Haverty Furniture Companies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to Hebrity's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Speaker 1

Thank you, operator, and good morning. 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 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 Our Chairman and CEO, Clarence Smith, will now give you an update on our results and our President, Steve Burdette, will provide some additional commentary about

Speaker 2

Thank you for joining our Q3 conference call. Our net sales of 220 $300,000 were down 19.7% over last year with comparable store sales down 20.7%. Total written sales were down 11.5% and written comp store sales declined 12.6%. These trends reflect the strong deliveries of back ordered goods last year and the current difficult headwinds in the shift in consumer spending and housing declines Related to elevated mortgage rates. Our Q3 delivered sales compared to Q3 of 2019 pre COVID We're up 5.3%.

Speaker 2

This quarter, our teams did a fine job in expense control, improving gross margins, Managing inventories and executing high quality service, which shall produce double digit pretax margins 10.4 percent or $22,900,000 Our growing design service Special order and custom upholstery continues to separate us from the more promotional players in the industry. Our relationships Partnerships throughout the industry, both domestic and international have helped us develop terrific merchandise values, which we believe is gaining share And building our reputation as a top quality home furniture. Several of our merchandising team recently returned from the international home Market in High Point followed by a trip to visit our key casegood suppliers in Vietnam. John Gill, Executive Vice President of Merchandising led these trips and reports that while orders are significantly down in the factories in these factories, Havertys is moving exciting new collections through production to ship before Chinese New Year. I believe that our long term relationships and partnerships are a major strength across the industry.

Speaker 2

Our collection of outdoor products, a new category for our stores, will be hitting the floors late this year early next year in time for the key selling season. Several updated bedroom and dining room products are in the process of arriving early next year. Recently committed major upholstery collections have hit our floors and quickly moved up as best sellers. The recent acquisition of 4 Bed Bath and Beyond leases are on track for converting to Haverty stores in the first half of twenty twenty four. We are in due diligence on several existing store opportunities in our regions and expect to be on track of our goal of 5 new stores per year In 2024 2025.

Speaker 2

The furniture industry is clearly in a recession Directly related to higher interest and mortgage rates and the consumers move to travel and entertainment. We believe that these are times when our strong balance sheet, outstanding long term supplier relationships And excellent new store opportunities align to set up real market share gains throughout our regions. We continue to focus on helping our customers' vision of their home come to life. We're in an excellent position throughout our regions to make that happen And grow our business. I now would like to turn the call over to Steve Burdett, President.

Speaker 3

Thank you, Clarence, and good morning. Our 3rd quarter results were weaker than expected, fueled by a weak Labor Day event proving to be slower than anticipated as our written sales We're down roughly 16% from our record Labor Day event last year. Store traffic continues to be our biggest obstacle. However, We were pleased to see our overall ticket average ticket rise low single digits and our closing rate percentage remained basically flat for the quarter when compared to Q3 last year. Our supply chain network is continuing to experience no headwinds With production or shipping times from our vendors, our inventories were down approximately 26% from Q3 last year.

Speaker 3

Our backlogs continue to remain consistent with pre pandemic levels, and our inventories are balanced to the current business conditions. Our lead times from our vendors continue to help drive our special order business. For Q3, our special order business was up approximately 47% Over last year and represents 33% of our upholstery business for the quarter. These increases have continued to be driven by our design business, Which grew to 29% of our business for the quarter with our designer average ticket growing just over 10%. Our focus is to continue to make sure that we are exposing all our customers to our complementary design services and increasing the number of customers that are engaging With our designers, which will help drive continue to drive our average ticket higher.

Speaker 3

Our business partner on our AB testing roadmap that is leading to more personalization and improved user experience. We continue to get good feedback from our sales and design teams on the new products that our merchandising teams are bringing to our stores. Financing continues to play an important part in our largest promotional holiday events each quarter as we manage these costs with rising interest rates. Distribution, home delivery and service are executing well, staying focused on getting it right the first time for our customers. Finally, I want to thank all of our team members throughout the company for all they do every day to help set Havertys apart from our competition.

