Synovus Financial Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Havertys Second Quarter 20 24 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, Richard Haire, Chief Financial Officer.

Operator

Thank you, Mr. Haire. You may begin.

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 of the date they are made, in which we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company's reports filed with the Securities and Exchange Commission. Our Chairman and CEO, Clarence Smith, will now give you an update on our results and our President, Steve Burdette will provide additional commentary.

Speaker 2

Thank you for joining our Q2 conference call. Total sales were $178,600,000 down 13.4% from last year, but an improvement over the 18.1% decline in the Q1. We've been proactive in reducing costs where appropriate and that has helped us produce a pre tax profit of $6,500,000 Gross margins continue to be strong at 60.4%. Our cash position of over $100,000,000 remains solid and continues to be a major strength. Our balance sheet allows us to continue to invest in future growth opportunities even in tough times for the industry.

Speaker 2

We're excited to announce the addition of our 2nd store in Indianapolis in Greenwood, Indiana, which will open late this year. This location will be our 5th new store to open in 2024 and the 5th former Bed Bath and Beyond building. Late this year, we'll open a new store in Pembroke Pines area in Southeast Florida and a store in St. Petersburg, strengthening our position in the Tampa St. Pete region, both are part of the Bed Bath and Beyond lease acquisition.

Speaker 2

With these openings, we will have 33 stores serving Florida, our largest state. Our expanded Lakeland, Florida distribution center is ideally located off I-four and allows for coastal specific products and quick delivery to the region. We have been furnishing Texas homes for over 100 years. Our Austin and College Station stores have been serving the northern part of Houston, and now our move back to Houston, Texas will be a significant effort for the coming years. We plan to open in Woodlands, Texas late this year and add a second store in 2025 in Baybrook, Texas.

Speaker 2

We will end this year with 22 Texas stores, our 2nd largest state. We're actively working to add stores in the Greater Houston market to add density and to support marketing and to build Haverty's brand position. All these stores will be served by expanded Dallas, Texas distribution center, allowing for quick delivery and more Western specific and regional merchandising. We are on target for our goal to open 5 new stores in 2024 and in 2025, strengthening our service position throughout our 17 states. We're very pleased with the new merchandise that is hitting our floors, which has quickly moved up to best sellers.

Speaker 2

We've added several locations to the better end of our lineup, which along with our enhanced special order and custom products have helped move design business to 35% of sales. These are tough times for a cyclical industry like home furnishings. We're closely tied to housing and interest rates. What we have learned these past decades is the importance of consistent investment and serving and inspiring our customers. This means new locations, upgrading stores, cutting IT systems and then most importantly investing in talent.

Speaker 2

And these are expensive commitments in tough times. We believe that the down cycles provide important opportunities when

Speaker 3

we can make strategic investments for future growth and position Havertys for significant gains in the months and years ahead. I'll now turn the call over to Steve Burdett. Thank you, Clarence, and good morning. Our Q2 results faced the difficulties of higher interest rates and frozen housing activity. Our Memorial Day event was disappointing, which affected the outcome of the quarter.

Speaker 3

We hope the potential interest rate cuts being discussed for the September Fed meeting will be a start to getting the housing market moving as we head into 2025. During the quarter, we were excited about the opening of our 2 new stores in South Destin, Florida, which is a part of our Pensacola market. Store traffic in both stores has been robust and we are pleased with the early results. Overall, our store traffic has continued to improve slightly during the quarter, but we are seeing a more deliberate consumer, which has caused our closing rates to slip. However, those customers that are buying are spending more as our average ticket continues to rise by over 4% to almost $3,500 Our design business continues to be a bright spot by growing over 24% for the quarter as a percentage of our business.

Speaker 3

Our design and sales teams have been able to increase the number of customers participating in design to almost 19% of our customers, which continues to grow at a double digit pace. Our average ticket is the driver of our design business as it moved higher to approximately $7,000 which is a 7% increase for the quarter. Our supply chain network continues to operate efficiently, which we feel puts Havertys at a competitive advantage. We have seen a minimal increase in our freight rates due to the container imbalance and the issues around the Red Sea, but have seen no real disruptions due to our partnerships with our carriers and suppliers. Our inventories continue to remain in excellent condition and were relatively flat with Q1 and approximately 20% down from Q2 2023.

