Haverty Furniture Companies, Inc.

Good day, ladies and gentlemen, and welcome to Havardy's reports, Operating Results for Second Quarter 2022 Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Richard Hare, Chief Financial Officer. Sir, the floor is yours.

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 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 about our business. Good

morning. Thank you for joining our 2022 Second Quarter Conference Call. We're very pleased to report a record Q2 sales performance of $253 million and earnings per share of $1.275 over last year. The second quarter was the fourth best earnings performance in the company's history. Our team has produced seven straight record sales quarters going back to the fourth quarter of 2020. We continue our billion-dollar annual sales pace that we reached in 2021. We believe that our target customer, located in the fastest growing markets in the country, has been impacted less than the more price-sensitive promotional customer base. We've seen a slowdown in store traffic, which has hit written orders, but we feel that we're very well positioned with a strong backlog of orders to provide and build profitable market share in our regions. We've changed our business model since pre-COVID. Our store count and retail square footage is level with 2019. However, our productivity measured by sales per employee is up 61% because we've been able to deliver more sales volume with fewer team members compared to 2019. In the second quarter, our written sales are .2% up over 2019. Average sale ticket is up 39% with a higher closing rate. Traffic is down double-digit compared to Q2 2019, and units are down compared to Q2 2019. But with the average ticket over $3,000, a higher closing rate, and a 58% gross margin, we are producing record profits. Recent sales trends have changed compared to 2021. Last year, we had more consistent volume during the week and a balanced traffic flow outside of the typical promotional activity. This year, we've seen stronger weekend sales and more activity around the holiday events, but weaker traffic during the weekdays returning to a more historically normal sales pattern. In our marketing efforts, we're more focused on attracting and driving new customers because we've seen the new customers build higher sales tickets and more quickly grow our volume. We're targeting a slightly younger customer than we've historically attracted with more digital advertising and social media. Our merchandising efforts also align with this strategy, emphasizing more contemporary styles, customization, and special order. Upholstery continues to be the key driver at over 40% of sales. We built up inventory's backup in upholstery, and domestic special order delivery times are improving, coming closer to pre-COVID performance levels. We're finally beginning to fill orders in bedroom and dining room with incoming containers from Vietnam and leather upholstery from China. Recently, our biggest sales gains have been in bedroom and case goods as we're able to complete back orders after the long delays. We expect to be in the best inventory position for the important Labor Day events than we have been in many years. Our team's top marketing, merchandising, and IT efforts are the relaunch of Harities.com later this year. We're actively pursuing a number of store locations within our distribution footprint with a goal of adding five stores a year beginning next year. We believe that they're very good locations both in new and existing markets that reach our target customer. We'll be relocating a store in Indianapolis and opening an additional store in the Washington, D.C. market this fall. Currently, we expect to end the year with 121 stores level with last year. Our -in-class balance sheet allows us to invest in the latest technologies for efficiency and managing supply chain, the major relaunch of our website, -the-art business intelligence, and upgrading and repositioning our stores in the best locations in the fastest-growing markets in the country. We're also able to build back our inventories to support growth and maintain an ongoing priority position with the industry's top suppliers. We are pleased with our team's dedicated performance for the first half of 2022. We have challenges with reduced traffic and lower incoming orders related to high inflation and slowing home closures. We're encouraged by our team's dedication to serving our customer better with great values, more design service, and customization. We believe that we will be able to earn a larger share of the home furnishings markets in the months and quarters ahead. I'll now turn the call back over to Steve Burdett.

