Haverty Furniture Companies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Havre's First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Richard Hare, Chief Financial Officer.

Speaker 1

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 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 our President, Steve Burdette, will provide additional commentary about our business.

Speaker 2

Thank you for joining our Q1 conference call. Our Q1 sales were down 18.1% to $184,000,000 with comparable store sales down 18.5%. Total written sales were down 12.6 percent. We continued with strong gross margins of 60.3% and controlled cost, which allowed us to produce a pre tax profit of $3,200,000 compared to $15,400,000 in last year's Q1. We're well prepared for the Memorial Day event, the most important of the first half, with energized marketing plans and exciting lineup of new products, excellent balanced inventories and new in store signage.

Speaker 2

Our Board approved a 6.7% increase in our quarterly dividend, which is our 12th year of consistent dividend increases. Havertys has paid a dividend every year since 1935. Our strong balance sheet with over $100,000,000 in cash allows us to return capital to our shareholders and invest in infrastructure and stores in our markets. In 139 years of furnishing homes throughout our regions, Havertys has consistently gained market share, especially in difficult times. The fall off in furniture van following the dramatic sales increases due to COVID has had a major impact on the industry.

Speaker 2

The industry struggled to supply timely furniture deliveries in the gangbuster years during COVID, but once that backlog cleared up, we experienced a significant negative impact throughout the industry. We pulled forward roughly 2 years of sales and then experienced a 2 year slide back to pre COVID. This time, there will be many players who won't survive the recovery. While the first weakness was felt at the lower end of the market, it has impacted all the industry. And we believe that that will continue until housing begins to edge back positive.

Speaker 2

Home sales in the South have a very high correlation to our business. Clearly, interest rates are a major factor in housing. In the past year, we've seen numerous furniture failures of major manufacturers and retailers with the demand slot and we expect to see more competitors struggle and players fail. These are times when it becomes clear that this industry closely tied to housing cannot handle heavy debt leverage. Major debt positions combined with higher interest rates is a fast slide to bankruptcy in the furniture world.

Speaker 2

We have 0 funded debt and are strongly positioned in the best states and fastest growing markets in the country. We believe that we're uniquely well positioned to continue to grow our market share in these important growth areas in the coming years. We're investing in store growth and upgrading our store and operating systems to better serve our customers. We have a couple of major remodeling projects underway in major markets, which should be completed by next month. We believe in financial resilience for sustained financial growth.

Speaker 2

We're on track to reach our goal of opening 5 new stores this year and 5 in 2025. I recently attended our new store opening in South Haven, Mississippi, entering our 17th state in a major growth suburb of Memphis, Tennessee. Southaven was the 1st store opening of 4 from former Bed Bath and Beyond stores, which will allow us to gain strong locations in market areas where we have not been able to find sites. In the next 3 months, we will be opening stores in 3 markets in Florida, Destin, central to the Emerald Coast St. Petersburg, submitting the southern coastal site in our Tampa region and Pembroke Pines, our southernmost store in Southeast Florida reaching into Miami.

Speaker 2

All these stores are in adjacent markets and locations where we have significant brand awareness, existing distribution and experience management in place. We know that these strengths combined with excellent locations at below market rates are a solid foundation for success. By Labor Day, we will have 33 stores throughout Southern Sunshine State, our largest state, followed by Texas with 22 stores. We're very excited to announce plans to return to Houston, Texas. Havertys left Houston over 40 years ago and it is the largest market in our footprint where we do not have stores.

Speaker 2

We will open our 1st store in a former Bed Bath and Beyond building in The Woodlands area later this year and follow with the Baybrook Village store in Q1 2025. We expect to have more stores positioned to serve the Greater Houston market in the next 2 years. We have delivered furniture in the northern suburbs of Houston for many years from our Austin and College Station stores. We believe that we'll be well positioned and well received in Houston and a major strengthening of our position in Texas. We are investing in brick and mortar, building our team's expertise, growing our design service, upgrading products and expanding customization and special order capabilities.

Speaker 2

All our teams are driven to be the best home furniture in the country and to gain profitable market share throughout our regions. I'll now turn the call over to Steve Burdett, President.

Speaker 3

Thank you, Clarence, and good morning. Our first quarter results continue to show the headwinds that we are facing with the housing crisis and interest rates. However, we continue to be encouraged by our team's efforts to ensure that Havertys is furnishing happiness to our customers. Store traffic continues to be a struggle in all markets. However, we did see a slight improvement in February March our traffic numbers coming off January, which was impacted by weather.