Speaker 3

This gives us confidence that we will be able to maintain our margin guidance for the year. Our vendors continue to provide us with excellent lead times that vary between 4 to 7 weeks. This has helped us to drive our special order business, which was up approximately 9% in dollars for the quarter. Extended financing continues to be a part of our promotional calendars, but we continue to manage the use and length of terms, which has helped us to lower our credit costs for the quarter by over 16% as a percent of the business. Also, we have been able we have been continuing to make the necessary adjustments with our headcount throughout the organization to ensure that we are right sized for the current business conditions.

Speaker 3

We are optimistic heading into the what is historically our largest promotional event of the year, Labor Day. I want to thank all the Haverty team members across the company for their hard work and dedication to furnishing happiness to our customers every day. Now, I'll turn the call over to Richard.

Speaker 1

Thank you, Steve. In the Q2 of 2024, net sales were $178,600,000 a 13.4% decrease over the prior year quarter. Comparable store sales were down 13.6% over the prior year period. Our gross profit margin decreased 10 basis points to 60.4% from 60.5%. The decrease was driven by the change in the LIFO reserve, which generated an immaterial impact on gross profit in 2024 compared to a positive impact of $3,400,000 in the Q2 of 2023.

Speaker 1

Excluding the impact of our LIFO reserve, our gross margins increased over 170 basis points over the prior year period. Selling, general and administrative expenses decreased $6,900,000 or 6.3 percent to $103,100,000 As a percentage of sales, these costs approximated 57.7 percent of sales, up from 53.3% in the prior year quarter. We experienced decreased selling costs, advertising, warehouse and delivery expenses during the quarter. Interest income was approximately $1,500,000 during the 2nd quarter as we earned more on our cash deposits due to higher interest rates. Income before income taxes decreased $9,400,000 to $6,500,000 Our tax expense was $2,800,000 during the 1st 6 months of 2024, which resulted in an effective annual tax rate of 29.2%.

Speaker 1

The primary difference in the effective rate and statutory rate is due to expected state income taxes and non deductible items for the year. Net income for the Q2 of 2024 was $4,400,000 or $0.27 per diluted share on our common stock compared to net income of $11,800,000 or $0.70 per share in a comparable quarter last year. Now turning to our balance sheet at the end of the second quarter, our inventories were $400,000 which was down $1,600,000 from the year end balance and down $22,300,000 versus the Q2 of 2023. At the end of the Q2, our customer deposits were $38,700,000 which was up $2,900,000 from the December 31, 2023 balance and down $6,900,000 versus the Q2 2023 balance. We ended the quarter with $109,900,000 of cash and cash equivalents.

Speaker 1

We have no funded debt on our balance sheet at the end of the second quarter of 2024. Looking at some of our uses of cash flow, capital expenditures were $16,000,000 for the 1st 6 months of 2024. We also paid out $10,100,000 of regular dividends in the 1st 6 months of 2024. We did not realize our share repurchase program during the Q2 of this year 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 of certain financial metrics.

Speaker 1

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 60.0% 60.5%. We anticipate gross profit margins will be impacted by our current estimates of product and freight costs. Our fixed and discretionary type SG and A expenses for 2024 are expected to be in the $282,000,000 to $284,000,000 range, which is a reduction in our previous estimate. We anticipate continued reductions in advertising, incentive compensation and professional fees.

Speaker 1

The variable type costs within SG and A for 2024 are expected to be in the range of 19.7% to 20%. We anticipate continued reductions in 3rd party credit costs as well as delivery costs. Our planned CapEx for 2024 is $33,000,000 anticipated new or replacement stores, remodels and expansions account for $28,000,000 Investments in our distribution network are expected to be $2,500,000 and investments in our IT our information technology are expected to be approximately $2,500,000 Our anticipated effective tax rate in 2024 is expected to be 27.5%. This projection excludes the impact of vesting of stock awards and any potential new tax legislation. This completes the commentary on the 2nd quarter finance results.

Speaker 1

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

Operator

Thank you. Our first question is from Anthony Lebiedzinski from Sidoti. Please proceed.

Speaker 4

Good morning, gentlemen, and thank you for taking the questions. So first, just wondering if you could comment on the sales trends throughout the quarter. I know you talked about Memorial Day being, I guess, somewhat disappointing. But just overall, as we look from April through June, how did that go in terms of written comps or however you want to handle that?

Speaker 1

Sure, Anthony. Good morning. This is Richard. In terms of the I can give you the written and delivered trends. In April, our written business was down approximately 14%.