Speaker 3

Now I'll turn the call over to Richard.

Speaker 1

Thank you, Steve. Looking at our income statement in the Q3 of 2023, net sales were $220,300,000 a 19.7 decrease over the prior year quarter. Comparable store sales were down 20.7% over the prior year period. Our gross profit margin increased 370 basis points to 60.8 percent from 57.1 Due to reductions in freight, positive LIFO inventory adjustment and better pricing discipline. Expenses decreased $11,800,000 or 9.5 percent to $112,700,000,000 As a percent of sales, these costs Approximated 51.1 percent of sales, up from 45.4% in the prior year quarter.

Speaker 1

We experienced decreased selling costs, advertising, distribution and transportation expenses during the quarter. Other income and our expense in the Q3 of 2020 was negligible and interest income was approximately $1,700,000 during the Q3 as we earn more on our cash deposits due to higher interest rates. Income before income taxes decreased $9,700,000 to $22,900,000 Our tax expense was $5,800,000 during the Q3 of 2023, which resulted in an effective tax rate of 25.2%. The primary difference in the effective rate and statutory rate is due to state income taxes. Net income for the Q3 of 2023 Was $17,200,000 or $1.02 per diluted share on our common stock compared to net income of 24 $6,000,000 or $1.46 per share in the comparable quarter last year.

Speaker 1

Now turning to our balance sheet. At the end of the 3rd quarter, our inventories were $102,300,000 which was down $16,000,000 from December 31, 2022 balance And down $35,000,000 versus Q3 2022 balance. At the end of the Q3, our customer deposits were $46,300,000 which was down $1,700,000 from December 31, 2022 and down $33,400,000 versus The Q3 2022 balance. We ended the quarter with $134,300,000 of cash and cash equivalents, And we have no funded debt on our balance sheet at the end of the Q3 of 2023. Looking at some of our uses of cash flow, Capital expenditures were $46,400,000 for the 1st 9 months of 2023.

Speaker 1

As a reminder, we repurchased our Florida distribution facility in the 2nd quarter $28,200,000 In addition, during the 1st 9 months of 2023, we paid $14,300,000 in quarterly dividends. During the Q3, we purchased 104,221 shares of common stock under buyback program for $3,200,000 We have approximately $16,800,000,000 of existing authorization in our buyback program. 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 margins for 2020 3, to be between 60% 60.2%.

Speaker 1

We anticipate gross profit margins will be impacted by our current estimate of product and freight cost And changes in our LIFO reserve. Our fixed and discretionary type SG and A expenses for 2023 are expected to be in the $286,000,000 $288,000,000 range. The variable type cost within SG and A for 2023 are expected to be in the range of 19.6 To 19.8 percent. Our planned CapEx for 2023 is $55,000,000 Anticipated new or replacement stores, remodels and expansions account for $19,000,000 Investments in our distribution network are expected to be $33,500,000 and investments in our information technology are expected to be approximately $2,500,000 Our anticipated effective tax rate in 2023 is expected to be 25%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation.

Speaker 1

This completes my financial Commentary on the 3rd quarter results. Operator, we would like to open up the call for questions at this time.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question Our first question comes from the line of Anthony Lebiedzinski with Sidoti and Company. Please proceed with your question.

Speaker 4

Good morning, gentlemen, and thank you for taking the questions. Good morning. So, as yes, so good morning. So as I look actually the Q3 written trends, they were actually down less than what you guys had in the 2nd quarter. So I guess there was some sequential improvement there.

Speaker 4

I know you guys talked about Labor Day, but just wondering as far as the rest of the business Throughout the quarter, how did that perform versus your expectations? And did you see any Big changes versus what you had thought about as far as business progression?

Speaker 1

Yes. Hey, Anthony, good morning. This is Richard. Just in terms of our written business and cadence during the quarter, if you recall in the second quarter, I believe we were down around 14.7%. In July, we were down A little slightly over 8% down.

