Good day, ladies and gentlemen, and welcome to the Havertys Reports Operating Results for Second Quarter 2022 Conference Call. All lines have been placed on a listen-only mode. At this time and it’s my pleasure to turn the floor over to your host Richard Hare, Chief Financial Officer. Sir, the floor is yours..

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 Chairman and CEO, Clarence Smith, will now give you an update on our results and then our President; Steve Burdette will provide additional commentary about our business..

Good morning. Thank you for joining our 2022 second quarter conference call. We’re very pleased to report a record Q2 sales performance of $253 million and earnings per share of a $1.27, 5% over last year. The second quarter was the fourth best earnings performance in the company’s history.

Our team has produced seven straight record sales quarters, going back to the fourth quarter of 2020. We continue our $1 billion annual sales pays that we reached in 2021. We believe that our target customer located in the fastest growing markets in the country has been impacted less than the more price sensitive promotional customer base.

We’ve seen a slowdown in store traffic, which is hit written orders, but we feel that we’re very well positioned with a strong backlog of orders to provide and build profitable market share in our regions. We’ve changed our business model since pre-COVID. Our store count and retail square footage is level with 2019.

However, our productivity measured by sales per employee is up 61%, because we’ve been able to deliver more sales volume with fewer team members compared to 2019. In the second quarter, our written sales are 23.2% up over 2019. Average sale ticket is up 39% with a higher closing rate.

Traffic is down double-digit compared with Q2 2019 and units are down compared to Q2 2019. But with the average ticket, over $3,000 with a higher closing rate and a 58% gross margin, we are producing record profits. Recent sales trends have changed compared to 2021.

Last year, we had more consistent volume during the week and a balanced traffic flow outside of the typical promotional activity. This year, we’ve seen stronger weekend sales and more activity around the holiday events, but weaker traffic during the weekdays returning to more historically normal sales pattern.

In our marketing efforts, we’re more focused on attracting and driving new customers, because we’ve seen the new customers build higher at sales tickets and more quickly grow our volume. We’re targeting a slightly younger customer than we’ve historically attracted with more digital advertising and social media.

Our merchandising efforts also align with this strategy, emphasizing more contemporary styles, customization, and special order. Upholstery continues to be the key driver at over 40% of sales. We built up inventories backup in upholstery, and domestic special order delivery times are improving, coming closer to pre-COVID performance levels.

We’re finally beginning to fill orders in bedroom and dining room with incoming containers from Vietnam and leather upholstery from China. Recently, our biggest sales games have been in bedroom in case goods, as we’re able to complete back orders after the long delays.

We expect to be in the best inventory position for the important Labor Day events than we have been in many years. Our team’s top marketing, merchandising, and IT efforts of the relaunch havertys.com later this year.

We’re actively pursuing a number of store locations within our distribution footprint with a goal of adding five stores a year beginning next year. We believe that there are very good locations, both in new and existing markets that reach our target customer.

We will be relocating a store in Indianapolis, and opening an additional store in the Washington DC market this fall. Currently, we expect to end the year with 121 stores level with last year. Our best-in-class balance sheet allows us to invest in the latest technologies for efficiency and managing supply chain.

The major relaunch of our website, state-of-the-art business intelligence, and upgrading and repositioning our stores in the best locations in the fastest growing markets in the country. We’re also able to build back our inventories to support growth and maintain an ongoing priority position with the industry’s top suppliers.

We are pleased with our team’s dedicated performance for the first half of 2022. We have challenges with reduced traffic and lower incoming orders related to high inflation and slowing home closures. We’re encouraged by our team’s dedication to serving our customer better with great values, more design service, and customization.

We believe that we’ll be able to earn a larger share of the home furnishings markets in the months and quarters ahead. I’ll now turn the call back over to Steve Burdette..

Thank you, Clarence, and good morning. Our supply chain has gained momentum over the second quarter with lead times continuing to improve from our domestic vendors and production becoming more consistent from our import vendors. This has allowed us to increase our inventories year-over-year by 16.5% in Q2.

This increase in inventory contributed to our record quarter, and it is helping to reduce our backlog of outstanding orders. While our backlog is still healthy. We have stabilized our age of the backlog at 11 weeks.

Our expectations are that we will continue to see the dollars in our backlog drop and the age of our backlog improve over the coming quarters due to the increase in consistency coming from our vendors on shipments and lead times.