Speaker 1

Steve mentioned the disappointing Memorial Day in May, we were down approximately 18%. June, we were down approximately 8%. And then in terms of deliveries, April, we were down approximately 12%, in April, about 6% in May and about 20% in June.

Speaker 4

That's very helpful, Richard. Thanks for that. And then so on your last conference call in May, you guys talked about a new media firm and a new media approach. Can you talk about that and then like what you've learned from that and how are you guys thinking about that for the back half of the year?

Speaker 3

Yes, Anthony, this is Steve. Yes, we did introduce Carmichael Lynch started in April. Really the first impact that we started seeing that would have been in May. I mean, it's too early to tell though. Though.

Speaker 3

One of our indicators is traffic that we're looking at and I made a comment that we're starting to see a little bit of improvement in traffic. So we consider that to be a positive with what they're doing. Some of the changes I looked at and I talked about is from a TV perspective, we're still doing streaming and OTT, but we're also doing a little more broadcast in our bigger markets on a balance there. And then we've kind of changed up our search direction, what we're doing there in search to drive more traffic to the stores. So we're encouraged right now.

Speaker 3

And so that's kind of why we're optimistic getting the 3rd quarter We'll continue to see those traffic trends improve.

Speaker 4

Got you. Yes, thanks, Steve. And then so I guess with the upcoming election and your, I guess, pivot to broadcast TV, with the election coming up, will that kind of prevent you guys from doing as much broadcast TV as you would have normally like to do?

Speaker 3

Well, we could be basically cut off because the election takes priority, those ads, but we won't know that till we get there. And there'll probably be more so in certain states than others. Those states that like Georgia, maybe North Carolina, Virginia are really the states in our market where our footprint is that are considered to be swing states. So in those states possibly so, but we'll monitor that and manage that, our marketing team will with EP and Co. And Carmichael Lynch.

Speaker 4

Got it. Okay. And my last question before I pass it on to others. So you mentioned that you're happy with the 2 new stores that just opened. But just overall, given the acceleration and store growth that you've had, can you talk more broadly about some of the other recent store openings?

Speaker 4

How have those done relative to your expectations?

Speaker 3

Yes. So I mentioned on the call, as you said, Southaven and Destin have both exceeded our expectations. And then we opened last year Dayton, Ohio and Concord, North Carolina. And both of those stores from a traffic perspective have done as well. Our closing out of the 2 new stores this year has been stronger than the 2 new stores last year from their initial start, but they are getting better and building strength there.

Speaker 3

But we have been pleased with both with all four of those store openings and look forward to the 2 more that we're adding this year in Pembroke Pines and South Florida and then obviously St. Pete and Tampa, again, Florida being our largest concentration of stores, we're really looking forward to that, along with Indiana and then getting into Houston.

Speaker 4

Got it. Well, thank you very much and best of luck.

Speaker 3

Thank you.

Operator

Our next question comes from Cristina Fernandez from Telsey Advisory Group. Please proceed.

Speaker 5

Hi, good morning. I wanted to follow-up on Anthony's question on demand and wanted to see if you looked at how the quarter progressed, particular Memorial Day event being disappointing, I guess, what are you planning differently? How does it change your approach for the back half, particularly for like the big promotional holiday weekends like Labor Day, which you mentioned is the biggest of the year, that would be helpful. Thank you.

Speaker 3

Yes, Christina, this is Steve. We're focusing from a promotional standpoint, we're not going to chase that. We don't feel like that's the need that we need to go after right now, lowering prices or be more aggressive in that state. We will certainly be out with our normal promotions, our credit financing as we're doing it. But what we're leaning on and feel really positive about is, again, like I talked about our new media partner and what we're doing there to reach the consumer and driving more traffic to our stores because the end result if we can increase our traffic to our stores, that gives us the opportunity, obviously, to close more business.

Speaker 3

That's the number one thing we're focused on right now in driving. And so it's too early right now, come out of the 2nd quarter. We've got some positive trends that we feel good on as they just started their first promotion with Memorial Day. But we feel confident what we got with our promotions that we have, there's no need to do anything different. We don't think that's the reason consumers are not buying.

Speaker 3

We just think they're a little more deliberate, a little more cautious in this environment and we're going to stay consistent, maintain our margins and continue off the customer quality and value product.

Speaker 5

Thanks. And then the second question I have for Clarence or Steve. Clarence, you talked about investments in the business and talent and IT. Can you expand on specifics like what areas where do you need more talent on IT like it's in systems, it's in supply chain?