Speaker 1

So there was some a nice improvement there. And then in August September, we kind of went back to The same range that we saw for the quarter in the second quarter overall. So we saw some slight improvement in July and then back to The 14.7% range in August and then slightly lower than that, but still double digits in September.

Speaker 4

Okay. That's helpful color, Richard. So, and do you know as far as like what drove that, was there anything competitively happening in your marketplace Or is it just macro headwinds?

Speaker 2

I think it's just macro. We haven't seen anything dramatically different with any of our competition And wasn't anything happening differently with us. So I think it's just the overall mood of the market. And as

Speaker 3

I commented, Richard, I mean, Anthony, about the Labor Day event, that drove the August, September number, Looking at it over a 2 week promotional period, I mean, we were just we were down more over that 2 weeks than we were Outside of it, for those 2 months, but it drove the overall on both of them. We were encouraged coming out of July with the single digits, but certainly we were going against a record Labor Day last year. We had a fabulous promotional period last year, an all time high. So We were down off of that and that's what's contributed to the bigger decreases in August September.

Speaker 4

Okay. So it sounds like it was a tough comparison. Okay. And then, Clarence, you mentioned outdoor furniture. Just wondering about the opportunity there as far as what we can see, whether this and also will this be in all stores or in just some stores, how should we think about that?

Speaker 2

Well, I said it was a new category. It's a new category because we dropped the last iteration of it several years back. We're going to do it the right way this time. It will not be in all of our stores, but it will be in the ones that make the most sense for us And eventually, probably all of our stores. So it'll be a more limited program And there are some special order opportunities in it.

Speaker 2

I don't see it as a significant part of our business. It could be A couple of percent, maybe 2% to 3% ultimately. But I think it's important, particularly for Our special order custom design sales, which is now a bigger part of our business, Our customers want to have a hold home done and this allows us to do that. So we're excited about it.

Speaker 4

Okay. Thanks, Clarence. And then last question for me before I pass it on to others. So your gross margin has Sunil, certainly you've done very well. It's had a nice tailwind, I'm sorry, from LIFO.

Speaker 4

So how should we think about the Overall gross margins beyond this year?

Speaker 1

Anthony, it's Richard. That's a great question. So this particular quarter, We had a pickup of around $2,300,000 in the Q3. Last year, it was an expense of about the same amount, dollars 2,500,000 So the overall improvement in gross margins for the quarter in terms of our merchandise margins, freight and Product discipline, that was about 45% of the increase, 55% of it is LIFO. We expect that Continue for the remainder of this year.

Speaker 1

We're still forecasting next year's and we'll release our On the Q4 call, we'll give guidance for gross margins for 2024.

Speaker 4

Got you. Okay.

Operator

Our next question comes from the line of Michael Legg with The Benchmark Company. Please proceed with your question.

Speaker 5

Thanks. Good morning, everyone. Can you talk just a couple of quick questions? 1, from a competition perspective, what you're seeing from a promotional perspective in your regions and how that's playing out. 2nd, your design initiatives obviously are doing well.

Speaker 5

Can you talk about any opportunity to How many designers do you have in each store? Is that something you're looking to expand? And then just on the outdoor furniture, What's that margin profile like compared to the rest of the company products? Thanks.

Speaker 3

Okay. So, Mike, this is Steve. So from a competitive standpoint, I would say, activity certainly has picked back up. People are I've seen probably a little more conservative approach to the financing. People are looking at that because of the rising cost and what goes on there.

Speaker 3

But obviously, you're still seeing the activity around the holiday events. And from the promotional players, you're seeing maybe increased activity at those levels as well. But really no real change overall from discounts or anything like that that they're offering. Those have been pretty consistent. From a designer opportunity, I think we have certainly opportunity to grow that.