Speaker 3

Our design business continues to gain momentum with an increase of over 10% in total dollars for the quarter, driven by our average design ticket increasing over 3%. The number of customers engaging with our design program was up over 19%. Our supply chain network continues to operate any significant disruptions. We have been able to negotiate our new freight rates for 2024 beginning in May, so that we feel comfortable with our margin projections for the year. Our inventories continue to be in excellent condition and we're down at quarter end almost 20% from Q1 2023 and almost 2% from year end 2023.

Speaker 3

Our vendors continue to be great continue to drive our special order business, which was up 13.5% in dollars for the quarter. As you know, we introduced our new marketing campaign, Furnishing Happiness to include with a regret free experience. This messaging circles around 4 pillars that we feel are key to our customers' happiness and experience: choices, quality, design, service. Our concern with the decrease in written business has centered around our decrease in traffic. As a result, we recently made a change in our media planning and buying partner.

Speaker 3

Effective April 1, we brought in Carmichael Lynch Media to overhaul our paid media approach. We believe that how they buy, manage and optimize media will result in better targeting and greater efficiencies resulting in a higher return on our media investments. Carmichael Lynch Media will partner with EP and Co, our agency of record to develop impactful communication strategies tailored to increase awareness of Havertys and our furnishing happiness with a regret free guarantee campaign. Our new media approach will be fully implemented for Memorial Day, our largest promotion in the first half of the year. Additionally, we are focusing on more local store marketing efforts to help complement our paid advertising campaigns.

Speaker 3

We feel this combination of awareness building media with community building local store efforts will positively impact traffic. Extending financing will continue to be a part of our holiday promotional events, and we continue to right size our staffing to match our current conditions through attrition in all areas of the business. Now, I will turn the

Speaker 1

call over to Richard. Thanks, Steve, and good morning. In the Q1 of 2024, net sales were $184,000,000 or an 18.1% decrease over the prior year quarter. Comparable store sales were down 18.5% over the prior year period. Our gross profit margin increased 120 basis points 60.3 percent from 59.1%, primarily due to product selection and merchandising mix.

Speaker 1

SG and A expenses decreased $9,000,000 or 7.6 percent to $109,400,000 As a percentage of sales, these costs approximated 59.4 percent of sales, up from 52.7% in the prior year quarter. We experienced decreased selling costs, advertising, distribution and transportation expenses during the quarter. Our interest income was approximately $1,600,000 during the Q1 as we earned more on our cash deposits due to higher interest rates. Income before income taxes decreased $12,200,000 to $3,200,000 Our tax expense was $800,000 during the Q1 of 2024, which resulted in an effective annual tax rate of 25.1%. The primary difference in the effective rate and statutory rate is due to state income taxes and additional tax benefit from the vesting of stock awards during the year.

Speaker 1

Net income for the Q1 of 2024 was $2,400,000 or $0.14 per diluted share on our common stock compared to net income of $12,400,000 or $0.74 per share in the comparable quarter last year. Now turning to our balance sheet at the end of the quarter, our inventories were $92,100,000 which was down $1,900,000 from the year end balance and down $22,200,000 versus Q1 of 2023. At the end of the Q1, our customer deposits were $40,900,000 which was up $5,100,000 from the December 31, 2023 balance and down $5,500,000 versus the Q1 2023 balance. We ended the quarter with $111,800,000 of cash and cash equivalents, and we have or we had no funded debt on our balance sheet at the end of the Q1. Looking at some of the uses of our cash flow, CapEx was $6,400,000 in the Q1 and we also paid out $4,800,000 of regular dividends.

Speaker 1

We did not utilize any of our share repurchase program during the Q1 of 2024 and we have approximately $13,100,000 of existing authorization in our buyback program. Our earnings release list out several additional forward looking statements indicating our future expectations with certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. We do expect our gross margins for 2024 to be between 60% 60.5%. We anticipate gross profit margins will be impacted by current estimates of product and freight costs.

Speaker 1

Our fixed and discretionary type SG and A expenses for 2024 are expected to be in the $290,000,000 to $292,000,000 range. The variable type costs within SG and A for 2024 are expected to be in the range of 19.9% to 20.2%. Our planned CapEx for 2024 remains at $32,000,000 anticipated new or replacement stores, remodels and expansions account for $27,000,000 Investments in our distribution network are expected to be $2,500,000 and investments in our information technology expected to be approximately $2,500,000 We do expect our anticipated effective tax rate in 2024 to be 26.5%. This projection excludes the impact of vesting of stock awards in any potential new tax legislation. This completes my commentary on the Q1 financial results.

Speaker 1

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

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question is from Mickey Legg with The Benchmark Company.

Speaker 4

Hey guys, good morning. Thanks for taking my questions.