Speaker 2

The main investments we continue to do there is enhancing our website and just everything about that to make sure that we're reaching the customer better than anybody else and getting our message across. It is a continual investment and it escalates. It's just so dadgum important that we are looked at as one of the better sites and easier to operate. So we spent a lot of energy there. A lot of our team is dedicated to it.

Speaker 2

And certainly, we're trying to stay on the leading edge for website and just making sure that we can easily communicate with our customer there.

Speaker 5

And then anything on talent where you need

Speaker 3

to make investments? On talent?

Speaker 2

Well, yes, we actually we have some issues we have some changes that we will be making in the next several months, particularly in the merchandise area. We've had a couple of retirements, one of which we've already announced and we will be supplementing our team here and adding creative talent. We're excited about that opportunity and that is underway right now. We just promoted our IT head, Greg Davis. He just was promoted.

Speaker 2

We had a retirement there, but we have a strong team there. We feel good about. Our main interest right now is supplementing our merchandising team here under John Gill.

Speaker 3

Christina, we're making this is Steve. We're making a few investments in the store side of things as far as the in store experience. We have 2 test stores right now going that has to do with basically point of purchase materials that are in the store to help the consumers and help the salespeople in communicating and hopefully improving the closing rate by providing better information for the consumer there. So we're excited about that. There's a change with the design centers.

Speaker 3

We're investing more with those, providing a few more options, more like rug choices, bigger screens, bigger TVs to make the experience for the consumer better. So we're doing a test with that as well. So that is an investment. And then of course, on the website, as Clarence mentioned, the AB testing is something we continually are doing and evolving and changing.

Speaker 5

Thank you. And the last question I had was with the election coming up, there's also increased talk and perhaps concern around tariffs on goods from China. I know your exposure has decreased to 15%. Can you talk if there were to be tariffs, how you can manage them this time? And maybe remind us of what you did last time?

Speaker 5

Is it pricing, shifting goods to other countries, etcetera?

Speaker 3

Yes. Cristina, our merchants are already working with our suppliers. Basically, we have leather that's coming out of China, some fabric, but mainly leather. And we've already got majority of our vendors already have alternative production either in Cambodia, Vietnam, Mexico, that they're already in the midst of executing on. And so we have an alternative and do not expect any kind of impact from tariffs, if they were to come about for China, additional tariffs.

Speaker 5

Thank you.

Speaker 3

Thank

Operator

you. Our next question comes from Budd Bugatch from Water Tower Research. Please proceed.

Speaker 6

Good morning and thank you for taking my questions. First, congratulations on really managing pretty well through this pretty difficult period. It's been a real challenge and your financials, they don't compare as well as you would like them. They look strong. So congratulations on that.

Speaker 6

I do have a couple of questions about the written business. And as you went through that, Richard, I think you said that June was down 8% or so. When you look at the change in customer deposits at the end of the quarter, that's down in the mid teens. And I wonder if there's any relationship or any change in the relationship with deposits to backlog or what you're looking for out of the retail system going forward in terms of deliveries?

Speaker 1

Yes. Budd, it's Richard. We hit the overall relationship really hasn't changed over the quarter in terms of the relationship between deposits and our backlog. So backlog is fairly consistent now with what it's been throughout this calendar year.

Speaker 6

And any read through the change in, I know that Memorial Day might have been a disappointment. Stephen, I was wondering if you had a thought about it as to maybe why that was. We heard Memorial Day had mixed results across the industry. So maybe what did you think maybe you did right or did wrong in Memorial Day, if anything?

Speaker 3

I don't know what we did. We were just on the wrong side of it, in that mix you just described. Obviously, we were not happy. It was still a great weekend. It just wasn't what our expectations and what it was last year.

Speaker 3

And it was probably it was equal to our Presidents' Day and typically it's a stronger holiday than Presidents' Day. So it was not a horrible weekend, it just was disappointing from a comparable basis for what we had done there. I think, Budd, the consumer we've just seen has been a little more cautious and delivered in there, taking the money out of their wallets and spending it. So but we still feel good where we are and what we're doing, the product we have. As Clarence mentioned, we've got new product coming in, is hitting some price points in places that we maybe had some voids.

Speaker 3

And as Clarence said, it's resonating and we still have more coming. So we're excited for that and excited to get that in.