Speaker 3

We average right now About one designer per showroom and our opportunity is to look at how can we increase that to get 7 day coverage And what does that look like? And we're doing some experimentations of adding either a designer To additional stores where it makes sense, to make sure we got that coverage in our bigger showrooms and then we'll continue to see how we can expand that out. I do think we'll increase that number as we go forward into 2024, so that we can have that coverage in our bigger stores. So we Probably could push toward 1.5 per showroom on average as you go forward into 2024. And then as far as the margins on the outdoor furniture, I don't anticipate it to be any different than our regular margins that we get And they're attending.

Speaker 3

So it won't be a hindrance on our margins and it won't be a plus. It will be in line with all the other merchandise. Hope that answered your questions.

Speaker 5

Yes, thanks. And then just a follow-up on the Designer piece. When you look at that, Is there an opportunity to get higher, scaled Furniture with that, I mean, it's almost like you're getting into a different category of custom designing. And is that does that change the price point at Maybe the high end of furniture you may start to carry longer term?

Speaker 3

We are carrying we do have access and have more products available to our that are special order that they have access to. Our sales consultants do as well. We think that's an important piece to fill in And that is on the better end side of the product line that we see. But I do think our opportunity there is getting into the home. And so if we can get into the home, we will see our average tickets continue to increase.

Speaker 3

We know that that is the largest average ticket When we get to the home, if we involve the designer in the showroom, we know that that's obviously increased about 50% from where it is On average for the company, we're running about 3,300 now. So there is opportunity to grow it and it is opportunity we're looking at better products, not necessarily we'll bring it to the lineup, but that we can access the special order to be able to meet their needs.

Speaker 5

Great. Thanks and congratulations. Thank you.

Operator

Our next question comes from the line of Cristina Fernandez with Telsey Group. Please proceed with your question.

Speaker 6

Hi, good morning. I had a couple of questions. The first one is on the ticket trends you're seeing, The up 2%, it's still good to see it up year over year, but it's decelerating. Even with the designer penetration going up, So I wanted to see what's the offset on the ticket side? And do you think ticket can continue to move up As we go through the next couple of quarters.

Speaker 3

Yes, Christine, I definitely do. I think we can continue to increase that. Is it going to be at the same rate we did over the from 2019 as we came out? No. So obviously, I think it'll stay in that Low single digits, but I think the opportunity lies with our designer and us continuing to increase and drive that.

Speaker 3

I talk about it, the number of customers. We're really focused on trying to engage more of our customers. And so we're seeing that Increase and I think we still have a lot of leg room there to go and opportunity. So Yes, we have seen maybe there's some smaller tickets that drove a little bit of that decrease that you saw. You're looking at being in the 2% range, but We're not.

Speaker 3

We see it long term as an opportunity for us to continue to grow, but it will be in the low single digit range.

Speaker 2

I think it's not just the designers. We're also adding some better lines to our whole collection here, Some upper end product that allows for more customization that we've ever had before. And I think it will be well received. So The combination, I believe, will help us continue to drive average ticket up.

Speaker 6

And then following on that comment, Clarence, you mentioned earlier on the call about the teams Going to Vietnam and coming up with some new collections. So should we think about the newness that's coming in next year Higher than what you saw this year or is it just count the same overall percentage of the timing a little bit different?

Speaker 2

I think we're emphasizing the better end of the market across our lineup. And we're getting great results from it. And I think we're getting more workability with the vendors to do customization across the line. For instance, we're now We're bringing in leather from China actually on some of our best selling upholstery that is custom and we're getting it in quick ship From China, but I think the overall trend is towards the upper end with us and where we're having the most success.

Speaker 6

Then the second question I had was around the store openings For next year, particularly the Bed Bath and Beyond stores, how are the retrofits progressing? And is the timing still to open those Stores in the Q1 of next year?

Speaker 3

It's going to stretch a little bit, Christina. This is Steve. We've had a little bit of a Delaying some permitting, especially in Florida, has taken us a little bit longer than anticipated. And if you remember, when we acquired those as we talked about, I believe, on last call, we basically brought in the Halloween spirit stores for a temporary period to help offset some costs. And so we took those stores back over here in the next couple of weeks here and we'll start the redo process and then working permitting as part of that, but it will start one of the stores will open up.