Speaker 2

Good morning, John.

Speaker 4

Just wanted to dig into the decision to enter the Houston market again. Maybe can you elaborate on why you chose Houston and opportunity you see there? Thanks.

Speaker 2

Well, Houston is the largest market that is in our distribution footprint. We used to be there. We talked about that and we've been trying to figure out a strategy to come back in for quite a while. So we got one store, our main store that we're going into in The Woodlands area is a former Bed Bath and Beyond store that we've got under lease and it's an extraordinary good lease. The second store down in Baybrook Village is also one of their spin off companies and also in a great position.

Speaker 2

So we know that it's a major market and we need to have more than a couple of stores. So we have plans to expand that over the next several years and reach out to the growth areas of Houston. We can serve it now from our Dallas facility that's in place. We already deliver there, as I mentioned in the northern markets. It is a terrific large market where they know who we are and we can serve it well and we're finally getting positioned to move back in.

Speaker 4

Great, great. Yes, that's super helpful. Great to hear. And then as a follow-up, maybe if you could just comment on the competition and promotion you're seeing out there in the industry. How promotional are some of your competitors getting in this market environment?

Speaker 4

And then maybe a quick comment on just any price increases you've been able to put in place? Thanks.

Speaker 3

Yes. This is Steve. I would tell you, we really haven't seen a change in our the cadence from higher competitors or promotion and pricing things out. So we really have not seen a change there on adjustment. Commented on the last call, we did see credit promotions are being tightened down because of the cost.

Speaker 3

We have seen that are not being offered on that side of it. So from that vantage point, we don't see any real changes off of that. Now from our side of it, as I commented, we made a change in our media partner, and we're very excited about that and what that can bring to us. And we're focused on driving traffic. And one thing they're really going to do is look at a plan by market, an individualized plan instead of being more of a fewer plans.

Speaker 3

We're going having individual plans by market that we're really excited about because Dallas is going to be different than Birmingham is going to be different than Tampa. So we're really excited about that and we're looking forward to seeing the results of that and what they're going to do for us.

Speaker 4

Great, great. That's all I have. Thanks for the time guys.

Speaker 1

Thanks, Mickey.

Operator

Our next question comes from Anthony Lebiedzinski with Sidoti and Company.

Speaker 5

Good morning. Thank you for taking the questions. Nice to see the balance sheet strength here and the dividend increase as well. So I know you touched on a little bit, but just wanted to see if you guys can quantify as far as the trends in the written business. You mentioned that February March was better than January because of the weather.

Speaker 5

So if you could just maybe go over the numbers, if you could. And also, I don't know if this is significant to you guys or not, but Easter fell earlier this year than last year. Did that have any notable impact on the business?

Speaker 1

Anthony, it's Richard. Let me hit the written business and then Steve's got some comments on Easter. But in terms of the cadence, January, we were down in written business almost 20%, very difficult month. Then in February, we were down about 8% and then March, it improved we were down about 5%. So, you can kind of see started out really difficult environment in January with the improvements in February March.

Speaker 3

Yes. And the Easter effect was really offset by the leap year effect of February. So we kind of look at those 2 together when you look at it, Anthony. And if you combine them, I think we were down a little less than 7% combined between the 2 months. So they were equal days there when you lost Easter, but you picked up leap year.

Speaker 5

Got it. Okay. I guess, forgot about that. And thanks for pointing that out. So obviously, good thing that you're reentering Houston.

Speaker 5

You do have a strong balance sheet. Would it be possible for you guys, as you think, to accelerate the growth? I know you talked about 5 stores that you're looking to open this year and next. But again, given the dynamics in the marketplace that are going on now, is there a chance that you may accelerate that in future years, the pace of store openings?

Speaker 2

I think so. It depends on the opportunities. As I mentioned, I think there are going to be more opportunities. We are very good at converting existing space to Most of our growth has been that we open and we'll open a new store that's being built when we have to do that and there'll be a few of those in the next years or we are planning. But I do believe they're going to be more opportunities for us and we're prepared to do it.

Speaker 2

We've got a team to do it and a staff to do it and we're good at converting. So as those things happen, we're ready and we're going to be ready to jump on them. So yes, if you look way back, Anthony, the biggest acquisitions of stores we did was at the were home life. That was Sears home life done around 2,000. And I think we opened 9 or 10 at one time and we're able to execute that.

Speaker 2

And that was 20 years ago. So we know we can do it. We just want to make sure there are good opportunities. We expect that to be there.

Speaker 5

All right. Thank you, Clarence for that. And then Steve, you mentioned some efforts to right size staffing. Did that already take place in the first quarter? Are you looking to do that coming up here and kind of which areas of the business?

