing Pflugerville, Round Rock markets, and a store opening tomorrow in The Villages in Central Florida.

We're in a deep dive reviewing potential locations in our best markets which will reach the fastest-growing areas and leverage our existing infrastructure. We expect to announce several new fill-in locations for the 2022 openings..

Thank you, Clarence. I'm very excited with our results from the second quarter.

This performance was due to the commitment, passion, and determination of the store, distribution, home delivery, service, and home office teams whom I want to congratulate personally for their efforts, Our supply chain network has been able to increase the flow of products into our warehouses over the second quarter even with all the headwinds.

Container capacity continues to be under pressure with a continued increase in demand across all of retail. We expect this to continue to be an issue for the remainder of the year, even if there's a softening in demand. Also, container prices on the spot market continue to increase with prices varying between $12,000 and $22,000 a container.

We have been able to balance our shipping medics so that no more than 20% to 30% is on the water at one time at these increased rates. As I stated last quarter, we finalized our contracts on May 1, which are significantly below the spot market rates. Foam continues to be an issue for some of our domestic vendors.

However, their production has increased during the second quarter, but still not at 100%. Our import vendors are not having any foam issues. The recent closures in Vietnam due to the increased spread of the Delta variant are not expected to have an impact on our customers if the closures remain at the projected two weeks.

They are expected to open back up beginning the week of 8/2. However, if the closures are prolonged four to six weeks, then there may be an impact to our customers who already bought and feature customer lead-times. Also, we are seeing port congestion in Vietnam and China along with continued issues at the LA port and rail yards.

Our merchandising and supply chain teams are monitoring the situation very closely with our vendors..

Thank you, Steve and good morning. In the second quarter of 2021, delivered sales were $250 million, 127.3% increase over the prior quarter. If you recall, our retail operations were closed due to the pandemic in the month of April in 2020, 103 stores reopened on May 1st, 2020 and the remaining stores reopened by June 20th.

Our written sales for the second quarter of 2021 were up 67.5% over the prior year period. Comparable store sales were up 46.9% over the prior year period. This only includes stores that were open for a full month in both periods.

Our gross profit margin increased 240 basis points from 54.2% to 56.6% due to better merchandising, pricing, and mix, and less promotional activity during the quarter. These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product costs.

Selling, general, and administrative expenses increased $39.8 million or 54.7% to $112.4 million, primarily due to increased sales activity. However, as a percentage of sales, these costs declined over 2,000 basis points to 45% from 66.1%.

As demonstrated in the past three quarters, our financial model has substantial operating leverage at the sales levels. Other income in the second quarter of 2020 was $31.8 million, which included the gain on the sales leaseback transaction of three distribution facilities in 2020.

If you recall the gross proceeds from the sale was approximately $70 million. Income before income taxes increased $10.5 million to $29.2 million. Our tax expense was $6.3 million during the second quarter of 2021 which resulted in an effective tax rate of 21.6%.

The primary difference in the effective rate and statutory rate is due to the state income taxes and the tax benefit from vested stock awards..

Thank you. Our first question comes from Anthony Lebiedzinski with Sidoti..

Good morning and thank you for taking the questions. So, you talked about the demand still being positive here in the third quarter, which is good to see.

Can you talk about other than the fact that people are buying more in stock merchandise or customized, are you seeing other changes as to what people are buying? I know you touched on mattress sales also being up in the quarter, but maybe just -- if you could just talk about like as far as if you're seeing any sort of differences as to what the -- what people are buying, that'd be helpful?.

I think over the last months, we've seen our case goods business improve a little bit more than some of the other categories. Upholstery, while up is a little less up because of the customization that we just -- we're having delays on product. So in some cases, we've had to suspend a few categories, few vendors on customization and special order.

So, the main thing is we're seeing growth across all categories. I think case goods, because we were able to get the product and bring it in have been a little stronger in bedroom and dining room..