Speaker 3

We anticipate late Q1 and the other 3 will come in the Q2.

Speaker 6

Thank you. And then last question on the buybacks. It was good for you for us to see you're buying back Fox, you hadn't done it in the 3 prior quarters. So what gave you the confidence to go ahead and do that this quarter?

Speaker 2

Well, our cash position and the fact that we feel our position in the marketplace is strong. I mean, Sales are tough, but we know that we're able to gain share. We like all of our We think that we're in a position to grow our business. So the main thing is that we've got The cash and the opportunity to do it, the stock did drop some and we were back in the market. Now, we meet Next Friday with our Board and we go over this every single Board meeting and that'll be clearly a conversation that we'll bring back up as far as Giving cash back to our shareholders.

Speaker 6

Thank you and best of luck this quarter.

Operator

Our next question comes from the line of Budd Bugatch with Water Tower Research.

Speaker 7

Good morning, and thanks for taking my questions. Good morning, clients, Steve and Richard, congratulations on the profit performance of this quarter. Very impressive.

Speaker 2

Welcome back, bud.

Speaker 3

It's been

Speaker 7

a long time. Thank you. Thank you, Clarence. Good to be back. Let me the questions I have Primarily relate to the sales impact.

Speaker 7

And you all have got a wide swab in stores and talk to a lot of consumers in the stores as you Visit the stores and we've had the and Clarence noted the twin effects of movement from Focusing on the home, which we saw during COVID and then the higher interest rates is kind of a double whammy to industry demand right now. I wonder if you as you talk to consumers, are you seeing that change? It seems like we've watched this diversion To services away from the home now for maybe 3 to 5 quarters. So are you seeing that come to an end? Do Do you sense that as you talk to consumers in the stores?

Speaker 2

Well, Steve and I have been with the industry players and We're listening to what's happening out there. It's certainly an impact and I don't see a clear ending to it. Some of the terms we've heard is the second half of next year. It might start to get better. That's probably as good as I can give you as far as what we anticipate.

Speaker 2

I mean, we're in a tough situation now for the industry. And those who have debt and need to refinance will be will have issues And there are going to be opportunities for us. So we're prepared to take advantage of converting existing boxes to Havertys. We're very good at that And that's what we're looking at. So it is a tough time and I don't see a clear ending to it, but I would think late next year should be better.

Speaker 7

And Steve, are you seeing any change in the cycle times of when customers start the process? And I'm particularly thinking of design customers, They begin and you go through a process. Is the sales cycle at all changed? And can you

Speaker 3

But on that side of it, yes, from a designer standpoint, it hasn't changed. I mean, it's still the same. I mean, if somebody is either moving, they're redoing a home And that's been part of the process. What may have sped it up is our availability of product. We can get it quicker and provide it quicker to them where A year ago, 2 years ago, we were struggling with that.

Speaker 3

And so that stretched it out because of us. Now it's because It's where the consumer is and so we're able to meet them. So I'd say from that standpoint, it has condensed because the consumers we're able to deliver the product quicker to the consumer Based on their needs, but overall, I'd say the cycle is still the same. We can deliver quickly on in stock product. We still deliver within less than a week and some cases within 2 to 3 days.

Speaker 3

It just depends on the area we're going to when that market when that's available.

Speaker 7

That's always been a strength of Reverdy. So and you have a number of different regions. Are you seeing any geographical changes Differences between the regions in terms of comps and order comps?

Speaker 3

We really aren't, Budd. I mean, it's pretty much across the board in the across all the districts. We've got 7 districts and they're all equally down within a percentage of 2 of each other. So there's no real difference there.

Speaker 7

Okay. And the quarter ending backlog versus the quarter beginning backlog, can you comment that there are much change in that? I know you had less The orders were down less than delivery, so that would say that backlog probably grew during the quarter. Is that a good way to look at it?