Speaker 6

And that does go to kind of the next area because we're seeing from others outside of the furniture industry, we're hearing a lot about the trade down issue and it looks like that's where the economy might be going over the immediate future. Your inventories are in awfully good shape, but maybe are they in too good shape? And are you how do you participate in the trade down? That's not something Havertys is known for and I wouldn't expect you to change it and wouldn't want you to change your stripes, but you still have to be aware of what's going on around you.

Speaker 2

Yes, we Budd, we feel really good about our position. I do think we're reaching a better customer. Actually, our deposits in the better product is higher than it was. We're doing more custom special order, Richard Steve talked about that. The bottom end of this industry is being devastated right now.

Speaker 2

The bankruptcies that you're seeing, the Conn's, Badcock and maybe Bed Bath and Beyond is devastating to the promotional end of this business. And we certainly don't want to go get into that bailiwick. I was talking with some of our suppliers about the Mississippi parts of the market, which is where the promotional upholstery comes from and they are absolutely devastated. We are not going down in price point. We are targeting a better customer.

Speaker 2

It's working. I do think we get more credit for it. We get more margin. I think we're taking some from that end of the market. And I think it'll pay off for us.

Speaker 2

It might take a little while, but I think it will pay off for us.

Speaker 6

I don't disagree with that at all. And remind me again what you're planning to open the balance of this year. You got St. Pete and

Speaker 3

Yes, we hope to open Pembroke Pines before Labor Day is what we're hoping, St. Pete before the end of the quarter. In the Q3, we open up Greenwood, Indiana, in sometime in the middle of Q4 and we'll open up Houston, our first store there in The Woodlands will be open in late Q4. So that's what we have planned for the remainder of this year. We should with that store count, that'll give us somewhere around 129 stores for

Speaker 2

the year. Hey, Budd, you can walk down the street for our store opening in St. Pete. We'll just see you there.

Speaker 6

I do that fairly often. And there's not as much activity there going on as I'd like to see. So I'd like to see that open before the end of the quarter.

Speaker 2

We'll buy you

Speaker 3

a cup of coffee.

Speaker 6

I'll cook you a burger. Okay. Thanks.

Operator

Our next question comes from Mickey Legg from The Benchmark Company. Please proceed.

Speaker 7

Hey, guys. Thanks for taking my questions. It looks like you touched on a bit of this already, so I'll try to frame it from a fresh perspective. If you could just talk about the competitive landscape a little bit. Are you seeing more companies going out of business?

Speaker 7

And I know you don't engage in pricing promotion too much on your end, but are you seeing any trends on competitors using more promotions? And I think you also talked a little bit about this in your prepared remarks about maybe any weather related impact that may have impacted sales or how you were able to avoid that? Any color on that would be helpful. Thanks.

Speaker 2

We try not to give weather reports. I mean, sometimes it does impact, but no, we haven't really had any major impact there. These GOB sales really don't affect us. I mean, and that's not something that I feel impacts us. Most of the time, that's by close out people.

Speaker 2

It's on the lower end of the market. We don't see that really affecting us. There'll be a lot of it in certainly in parts of our market, but I don't think it might have very short term impact, but nothing significant. Yes.

Speaker 3

From Nicky, it's Steve. From the promotional side of things, I think it's still they're still consistent. The lower end players are going to be aggressive with credit and with price points trying to hit on that. I don't think any different than what they've been. They may be trying to seek out in their mind better values of what they're putting out there.

Speaker 3

But from our perspective, I don't see it being any different. And the upper end is still doing their same thing and promoting service and design and not as much credit. So I don't really see a change in general. It's still people are promoting. When he gets around the holidays, you still see it and there's still a lot of it.

Speaker 7

Got it. Got it. That's helpful. And then maybe just some additional color on the interest rate environment going forward. If we're expecting cuts over the next 12 months, how do you see that impacting the consumer environment and maybe a little bit on the timing of that impact?

Speaker 1

Yes. This is Richard. We certainly are pleased to see the Fed's recent indications or signals that the rates are going to be coming down this year. We're tied to housing and mortgage rates. And so we know it's coming.

Speaker 1

We just don't know exactly when, but we certainly feel like based on things you're reading in the industry publications and things of that nature, next year, we'll certainly we should see an improvement in overall demand for housing, which certainly will affect us in a positive way.

Speaker 7

All right, great. That's all for me.

Speaker 3

Thanks, Mickey.

Operator

This concludes our question and answer session. I would like to turn the floor back over to Mr. Richard Haire for closing comments.

Speaker 1

Well, we thank you for your participation in today's call, and we look forward to talking to you in the future when we release our Q3 results later this year. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

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