Thank you, Clarence, and good morning. Our supply chain has gained momentum over the second quarter, with lead times continuing to improve from our domestic vendors and production becoming more consistent from our import vendors. This has allowed us to increase our inventories year over year by .5% in Q2. This increase in inventory contributed to our record quarter, and it is helping to reduce our backlog of outstanding orders. While our backlog is still healthy, we have stabilized our age of the backlog at 11 weeks. Our expectations are that we will continue to see the dollars in our backlog drop and the age of our backlog improve over the coming quarters due to the increase in consistency coming from our vendors on shipments and lead times. However, we are experiencing some longer shipping times on imports for several reasons. A shifting of cargo from west coast to east coast in anticipation of the potential disruption during labor talks, resulting in port congestion at some of our gateways. An increase in orders from retailers getting ready for the second half of the year. And the ports seeing longer dwell times of containers as many retailers are not able to receive their excess inventories due to a softening in sales. One bit of encouraging news is we have seen a reduction in some of our contracted container rates with some of our carriers due to the drop in the spot market rates. Our special order business has remained flat as a percentage of total upholstered sales for the quarter at around 19%. Getting our team's confidence restored and our vendors' abilities to meet their new reduce lead times consistently will go a long way to us getting back to our special order goal of 25% of upholstered sales. Staffing in our distribution centers, home delivery areas, and customer service centers is within 5% of our expected goals for the first time since the pandemic started. Our focus for our teams is on training, execution, and retention. We are excited to see our results for the second quarter and first half of the year. We are appreciative to all our team members for their dedication and passion, furnishing happiness to all our Havardy's customers every day. Now I'll turn the call over to Richard.

Thank you, Steve, and good morning. In the second quarter of 2022, net sales were 253.2 million, a .3% increase over the prior year quarter. Comparable store sales were up .1% over the prior year period. Our gross profit margin increased 130 basis points to .9% from .6% due to better pricing discipline and merchandising mix. Selling general administrative expenses increased $5.7 million, or 5.1%, to $118.1 million. As a percentage of sales, these costs approximated 46.7%, up from 45% in the prior year. As expected, we saw increased selling, distribution, and transportation expenses during the quarter. Income before income taxes decreased $501,000 to $28.7 million. Our tax expense of $7 million during the second quarter of 2022 resulted in an effective tax rate of 24.3%. The primary difference in the effective rate and statutory rate is due to state income taxes and the tax benefit from vested stock awards. Net income for the second quarter of 2022 was $21.7 million, or $1.27 per diluted share on our common stock, compared to net income of $22.9 million, or $1.21 per share in the comparable quarter last year. Now, turning to our balance sheet, at the end of the quarter, our inventories were $134.1 million, which was up $22 million from the December 31, 2021 balance, and up $19 million versus the second quarter of 2021 balance. At the end of the second quarter, our customer deposits were $90.8 million, which were down $8.1 million from the end of the year, and down $25.3 million versus the second quarter of last year's balance. We ended the quarter with $143.5 million of cash to cash equivalents, and we have no funded debt on our balance sheet at the end of the quarter. Looking at some of the uses of our cash flow, capital expenditures were $13.5 million for the first half of 2022, and we paid $8.8 million of regular dividends during the first half of this year. During the second quarter, we purchased $12.5 million of common shares, which approximated 461,391 shares of stock. During the first half of 2022, we purchased $25 million of common shares, which approximated 899,890 shares. 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 profit margins for 2022 to be between .7% and 58%. We anticipate gross profit margins will be impacted by our current estimates of product freight costs and changes in our life over reserve. Our fixed and discretionary type ST&A expenses for 2022 are expected to be in the -$295 billion range, an approximate 5% increase over prior levels. The variable type costs within ST&A for 2022 are expected to be in the range of .2% to 18.4%. Our planned capital expenditures for 2022 is now $32 million, anticipated new replacement stores, remodels, and expansions account for $21.3 million. Investments in our distribution network are expected to be $6.5 million, and investments in our information technology are expected to be approximately $4.2 million. This estimate reflects a deferral of the conversion of our Home Delivery Center in Virginia to a regional distribution facility due to availability and pricing of building materials. Our anticipated effective tax rate in 2022 is expected to be 25%. This projection excludes the impact from besting of stock awards and any potential new tax legislation. This concludes my commentary on the second quarter financial results. Operator, we would like to open the call up for any questions at this time. Operator, we would like to open the call up for questions at this time.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. Okay, we have a question from Anthony Lewininkski from Sudoti. Please state your question.

Yes, good morning, gentlemen, and thank you for taking the question. Taking a step back, Clarence, you talked about how you're doing more with less now as far as on the people side. One of the things you attributed to that too is your improved productivity because of higher closing rates. What's driven that? Do you feel like you have done anything as far as training your associates better? What would be the main reasons why you think you're more productive with your sales team now?

