Corteva Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Haverty First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Richard Haire, Chief Financial Officer. Thank you, sir. You may begin.

Speaker 1

Thank you, operator. During this 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

Speaker 2

Good morning. Thank you for joining our Q1 conference call. Consolidated sales decreased 5.9 percent to $224,800,000 with comparative store sales down 6.7%. Earnings per share came in at $0.74 versus $1.11 last year. In the face Of difficult headwinds and the shift of consumer spending and inflationary pressures, I believe our teams delivered a strong performance.

Speaker 2

As we anniversary our business against the outsized demand generated by COVID, our incoming orders have declined. For Q1, our written sales were down 11.7% and written comp store sales declined 12.7% for the quarter. However, this year's written sales compared to Q1 of 2019 were up 10.9% with written comp store sales up 6.9%. We're building our reputation for quality, service and design. Our free design service continues to drive increases in average sales, And these services are helping grow our special order business.

Speaker 2

Our strong design service and excellent sales teams, Along with the high quality, further separates us from the more promotional players in our industry. I share our team's enthusiasm for the new collections and merchandise hitting our floors. We've developed great Values and exciting new styles, which we believe will be well accepted by our customers. We've added to our curated collections and online exclusives, which greatly broaden our breadth of products. This spring, we're bringing in several new collections of outdoor furniture and enhance new category for our stores.

Speaker 2

With the major reductions in orders from our factories, we're getting lower minimum shipments, which will put less pressure on our buying teams Without risking over inventory problems. We are in a strong inventory position and are rightsizing our buying for what we need Compared to large orders, we were required to place during the last few years. In February, we opened a new location in Durham, North Carolina. We plan to open 3 stores in the 4th quarter in Concord, North Carolina, North of Charlotte Dayton, Ohio and the Store South of Richmond, Virginia. Our development real State teams are actively evaluating and reviewing the number of store opportunities that we're seeing in our delivery footprint.

Speaker 2

We've invested, upgraded and repositioned our stores in our last 6 in our 16 state footprint over the past several years, which sets us up to be able to add to our store fleet. We have the range to serve several more states from our DCs. We think there will be a number of retail locations that will be available in the coming months that would help us reach new markets and expand our presence In existing markets, we have a long 138 year history of gaining market share during difficult times, And we believe that we're in an exceptionally strong position with our solid balance sheet to grow our store count in our regions. While housing sales in the South are an important indicator for our business, we believe our move to personalization and customization, Along with our strength in the faster growing southern markets, help offset softer housing numbers. We were encouraged by the recent better selling news from homebuilders.

Speaker 2

As housing prices moderate And mortgage rates improve, we expect to see some positive movement in our sales. Havertys is driven to help our Customers' vision of their home come to life. I believe that we're in the best position in our industry as well as in our history to deliver on that vision. As we deliver on that promise, we will gain share and build our return for our shareholders. I'll turn the call now over to Steve Burdett, our President.

Speaker 3

Thank you, Clarence, and good morning. While we were hoping for stronger results in the Q1, we are appreciative of the hard work that our team members are putting in every day to ensure that we are furnishing happiness to each and every customer. Our supply chain network continues to operate with normalized lead times. Our inventories were down 4.7% from Q1 last year. However, our backlog continues to decrease With our average age of the own arrival backlog dropping below 6 weeks.

Speaker 3

We continue to feel that our backlog will be back to pre pandemic levels by early summer. We are encouraged to continue to see freight rates continuing to drop as we just finalized our contracted rates for the upcoming year beginning May 1. Our special order business was a bright spot for the quarter as we increased our business by over 40% year over year to be almost 30% of our total upholstered sales. Our experiment with offering more special order color options From our upholstery import leather vendors has been a hit as we look to expand to other vendors. Our design business continues to show improvement as it grew to 26% of our business for the quarter.

Speaker 3

We expect our design business to continue to grow as we create more awareness And focus on each customer's experience. A key metric for design is our average ticket, which increased for the quarter approximately 11%. We will be testing in the Q3 a new in store point of purchase program to help elevate the customers' experience within our stores and provide our sales and design consultants with more tools to serve our customers' needs. We continue working on expected refinements to the website. We have engaged a new business partner to identify incremental optimizations and opportunities, including a roadmap for meaningful personalization, A robust AB testing plan, continued technical and user experience optimizations, all driven by improved site behavior analytics.

Speaker 3

We'll start to see some of these implementations in place before the Memorial Day promotion. Our merchandising team has brought in lots of new products In Q1, with more arriving to help elevate the excitement of our sales teams and customers heading into the Memorial Day, which is our largest promotional period for the first half of the year. We will continue to use credit as a trigger to entice the consumers during this important holiday, but will be more prudent in the use of credit in the non holiday sale periods due to the increased cost from rising interest rates. Finally, we continue to focus on our execution, training and retention across the organization. However, due to the drop in our backlogs and the current written trends, we will match our staffing levels to the current business trends.