However, we are experiencing some longer shipping times on imports for several reasons, a shifting of cargo from West Coast to East Coast in anticipation of the potential disruption during labor talks resulting in port congestion at some of our gateways.

An increase in orders from retailers getting ready for the second half of the year and the port seeing longer dwell times of containers as many retailers are not able to receive their excess inventories due to a softening in sales.

One bit of encouraging use is, we have seen a reduction in some of our contracted container rates with some of our carriers due to the drop in the spot market rates. Our special order business has remained flat as a percentage of total upholstered sales for the quarter at around 19%.

Getting our team’s confidence restored in our vendor’s abilities to meet their new reduced lead times consistently will go a long way to us getting back to our special order goal of 25% of upholstered sales.

Staffing in our distribution centers, home delivery areas, and customer service centers is within 5% of our expected goals for the first time since the pandemic started. Our focus for our teams is on training, execution and retention. We are excited to see our results for the second quarter and first half of the year.

We are appreciative to all our team members for the dedication and passion furnishing happiness to all our Havertys customers every day. Now, I’ll turn the call over to Richard..

Thank you, Steve, and good morning. In the second quarter of 2022, net sales were $253.2 million, a 1.3% increase over the prior year quarter. Comparable store sales were up 1.1% over the prior year period. Our gross profit margin increased to 130 basis points to 57.9% from 56.6% due to better pricing discipline and merchandising mix.

Selling, general and administrative expenses increased $5.7 million or 5.1% to $118.1 million as a percentage of sales these costs approximated 46.7% up from 45% in the prior year. As expected, we saw increased selling, distribution and transportation expenses during the quarter. Income before income taxes decreased $501,000 to $28.7 million.

Our tax expense $7 million during the second quarter of 2022 resulted in an effective tax rate of 24.3%. The primary difference in the effective rate and statutory rate is due to state income taxes, and the tax benefit from vested stock awards.

Net income for the second quarter of 2022 was $21.7 million or a $1.27 per diluted share on our common stock, compared to net income of $22.9 million or a $1.21 per share in the comparable quarter last year.

Now, turning to our balance sheet, at the end of the quarter, our inventories were $134.1 million, which was up $22 million from the December 31, 2021 balance, and up $19 million versus the second quarter of 2021 balance.

At the end of the second quarter, our customer deposits were $90.8 million, which were down $8.1 million from the end of the year, and down $25.3 million versus the second quarter of last year’s balance. We ended the quarter with $143.5 million of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of the quarter.

Looking at some of the uses of our cash flow, capital expenditures were $13.5 million for the first half of 2022 and we paid $8.8 million of regular dividends during the first half of this year. During the second quarter, we purchased $12.5 million of common shares, which approximated 461,391 shares of stock.

During the first half 2022, we purchased $25 million of common shares, which approximated 899,890 shares. 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.

We expect our gross profit margins for 2022 to be between 57.7% and 58%. We anticipate gross profit margins will be impacted by our current estimates of product freight cost and changes in our LIFO reserve.

Our fixed and discretionary type SG&A expenses for 2022 are expected to be in the $293 billion to $295 billion range and approximate 5% increase over prior levels. The variable type costs within SG&A for 2022 are expected to be in the range of 18.2% to 18.4%.

Our planned capital expenditures for 2022 is now $32 million anticipated new or replacement stores, remodel and expansions account for $21.3 million. Investments in our distribution network are expected to be $6.5 million and investments in our information technology are expected to be approximately $4.2 million.

This estimate reflects a deferral of the conversion of our home delivery center in Virginia to a regional distribution facility due to availability and pricing of building materials. Our anticipated effective tax rate in 2022 is expected to be 25%. This projection excludes the impact from vesting of stock awards in any potential new tax legislation.

This concludes my commentary on the second quarter financial results. Operator, we would like to open the call up for any questions at this time..

Thank you. The floor is now open for questions. Okay, we have a question from Anthony Lebiedzinski from Sidoti. Please state your question..

Yes. Good morning, gentlemen. And then thank you for taking the question. So, taking a step back. So Clarence, you talked about how you’re doing more with less now, as far as on the people side, and one of the things you attributed that to is your improved productivity because of higher closing rates. So, what’s driven that.