Speaker 1

Hey, Budd, it's Richard. I'd say the backlog number in the last quarter

Speaker 6

and the

Speaker 1

end of quarter and the 3rd quarter is basically flat. And our customer deposit number at the end of the Q3 versus the end of the second quarter is basically flat as well. So we're kind of at a Yes, we're back to the old backlog. We're delivering what the orders that we take in.

Speaker 2

It's in

Speaker 7

You haven't made any changes. I'm sorry.

Speaker 1

Go ahead, Clarence.

Speaker 2

I said, what you kill again, bud.

Speaker 7

Got you. I know that phrase, Clarence. In our industry, we're very familiar with that phrase. The issue that you mentioned, I think it's very accurate. You're a strong player with your suppliers and the suppliers have got to be hurting Maybe even worse than the customers are, than their customers are.

Speaker 7

And you have some opportunity there. What are you hearing from them? And you've You talked about some of the new collections coming in. Obviously, you're not going to take advantage of them, but That doesn't mean that you don't get great new product and great new pricing.

Speaker 2

I mentioned John Gill in Vietnam last week, And he told me that a number of our key suppliers who are the best players in the industry are down anywhere from 30% to 50%, and they're all looking for orders. So, I mean, we're not worried about these guys Failing or anything like that, but it is hitting the manufacturers, I think, more dramatically than the retailers right now and That all catches up. So everything was on hold last year. I mean, it took us sometimes Up to 9 months to get product and now it's down to normal or even shorter. So a number of vendors are hurting, but I think Pliers we feel very good about and the partnership there are strong and they come to us and give us great values and We appreciate that.

Speaker 7

Okay. And you did mention you were bringing in some leather from China. Are there any geopolitical issues that are going on That might worry you with China. The country has got its own issues, but

Speaker 2

We used to do almost everything from China, now only basically the better in leather. They're very good suppliers. We like them. We do it does make us uncomfortable with what's happening, But they're able to work through it and we're getting the product and they're good partners. So they still with even the tariff on top of them Are offering better quality product than we're getting elsewhere.

Speaker 2

But you certainly have to look at moving it to other Places like Vietnam or even Cambodia, things like that, we're looking at all of that. But right now, we have some very strong players In China that we're still doing good business with.

Speaker 7

And much of the leather in China, as I recall, was being From Italy and actually tanned either in Italy or also in China because of their last environmental It's still coming from Italy?

Speaker 3

I'm sorry.

Speaker 2

It does come from the U. S. Too and South America, but that's where most

Speaker 7

Okay. And last for me, I'm always curious to get into the outdoor furniture business. So when I was in the retail business, it was the product category I both hated and loved the most because of the seasonality And the difference is, so you said you're going to do it right this time. Can you maybe give us a feeling of what you meant by that and what was different It's fewer collections.

Speaker 2

It's fewer collections. It's only 2 or 3 collections that we'll have available and then we do the rest of it Throughout suppliers who do it as a third party arrangement. And we won't roll it out everywhere. We'll start where we know what's going to do the best and expand it from there. And these suppliers are Very good at it.

Speaker 2

We're just going to be more controlled, more focused, more strategic.

Speaker 7

And Havertys branded, that scenario where there are brands in outdoor, is it Havertys branded or is it national branded?

Speaker 2

No, it'll be Havertys branded product.

Speaker 7

Okay. And what about accessories like fire pits and the other stuff that

Speaker 2

We'll have some of that, but it'll still be Havertys brand.

Speaker 7

Got you. Well, good luck on it. Do you guys said to see it in the stores? When does it hit? When does it hit in

Speaker 2

the stores? It starts arriving in December and then January.

Speaker 7

Okay, great. Thank you and good luck on next quarter and the year. Thank you.

Speaker 1

Thank you.

Operator

There are no further questions in the queue. I'd like to hand the call back to Mr. Hare for closing remarks.

Speaker 1

Well, thank you for your participation in today's call. We look forward to talking with everybody in the future when we release our Q4 results later on this year. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

Remove Ads
Powered by Quartr
Earnings Conference Call
Haverty Furniture Companies Q3 2023
00:00 / 00:00
Remove Ads