Speaker 3

The expectation is that through normal attrition, this will be a reduction of over 200 positions or approximately 7% of the workforce by the end of the Q2.

Speaker 4

Now, I will turn

Speaker 3

the call over to Richard.

Speaker 1

Thanks, Steve. In the Q1 of 2023, net sales were 224 $800,000 a 5.9 percent decrease over the prior year quarter. Comparable store sales were down 6.7% over the prior year period. Our gross profit margin increased 10 basis points to 59.1% from 59% due to better pricing discipline And merchandising mix, reduced freight costs and a positive LIFO inventory adjustment. Selling, general and administrative expenses increased $3,200,000 or 2.8 percent to $118,400,000 As a percentage of sales, these costs approximated 52.7%, up from 48.2% in the prior year quarter.

Speaker 1

We experienced increased selling, administrative and occupancy costs, which were partially offset by reduced distribution and transportation expenses during the quarter. Other income and expense in the Q1 and interest income increased to $1,000,000 during the Q1 as interest earned on our cash deposits Increased this past year as interest rates have increased. Income before income taxes decreased $10,300,000 to 15,400,000 Our tax expense was $3,100,000 during the Q1 of 2023, which resulted in an effective tax rate of 19.8%. The primary difference in the effective tax rate and statutory rate is due to the state income taxes and The tax benefit from vested stock awards. Net income for the Q4 of 2023 was $12,400,000 or 0 point 7 $0.04 per diluted share on our common stock compared to net income of $19,400,000 or $1.11 per share in the comparable quarter last year.

Speaker 1

Now looking at our balance sheet at the end of the Q1, our inventories were $114,300,000 which was down $4,100,000 from year end. At the end of the Q1, our customer deposits were $46,400,000 which was down $1,600,000 from year end and down $52,100,000 versus the Q1 2022 balance. We ended the quarter with $120,200,000 of cash and cash equivalents, and we have no funded debt on our balance sheet at the end of Q1 2023. During the Q1 of 2023, we amended and extended our retail program agreement with Synchrony Bank, who provides We extended our agreement for an additional 7 year term and replaced the LIBOR rate With a certain U. S.

Speaker 1

Treasury securities rate as the interest rate benchmark. Looking at some of our uses of cash flow, Capital expenditures were $6,700,000 in the Q1, and we also paid $4,500,000 of regular dividends during the quarter. During the Q1, we didn't purchase any common shares under our existing stock buyback program, and we have approximately $20,000,000 of existing authorization in our buyback program. Our earnings release lists out several additional forward looking statements indicating our future I'll highlight a few, but please refer to our press release for additional commentary. We expect our gross margins for 2023 to be between 58.5% 59%.

Speaker 1

We anticipate gross profit margins will be impacted by our current estimates of product and freight costs and changes in our LIFO reserve. Our fixed and discretionary type SG and A expenses for 2023 are expected to be in the $289,000,000 to $292,000,000 range And the variable type cost within SG and A for 2023 are expected to be in the range of 19.5% to 19.7%, With the increases over 2022 primarily being inflation driven. Our planned CapEx for 2023 has increased $53,100,000 As previously disclosed, we're in the process of purchasing our Florida distribution center for Approximately $28,200,000 We anticipate closing on this transaction in the Q2 of this year, Anticipated new or replacement stores, remodels and expansions account for an additional $16,700,000 Investments in our distribution network are expected to be $5,800,000 and investments in our information technology are expected to be approximately $2,500,000 Our anticipated effective tax rate for 2023 remains at 25%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my commentary on the Q1 financial results.

Speaker 1

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

Operator

Thank you. We'll now be conducting a question and answer 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 3

Good morning and thank you

Speaker 4

for taking the questions. So first, just going back to Q1, If you could just give us a little bit more details, please, as far as the written sales trends. Just curious to see if you guys saw any Notable variation month to month. Obviously, I know Presidents' Day is a key holiday within the quarter, but Just wanted to get a sense as to whether business was kind of steady or was there much difference month to month? And as far as Product categories, if you can also comment on that as well, how that trended, that would be very helpful.

Speaker 1

Sure, Anthony. It's Richard. On the written sales trends, we're pretty consistent during the quarter. January, February, March were all Low single digits, January was. February was almost mid single digit excuse me, Slightly above double digit and then low double digit in March.

Speaker 1

So fairly consistent on the written side. The delivery side was a little different. Our deliveries were up in January, very low single digits And then we were down mid single digits in February and very low double digits in March. So that pattern was somewhat different. And just in terms of our revenue by category, we did see an increase in case goods in the Q1.

Speaker 1

It went from 31% up to 35% in terms of deliveries and sales. Upholstery Flip from 46.5% down to 42.6%. Mattresses were pretty flat at 8.2% to 8.3%, And that kind of rounded out the revenue mix.

Speaker 4

All right. Thank you, Richard, for that. And then Yes. Memorial holiday is obviously an important holiday for furniture shopping. So how would you describe your strategy as far as So demand levers for this holiday versus last year.