Got it. Okay, that's very helpful. And so you guys have done a nice job over the last few years improving your gross margins even with some headwinds.

So, just overall, how should we think about the potential for gross margins going forward in future years?.

Anthony this is, Steve. I would say we're committed, you saw the guidance that Richard has provided you, and we don't certainly provide guidance on that going forward, that we still feel confident with what Richard put out there, the 56.5% to 56.8% for the remainder of the year..

Okay, got it. And then as far as the usage of cash, obviously, though, you guys have a balance sheet.

So, as you continue to build up cash, I mean, would you -- be to perhaps purchase additional stores or distribution facilities or dividends or buybacks? I mean, how should we think about the -- your priorities or preferences for usages of your excess cash flow?.

Well, Anthony, we've got a Board meeting next week, we meet and discuss this and every Board meeting. Yes, we're generating a good deal of cash. It also points out the opportunity we had to buy back our distribution center, which I think is a real plus. We may have to invest in that which could be significant.

We look at buybacks, we look at dividends and if we don't need the cash, we do like to return it to stockholders as we've done historically. But we'll review that and look at it every quarter..

Got it. Okay. Thanks and best of luck..

Thank you, Anthony..

We'll take our next question from Bradley Thomas with KeyBanc Capital Markets..

Hi, good morning Clarence, Steve, and Richard. This is Andrew on for Brad. I wanted to start by talking about your written sales trends. It was encouraging to see the positive written sales growth quarter-to-date even against the tough comparison last year in 3Q 2020.

But as we look to the rest of the quarter, could you remind us what the comparison for written sales growth looks like for August and September when you compare it to July? In other words, does the comparison for written sales growth get more difficult or easier as we progress through the third quarter?.

Yes, Andrew, this is Richard. I think it's -- first of all, appreciate the question. We typically don't get into that level of detail on months, but just generally speaking, the back half of the year for Q3 and Q4 on written and delivery are both obviously more challenging.

So, we were very pleased to report the positive sales trends in both of those categories month-to-date for the third quarter and we're certainly optimistic about the rest of the year..

Understood. And in your commentary, you noted that there was a moderation in pandemic patients among consumers and that's led to a shift in product mix away from custom merchandise.

Could you talk about how this shift is impacting margins and do you expect this shift to grow in intensity over the next few months?.

I don't think it's going to impact margins. I don't see that..

Yes. I don't see -- this is Steve. I don't see any impact. I did say we have seen, because of the delays and the extension of the lead-times with our vendors -- our domestic vendors, we have seen some delay in the custom orders.

But I'm seeing that already bounced back in the early part of July from where it was in the second quarter, not back to the levels where we were, but it's moving back up. So -- but I definitely don't see any impact to the margins, because of the reduction in the special order..

Okay, great..

And we're optimistic that would pick up as we -- as vendors get more online and get back things flowing as we move through the third quarter into fourth quarter..

Great.

And could you talk a little bit more about the magnitude of the changes in product and freight costs that you are seeing? And do you expect to eventually offset these changes with your own price adjustments?.

We have already -- we're addressing that as it happens. We don't -- as soon as we are aware of that, our merchandising and supply chain teams are immediately addressing that and passing those along. So, those have been -- those are passed on as we are finding them out from our vendors..

Got it.

And given the resurgences of COVID-19, particularly in some of the southern states, have you seen any changes in consumer behavior as a result of this resurgence?.

We haven't seen anything recently. Traffic is pretty balanced across the regions. No, we haven't seen anything. It could come to be more significant, but we haven't seen anything to-date..

Got it. Okay. I think that’s all for me. Thank you..

Thank you..

Thank you, Andrew..

This concludes today's question-and-answer session. I will now turn it back to Richard Hare for closing remarks..

Well, we appreciate your participation in today's call, and we look forward to talking to you in the future when we release our third quarter results. Thanks again..

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your phone lines..