Haverty Furniture Companies, Inc.

Good day and welcome to the Haverty's Third Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Hare, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. During this conference call, we'll make forward-looking statements which are subject to risk and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as 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 President, Chief Executive Officer, and Chairman Clarence Smith will now give you an update on our results and provide commentary about our business.

Good morning. Thank you for joining our third quarter conference call. As we reported earlier, our delivered comparable store sales were up 4%, with very strong written comparable sales up 22.6%, the largest increase in at least 50 years. We've been significantly benefiting from the nesting and homebody economy, where so many of our customers are focusing on improving their home, the place where they're spending much of their time. We're pleased to report a record quarterly net profit of $18.3 million, with $0.97 earnings per share compared to $6.1 million and $0.31 per share last year. The major contributing factors are strong gross margins of 2.7% and SG&A 3.7% lower. We had lower advertising expense and lower operating costs across almost all categories. While we're seeing pressure to increase personnel costs in warehouse and distribution, We're committed to holding our costs in the coming quarters in most of our SG&A categories. The gross margin improvement was due to fewer markdowns, less discounting, and a higher mix of special order products. Our merchants and stores have done an excellent job in improving our gross margins, and we believe this trend will continue. We have a key objective to maintain high single-digit pre-tax operating income in the quarters ahead. During this pandemic, we've seen the increasing importance of convenience to our customers. Our internet sales are a highest producing store at 3.9% of sales, up over 80%. Buy online, pick up in store is currently running at 15%, up triple over past years. We're investing in improving the efficiency and ease of use of our website and increasing the use of digital and social media to best reach our targeted customers. We're dedicated to making it as easy as possible for our customers to interact with us any way she wants. A recent driver of our business is what I call a triple-double. This has never been achieved since we began measuring. However, in several periods and weekends over the past two months, we've experienced a triple-double of a double-digit increase in traffic, closing rate, and average ticket. While this is highly unusual as it is in basketball, it's a strong indicator of the powerful trends in our business that we've seen. We've seen balanced growth across our regions with especially strong performance from our larger markets. It's very rewarding to see our big horses kicking in with strong sales growth. We feel we're very well positioned in some of the strongest markets in the country, with excellent growth potential. In today's digital and virtual world, we believe that Haverty's emphasis on a strong combination of high personal touch with our H design combined with the state-of-the-art technology helps to create a strong trust in the Haverty's brand. We believe that our 135 years of helping our customers' vision of their home come true is a foundation that our customers rely on. especially in difficult times. The unified operating system that we have deployed, whether in-store or online, allows for better visibility for our customers and for our operating and supply chain teams. We believe that we're in better position than most of our competition in being able to provide accurate product information and reliable delivery because of the strong systems and the excellent relationships with our suppliers. However, we know that we must change with the world or go by the wayside, which has recently impacted many retailers. We believe in staying in front of the changes and play a part in the inevitable disruption that our industry is experiencing. We will thrive in the disruption. We're very thankful for all our team members who are working directly with our customers every day in their homes and in our stores. We greatly appreciate their continued efforts and dedication. We're also appreciative of all our team members who support those on the front. We're all part of Team Haverty's and are coming together to serve our customer. Tomorrow, we are celebrating our first Founders Day, October 30th, on JJ Haverty's birthday. While the celebration is in memory of JJ Haverty, it's dedicated to our valued team members who are building Haverty's for the next 135 years. And we thank them for the tremendously hard work and dedication to Haverty's, our customers, and to each other. We are certainly quite blessed to be in the business of serving homes in the best part of the country during a pandemic. We're dedicated to building our business by being the best and justifying our customers' loyalty today and in the years ahead. I'll turn the call back over now to Richard.