Speaker 5

I know you guys did a big staffing reduction right after COVID initially hit 4 years ago, then you rehired some people back. But how should we think about that as far as timing and potential sizes as far as personnel reductions?

Speaker 3

I would think about it as it is ongoing and it's fluid. And we're managing it to the business and as we go. So we're constantly looking at that and evaluating that, Anthony.

Speaker 1

Yes. And let me add to that, Steve. Anthony, we continue to we always reassess and evaluate all areas of our business for cost efficiencies. So during this past quarter, I believe our headcount was down to 2,487. I think we were down 71 people versus the end of the year.

Speaker 1

Most of that was in distribution home delivery as the demand came down, so did the need for additional support there. And just generally speaking in other areas of business, just one in particular, we're evaluating our entire lease portfolio for opportunities for further reduction of expenses, looking at all of our retail distribution and corporate leases for areas where we can get savings and extend the term on certain leases. So it's a constant process.

Speaker 5

Got it. And the last question for me before I pass it on to others. So given where your share price is today, what is your appetite now for share repurchases?

Speaker 2

Well, we meet with our Board every quarter and we've got a meeting later this in a few weeks and we evaluate it every quarter. We've got authority now for about $13,000,000 and we'll get in as it makes sense for us.

Speaker 5

Understood. Well, thank you very much and best of luck.

Speaker 3

Okay. Thanks, Anthony. Thank you, Anthony.

Operator

Our next question is from Budd Budatch with Water Tower Research.

Speaker 6

Good morning, Clarence, Steve and Richard. I know these are challenging times for the industry as you noted, Clarence, and you talked about expecting to see more disruption and we've seen enough of it already. Are you seeing any of that with your suppliers? I know you mentioned you got 4 to 7 weeks in good supply pattern with your suppliers, but I'm just curious to see if you can give us any more color that you may be seeing.

Speaker 2

I can't say I've seen anything that will impact our direct suppliers. I must admit I was a little concerned with the Liggett release. They're the main player in the industry. It tells you a lot about what the industry is going through there. But we haven't seen anything that's disrupted our flow of product with our main suppliers.

Speaker 6

Okay. And you talked about January February and gave us the cadence on that. But in conjunction with what you just mentioned and other things that we're hearing, April has seemed to have hit another real significant air pocket. And I know you don't like to comment on the current quarter, but I also know you don't want to surprise people either. So can you give us a flavor of what you're seeing in the

Speaker 5

industry now or from the macro standpoint or

Speaker 6

how it affects Havertys? Habertys?

Speaker 2

We've both been around a long time and I will say that historically April is the slowest month, 1 if not the slowest month of the year for a couple of reasons. One is because of Easter and the other is because of tax season, that type of thing, tax day. I don't think you'll see anything much different than what we've historically seen about April.

Speaker 6

Okay. I mean, TS Eliot made the same comments, so that being the coolest month. So,

Speaker 4

yes, I

Speaker 6

know April and Easter and Passover, we always used to joke when I was doing what you do, it was either late or early when it was never on time.

Speaker 2

Well, the good thing is it is behind us. Easter hit early, so it's behind us and now we're moving on.

Speaker 6

Okay. Why do you open up St. Petersburg? Just curious from that standpoint?

Speaker 3

We're hoping 3rd quarter, mid third quarter, hoping to get before Labor Day.

Speaker 2

All of the problems have just been getting the approvals from Florida, as you know, how difficult it is to get.

Speaker 6

Yes, I remember that remark. I understand.

Speaker 2

Right. We were able to open very quickly our store outside Memphis, but Florida is a little different.

Speaker 6

I got you. And last for me, on the expense side, Richard, and thank you for all the detail on the color you give and that's really very helpful to help people understand the structure of furniture retail. Are you seeing any cost issues that are worrisome?

Speaker 5

Were starting

Speaker 6

to see rate issue for the way people are paid. So I'm curious if you're seeing that or how you're what you can give us color on that?

Speaker 1

Yes, I'm just saying nothing that really keeps me up at night. Just your standard inflationary increases, but they're low single digits. Steve, I think mentioned it in his opening remarks that we've locked in our freight contracts. So we're got that behind us and things are back to more historical levels there. But I guess it's probably not so much a cost problem, but a revenue issue with the way business is.

Speaker 1

We continuously look at other areas to find cost efficiencies and we'll continue to do that.

Speaker 6

And any of the freight issue, any of them do with Baltimore or any of the turmoil in the oceans giving you problems?