Well, I do think we're training our people better. The biggest reduction that we had in category was in our sales staff number and in the clerical and office. We really retained our best salespeople who are making more money. They're selling more. We, I think, have the best people who are now dealing with our customers. We're able to close higher because of that. I think we're serving our customer better. They're just the top performers, and we're not adding back. That's the main thing that I'm pushing is that we're not adding back to the count since we've reduced about 18 to 20 percent when we had the COVID hit us. We've cut our store hours, which has allowed us to staff with fewer people in our stores and actually have our salespeople man the floors a longer period, a whole day, for instance. We think this is something we can maintain, and we're certainly not planning to add back there.

Thanks for that, Clarence. The other key thing that has certainly improved since pre-COVID is your gross margin going up from roughly 54 percent in 2019 to now around 58 percent, so quite a meaningful improvement there. I know this, Corey talked about improved pricing discipline and mix driving the gross margin improvement. Going forward, how should we think about your ability to sustain your gross margins? Obviously, as you pointed out, there's a lot of uncertainty in terms of the macro economic landscape, inflation, and higher interest rates. Broadly speaking, if you could just talk about the gross margins, how should we think about those?

Well, we think we can maintain and possibly plan to increase our gross margins. We have gained it and made that happen with discipline. It's not only pricing discipline in the store level, but it's also with our merchants. We've been very fastidious about following up on any changes and making sure that if we have increases, we increase the price on the floor, and we've been able to do that. I think we're getting more credit for the product that we're developing, and customers are willing to pay the price. So, we believe that we can maintain and frankly increase our margins in the years ahead. We've got that pricing ability.

Got it. Okay. Thanks for that. And then, as far as just looking at the quarter here, so your written sales, you gave us a number for the quarter. Just wondering, was there any meaningful change from month to month between April and June as far as that written trend was, or was it consistent throughout the quarter?

I would say – hey, Anthony, it's Richard. I would say in the quarter, in April and May, double-digit declines in written business was – June was single-digit decline. So, April and May were a little – quarter decline, June was less.

Okay. So, June was better. Okay. So, that's good to hear here. And as far as the backlog, I know you guys don't quantify that exactly, but if you could give us maybe a little bit more color on that, and then I think your lead times are down to 11 weeks. So, by the end of the year, kind of like where would you expect the backlog and your lead times to be? If you could give us the rough estimate, that'd be great.

Yeah. Anthony, this is Steve. Yeah, we're anticipating that, as we said, we've stabilized the age of that pool, and on the backlog, we see that our product flow as our inventories increase for the quarter. We see that product flow continuing for the rest of the year. Our vendors are getting more consistency in their production schedules, and then we're able to see the – obviously, the lead times come down. I still think it'll take us into next year before we get back to where we were pre-COVID, exactly, but I think with every month and every quarter that goes by, we're going to continue to see that improvement without getting specific. Sure.

Got it. Got it. Okay. And then, you know, in terms of the deferred conversion of the Home Delivery Center in Virginia, does that impact your store growth expectations longer term, or is this just a temporary deferral?

It was just a temporary deferral due to cost and just being prudent with our dollars and monies, and we just felt like right now it has no hindrance on our growth and what we can do going forward.

Got it. Okay. That's good to hear. And lastly, just wondering what your thoughts are on doing additional share repurchases.

Anthony, you know, our board encourages, you know, a mixture of share buybacks and dividends to return shareholder value back to our shareholders. We have exhausted our current limit. You know, that's something we'll, the board will evaluate it, you know, on a quarter by quarter basis, and if that changes, we'll let you know. But we have, at the beginning of the year, we did say we planned on going through our $25 million amount in the first half of the year, and we certainly completed that in the second

quarter. Got it. Okay. Well, thanks a lot, and best of luck. Thanks, Anthony. Thanks, Anthony.

And that was our only question.

Well, we appreciate everyone's participation in today's call. We look forward to talking to you in the future when we release our third-core results.