Speaker 4

I know you said that you'll use credit, although obviously it's gotten more expensive. So Maybe you could just talk about what your strategy is here for the key Memorial Day holiday?

Speaker 3

Yes, Anthony, this is Steve. We're going to have the same pretty much promotional calendar going for the Memorial Day as we did last year From a sale period as far as pricing, etcetera. And then from a credit side of things, we will be using the 60 months during that time period. But What I made a comment to is we will not be using in the non promotional periods. We will just focus it around the Memorial Day event, the 2 week holiday event Kind of leading up to it.

Speaker 4

Got you. Okay. And a couple of other questions, if I could. So you talked about outdoor furniture as a new Category, is this going to be in stores and online or just online? And as far as like the number of SKUs that you plan to offer, can you give us a sense of that?

Speaker 4

I just wanted to see what the potential opportunity could be?

Speaker 2

Anthony, it will be both. We are adding product to about half of our stores That will be in stock and exclusive to us, and we also will be offering some online opportunities that will be available. Most of that's going to be later this quarter and next month. It's really set up for later in the year, and We think it will be an important add to our stores, particularly the ones that are in Florida and Texas. It's not going to be a big category.

Speaker 2

We're going to be careful with it, but it's going to be addition.

Speaker 4

Understood. Yes, thanks, Clarence. And then lastly, as far as Share repurchases, so Richard, I know you said you have $20,000,000 left on the buyback. I know over time you guys have done a terrific job of returning cash to shareholders through share repurchases as well as dividends. But specifically as far as share buybacks, Haven't seen anything last couple of quarters.

Speaker 4

How should we think about share repurchases here on a go forward basis?

Speaker 2

Well, we review that every quarter with our board, and we have a meeting coming up in May. That's to be determined.

Speaker 4

Okay. Sounds good. Well, thanks and best of luck.

Speaker 3

Thanks, Anthony. Thank you.

Operator

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

Speaker 5

Hi, good morning. I have a couple of questions. The first one is On the SG and A expenses, they increased at least the fixed side about 300 basis points In the Q1 relative to last year, and the overall margin came in around the 6.4%. So in the past, you've talked about maintaining a double digit operating margin. I wanted to see Your outlook, was there anything specific to the Q1?

Speaker 5

I know that the volume tends to be a little bit light, but that will allow you to get closer to that double digit Operating margin as we move through the rest of the year?

Speaker 1

Hey, good morning, Christina. This is Richard. So, yes, our variable G and A component was up, I believe, 20% this past quarter. The volume was pretty low, which Really exacerbated that percentage. With the attrition and the headcount reduction that Steve mentioned, I believe, of approximately 7% of the workforce or 20%.

Speaker 1

That should help us on an ongoing basis, and so that's kind of why we're guiding back down to the And then on the guidance That came down on the G and A for the non variable is mostly related to advertising and warehousing costs. So We expect to match our levels of written business to the current trends. We'll adjust slightly our advertising strategy, and then We don't expect to see demurrage type expenses that we saw in the prior years. We think that will certainly help us out in the future on the non variable piece.

Speaker 5

Thank you. And to clarify then on the gross margin, the 50 basis points of improvement in the guidance for the year, Where exactly is that coming from?

Speaker 1

It's in a number of places. I mean, Reduction in freight cost is driving that primarily, and we're seeing those rates return back to pre pandemic levels, if not better. And secondarily, just the overall LIFO impact, last year in the Q1, we had, I believe about $1,000,000 expense we booked in the Q1 of this year was approximately $1,000,000 pickup. So we should see Some improvement in LIFO. The last 2 years, we've had significant expense, and we would expect to see some recovery of that ongoing this year.

Speaker 5

And then my last question, any thoughts around the impact of Bed Bath and Beyond on your business. I know they're not a direct competitor, but we've seen other furnishing companies be a little bit more promotional. So Did you expect any impact near term and perhaps longer term talk about the real estate strategy and any opportunity that could arise from those Boxes coming on the market?

Speaker 2

Well, they have not impacted our sales. We really don't overlap with Bed Bath and Beyond's merchandising, But we are very interested in looking at the opportunities for store locations in existing markets and some target markets that we can add. As you know, there are several 100 of them that will all be done through auction and also working with some of the landlords. We're interested in it. We're very active in evaluating it.

Speaker 2

We think this could be an opportunity for us. Similar to what we've done in the past, we've been very good at converting existing retail boxes to Havertys. We've done it with Linens and Things, HH Greggs, Stan Mart, Circuit City, Home Life, and we've got some of those Buildings in our portfolio today. So, we think there could be opportunities there, and we're very closely evaluating Those potentials.

Speaker 5

Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Hair for any closing remarks.

Speaker 1

Well, we appreciate your participation in today's call, and we look forward to talking to you in the future when we release our 2nd quarter results later this year. Have a great day.

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