Thank you, Clarence, and good morning. In the third quarter of 2020, delivered sales were $217.5 million, a 3.9% increase over the prior year quarter. Comparable store sales were up 4% for the quarter. Total written sales for the third quarter of 2020 were up 22.8%, and written comparable store sales were up 22.6%. over the prior year period. Our gross profit margin increased 270 basis points from 53.5% to 56.2% due to better merchandising mix and less markdowns were recorded during the quarter. Selling general administrative expenses decreased $4.1 million or 3.9% to $100.1 million and fell to 46% of sales from 49.8%. This was due to reduced advertising and travel costs, as well as reduced salaries and benefits, which were partially offset by increased selling costs. During the third quarter of 2020, we recorded a $2.4 million gain on the sale of a surplus property adjacent to one of our distribution facilities. This transaction was recorded in other income. We recorded net interest income of $51,000 in the third quarter of 2020 versus interest income of $292,000 in the third quarter of last year. Income before income taxes increased $16.4 million to $24.5 million. Our tax expense was $6.3 million during the third quarter of 2020, which resulted in an effective tax rate of 25.6%. Net income for the third quarter of 2020 was $18.3 million or $0.97 per diluted share on our common stock compared to net income of $6.1 million or $0.31 per share in a comparable quarter last year. Now, looking at our balance sheet at the end of the third quarter, our inventories were $90.9 million which was down $13.9 million from the December 31, 2019 balance and down $9 million versus the third quarter of last year's balance. At the end of the third quarter, our customer deposits were $88.4 million, which was up $58.3 million from the year-end balance and up $53.6 million versus the Q3 2019 balance. We ended the quarter with $211.8 million of cash and cash equivalents. We have no funded debt on our balance sheet at the end of Q3 2020. Looking at some of our uses of cash flow, capital expenditures were 2.9 million for Q3 2020 and 7.2 million for the first nine months of 2020. We also paid 3.7 million for Q3 2020 and $10.3 million in the first three quarters of 2020 on regular quarterly dividends. We purchased $12.9 million in common stock, which equates to 614,054 shares during the third quarter of this year. Year to date, we purchased $19.7 million or 1,033,165 shares. we have $16.8 million remaining under current authorization in our buyback program. Our earnings release lists out several additional forward-looking statements indicating our future expectations of certain financial metrics. I will highlight a few, but please refer to our press release for additional commentary. We expect our gross margins in the fourth quarter of 2020 to be similar to the margins we achieved in the third quarter of 2020. This is based on current estimates of product and freight costs, as well as changes in our LIFO reserve. Our fixed and discretionary type SG&A expenses for the fourth quarter are expected to be in the $67 to $69 million range, compared to $69.6 million for these same costs in 2019. The variable type costs within SG&A for the fourth quarter of 2020 are expected to be 17.8% compared to 18.2% in the fourth quarter of 2019. Our planned CapEx for 2020 has been increased to $11.4 million. Our original CapEx budget was $17 million, and we dropped it to $5 million at the end of the first quarter of 2020. This revised budget includes additional repairs and maintenance, IT upgrades focused on our stores and distribution facilities, We opened one new location in the Dallas-Fort Worth area during the third quarter of this year. Earlier this year, we closed an outlet store in the Atlanta market, and we closed another location in the Dallas-Fort Worth area. So our square footage is going to be slightly lower at the end of this year. This completes our commentary on the third quarter financial results. Thank you for your participation in today's call. Operator, we would now like to open the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And again, press star 1 to ask a question. We'll take our first question from Brad Thomas with KeyBank Capital Markets.

Good morning, Clarence. Good morning, Richard. Congrats on a great quarter here.

Mm-hmm.

Thank you, Brad. Good morning. I love the triple-double analogy. My favorite. I was hoping you'd give us a little bit more color on the trends through the quarter, how things have started out here in 4Q, and give us any insights into how we should think about the delivered side of the business and your ability to start working through some of these strong orders that you had in 3Q.