I mean, are you – do you feel like you – have you done anything as far as training your associates better? Or like what would be the main reasons why you think, you’re more productive with your sales team now?.

Well, I do think we’re training our people better. The biggest reduction that we had in category was in our sales staff number, and in the clerical and office. And we really retained our best sales people, who are making more money.

They’re selling more, more, I think have the best people who are now dealing with our customers we’re able to close higher because of that. I think we’re serving our customer better. They’re just, the top performers and we’re not adding back.

That’s the main thing that I’m pushing is that we’re not adding back to the count, since we’ve reduced about 18% to 20% when we had the COVID hit us. We’ve cut our store hours, which has allowed us to staff with fewer people in our stores and actually have our sales people, manned the floors a longer period for the whole day, for instance.

So, we think this is something we can maintain, and we’re certainly not planning to add back there..

Got it. Yes. Thanks for that Clarence. And then, yes, the other key thing that, that has certainly improved since pre-COVID is your gross margin going up from roughly 54% in 2019 to now around 58%. So, quite a meaningful improvement there.

So, I know this quote, you talked about improved the pricing discipline and mix, driving the gross margin improvement, going forward out, how should we think about your ability to sustain your gross margins? Obviously, as you pointed out, there’s a lot of uncertainty in terms of the macroeconomic landscape inflation and higher interest rates.

So kind of broadly speaking, if you could just talk about the gross margins, how should we think about those?.

Well, we think we can maintain and possibly and plan to increase our gross margins. We have gained it and made that happen with discipline. It’s not only pricing discipline, in the store level, but it’s also with our merchants. We’ve been very, fastidious about following up on any changes and making sure that we – if we have an increases.

We increase the price on the floor and we’ve been able to do that. I think we’re getting more credit for the product that we’re developing and customers are willing to pay the price. So, we believe that we can maintain and frankly increase our margins in the years ahead. We’ve got that pricing ability..

Got it. Okay. So thanks for that. And then as far as, just looking at the quarter here. So you written sales, you gave us a number for the quarter.

Just wondering, was there any meaningful change from month-to-month between April and June, as far as that written trend was? Or was it consistent throughout the quarter?.

I would say, Anthony it’s Richard. I would say in the quarter, in April and May, double-digit declines in written business, June was single-digit decline, but so April and May were a little quarter decline, June was less..

Okay. So this is June was better. Okay. So that’s good to hear here. And as far as the backlog, I know you guys don’t quantify that exactly, but if you could give us maybe a little bit more color on that, and then I think your lead times are down to 11 weeks.

So by the end of the year, kind of like, where would you expect a backlog and your lead times be, if you could give us the rough estimate, that’d be great..

Yes, Anthony, this is Steve. Yes, we are anticipating that, as we said, we’ve stabilized the age of that pool. And on the backlog, we see that our product flow is our inventory is increase for the quarter. We see that product flow continuing for the rest of the year. Our vendors are getting more consistency, in their production schedules.

And then we’re able to see the, obviously the lead times come down. I still think it’ll take us in the next year before we get back to where we were pre-COVID exactly. But I think with every month and every quarter that goes by, we’re going to continue to see that improvement, without getting specific..

Sure. Got it. Okay.

And then, in terms of the deferred conversion of the home delivery center in Virginia, does that impact your store growth expectations longer term? Or is this just a temporary deferral?.

It was just a temporary deferral due to cost and just be in prudent with our dollars and monies. And we just felt like right now it has no hindrance on our growth and what we can do going forward..

Got it. Okay. That’s good to hear.

And lastly, just wondering what your thoughts are on doing additional share purchases?.

Well, Anthony, our board encourages, a mixture of share buybacks and dividends to return share holder – value back to our shareholders. We have exhausted our current limit, that’s something we’ll, the board will evaluate it on a quarter-by-quarter basis.

And if that changes, we’ll let you know, but we have, at the beginning of the year, we did say we would, we planned – going through our $25 million amount during the first half of the year. And we certainly completed that in the second quarter..

Got it. Okay. Well, thanks a lot and best of luck..

Thanks, Anthony..

Thanks, Anthony..

And that was our only question..

Well, we appreciate everyone’s participation in today’s call. We look forward to talking to you in the future, when we release our third quarter results..

Thank you. This concludes today’s conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day..