Speaker 3

No, Budd. We're not we do not use

Speaker 2

the Baltimore

Speaker 3

port. So that has not caused us will not cause us any disruptions. And the overseas, what's going on in the Red Sea and all of that, that movement is going around, already diverted going a different path. It's just extending the lead time by a couple of weeks, but that's not any impact to our customers. We plan for that.

Speaker 3

We know where it is. So, no disruptions there from to impact our customers.

Speaker 6

Okay. Thank you very much and best of wishes on the balance of this year and beyond.

Speaker 2

Thank you both.

Operator

Our next question is from Cristina Fernandez with Telsey Group.

Speaker 7

Hi, good morning everyone. I wanted to ask about the industry or revenue assumptions behind the guidance. And maybe, Clarence, you can touch on it. It seems like the order trends were got a little bit better or less worse as the quarter progressed. But at the same time, you talked about the challenges in the industry in some companies going out of business.

Speaker 7

So do you think we should expect similar trends as we saw in the Q1 or we're getting closer to that point where there could be an inflection in demand at some point this year?

Speaker 2

Well, we have said that we thought things would be better in the second half. I don't know if we're feeling that or expect that from what we're hearing from the Fed the marketplace. It is definitely difficult. We've been down for a long time in written business. I think that will be softening up.

Speaker 2

I think it will be less down, but we don't see I don't have visibility to the point where we think it's going to be positive anytime real soon. But and I think we're saying the same thing in the industry. I haven't heard anything positive from other players. I think it's across the board, frankly. And it's now moved into the better end of the market, as I mentioned.

Speaker 2

I mean, it started in the lower end of the market. It's now hit I think it's hit everywhere. And not a lot of people release retail sales, but I think it's a trend that is in place. I hope that it turns around soon. We're certainly positioned to do that.

Speaker 2

And we hope some of the new things that Steve talked about with a new marketing and certainly new merchandise will resonate to help that happen.

Speaker 7

Yes, that makes sense. And yes, that seems consistent with what we're hearing. So I wanted to follow-up on that point with Steve on the marketing side. Can you expand more on like where are the efficiency? So kind of what's changing to what you've been doing versus what you're going to do going forward?

Speaker 7

Anything else in addition to the comp, I guess, market specific marketing? Are we going to see a change in like medium, digital versus print? I don't think you do too much print, but perhaps TV or some of the other channels that you've been traditionally using?

Speaker 3

Christina, we're not going to play our hand obviously because we haven't done it yet. I mean, we're just now starting it in our big advertising for the quarter will be around and focused on Memorial Day. But obviously, all those things that you just mentioned are on the table. I mean, we're looking at it by market. To me, that's one of the most exciting things.

Speaker 3

The Villages, for example, will be different marketing than Atlanta and those type of things. So yes, there will be in some markets, we could use print. In some markets, we may be doing more broadcast. We will look at it individually and attack it to how we can create more awareness to drive people into the funnel and get them to stores. So there'll be more to report on that as we go forward with it, but we are excited about it.

Speaker 3

They are making changes that are different from our approach that we had been executing on. And so that's what we'll have to see the results as it goes forward.

Speaker 7

And the last question I had was on the merchandising. So last call, there was some talk about outdoor and the introduction and expansion of that category. Any comments on the early reads, how that's doing or any other merchandising initiatives we can track for the rest of the year?

Speaker 3

Well, from an outdoor perspective, it is in now. We got it in and we're glad to see it. We've got some early results. It's not in all our stores, it's in about a little less than half our stores, but the early results have been very positive. It's 2 different groups and some fire pits and things with it.

Speaker 3

So it's not a huge assortment, but assortment enough that we can satisfy that customer's request if they need that. From a category perspective, we're seeing strength obviously in upholstery that continues to do well. I talked about special order business continues to trend up. It was up 13.5%. So we're very excited about that and what our designers are able to provide and the options we're able to offer our customers from that side of it.

Speaker 3

Bedroom, dining room have been a little bit of a struggle, been softer than we had hoped in the Q1 of things and bedding has been pretty stable, I would say, right now. So that kind of gives you kind of an overview. But we do have a lot of new product coming. We're in that cadence now. We've gotten back into that.

Speaker 3

Our merchants are flowing new product in and we're excited about it. Our teams are excited about it, because obviously that gives new choices for our customers.

Speaker 7

Great. Thank you.

Speaker 2

Thank you, Christine.

Operator

Gentlemen, there are no further questions at this time. I'd like to turn the call back to Richard Tarr for closing comments.

Speaker 1

Well, we appreciate and thank you for your participation in today's call and we look forward to talking to you in the future when we release our Q2 results later this year.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time.

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