Thank you, Brad. Let me start and then Clarence can fill in. So quarter to date in the fourth quarter, we're seeing similar metrics that we saw in terms of what we indicated, the written sales for the third quarter being up 22.8%. We're seeing the same ballpark area so far into this quarter. And we've done some things in terms of making some investments. We talked about our CapEx. We're investing some additional CapEx spend on our distribution side as we ramp up our delivery capacity. We talked also a little bit about that or it's implied in our Variable costs, as we go from the third quarter to the fourth quarter, we're going to see some slight increases, as we indicated, going from 17.3% up to 17.8%. Some of that is additional personnel costs in the delivery and the warehouse and transportation areas. We have added some people in that area. Our overall headcount, is still down about 26 percent from where we were pre-COVID. I think it was down 35 percent in the last quarter, so we are adding back personnel as we ramp up our distribution capabilities. I will say the third quarter, if you look over the last 18 years in the company, I think the third quarter of this year was our fourth highest delivered sales quarter. So we continue to invest in that side of the business and ramp up production capabilities. In terms of the inventory and the ability to deliver, you noticed our inventory levels were down. We do expect those to come back up some in the fourth quarter, but we don't expect to have an inventory build as soon as that product comes in. It basically goes back out in terms of deliveries. But we have a lot of – product on the water headed this way and a lot of visibility in that area. But we're making a lot of investments on the distribution side and things seem to be heading in the right direction going into 2021.

And just to follow up on that a little bit, I think the customer deposit number that you reported on the balance sheet, the $88 million, I mean, that looks like the highest number in company history, at least in my model. How are you feeling about your ability to, you know, work through that? Do you feel like you start to get back to normal lead times by the end of the year, or is this something you think will drag into 2021?

Brad, I think this is Clarence. I do think that this will take us into next year. Our backlog has stayed pretty consistent. which is higher than we've ever had. We do have an enormous amount of product coming in. Much of it is sold. We have well over 1,000 containers on the water and more coming. So I know that this will carry over into the first quarter, maybe into the second quarter. So with the consistent sales trends and – The backlog, I don't see that we'll be able to fill that out this quarter, but we certainly are counting on that to complete most of the deliveries that are important to the customer before the holidays.

Gotcha. Very helpful, Clarence.

If I could squeeze one more in, you know, just as we're thinking about fine-tuning models for 2021, It seems that you all are going to start the year, you know, hopefully with momentum and some backlog still that you're working through. You've got a very easy comparison, particularly in 2Q. You know, 3Q, while, you know, strong from an earnings perspective, isn't the most gigantic number at a 4% comparison. And a lot seems to be set up for a very good year for you all in 2021. I guess, can you help me just think about some of the offsets, you know, for example, on the gross margin line? Do we need to see that come back a little bit because you may have to be, you know, a more normal level of promotion in the back half? You know, on the SG&A side, are there, you know, costs that you're going to have to put back in next year? How should we think about some of those offsets to what looks to be a very good year for you next year?

Yeah, I mean, those are great questions. I'd say on the gross profit line, you know, right now is a very non-promotional time period, so you have to make assessments of how long you think this will last. These are unprecedented times, so you have to kind of factor that in your forecast in terms of gross profit margins. And then on the SG&A side, we had some incredible improvements there in the third quarter. We talked about some of the increases expected for the fourth quarter on both the variable and the non-variable. We don't want to get our headcount back to where we were pre-COVID, but we are ramping it back up some on the delivery side. But, you know, I don't want our headcount, my goal is for the headcount not to get, you know, I'd like to have it hover around a 20% number, down 20% and kind of hold it there from where we were. But you're still going to, you know, we have added some costs back and we factored that in, you know, our fourth quarter numbers that we've given. Clarence, I don't know if you have anything to add.

Yeah, Brad, I feel and our team feels that the gross margin, we don't see that going back down. We're committed to getting credit for the product that we develop. We're doing more special or more custom, and I don't see our gross profit margins coming down from where they are.

Really helpful details. Thank you, guys, and good luck going forward here. Thank you, Brad.

Thank you.

And once again, ladies and gentlemen, to ask a question, please press star 1 at this time. And we currently have no further questions.

I would now like to turn the conference back to Mr. Richard Hare for closing remarks.

Thank you, Brad. We appreciate everybody's participation in today's call, and we look forward to talking to you in the future when we release our fourth quarter results. Thanks again.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for your attendance and participation, and you may now disconnect.