Haverty Furniture Companies, Inc.

Greetings and welcome to the Habity's second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Hare, CFO. Thank you, sir. You may begin.

Thank you and good morning. 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 president and CEO, Steve Burdett, will now provide additional commentary about our business.

Good morning. Thank you for joining our 2025 second quarter conference call. We are excited to report our first increase in written and delivered sales for Q2 in over two years. While this progress is encouraging, we remain focused on returning to positive same-store sales. Our sales for Q2 were $181 million, which was up 1.3% with comps down 2.3%. Total written sales were up 0.4% with comps down 2.1%. Gross margins continue to show our discipline and consistency coming in at 60.8% compared to 60.4%. Our pre-tax profits for the quarter were 4.3 million or 2.4% operating margin compared with 6.5 million or 3.6% operating margin in Q2, 2024. Our EPS for the quarter came in at 16 cents compared to 27 cents. Richard will provide additional details later in this call regarding the increase in SG&A expenses for the quarter. During the quarter, we continue to see a struggling housing market with high interest rates and rising home prices, lack of clarity around tariffs, inflation concerns, ongoing geopolitical issues, and consumer confidence remaining low. Despite all this noise in the economy, the consumer has remained amazingly resilient. Traffic in the quarter remained positive in the mid-single digit compared to the same period last year. Our average ticket decreased slightly, but remained strong at just under $3,400, while designer average ticket continued to grow at approximately 5% to over $7,600. However, our overall design and special order business was down mid-single digits for the quarter. A portion of the decrease can be attributable to the 145% additional tariffs placed on China imports in early April, which caused us to temporarily suspend our special order capabilities from our China vendors. We got more clarity in mid-May when the additional China tariff was reduced from 145% to 30%. During the quarter, our supply chain and merchandising teams have been realigning our production moves out of China with our import vendors. We should be fully operational in Q3, allowing us to resume our special order business. Conversion rates showed a nice improvement in the quarter, moving from a double digit decrease in Q1 to a mid-single digit decrease in Q2. Memorial Day is the company's largest event in the first half of the year. Sales increased by just over 3% during the two-week period and by more than 14% over the four-day period. The company noted improvements during the four-day event in all key metrics. Traffic was up double digits, average ticket was just under $4,000, and conversion rates were consistent with last year. Our marketing, creative, and media plans continue to reach our customers through broadcast, OTT, and digital marketing channels. We continue to use AI algorithms to learn from our first- and second-party data to ensure our digital ads are efficient and more effective in driving engaged site traffic. In June, we converted all product page traffic and listing page traffic, in addition to the homepage, which was converted in Q4, to Adobe's Edge delivery service. Since this change, we have seen a 15.6% increase in organic traffic, which we feel this, combined with the more engaged site traffic, has contributed to our web sales growth of 8.4% for the quarter. We invested an additional $1.1 million over the quarter to get our messaging out as we promoted 60 months no interest to be more competitive and strengthen our credit offerings. However, we did not experience an increase in our credit usage. In fact, our overall credit costs for the quarter decreased double digits compared to last year's Q2. We implemented a more aggressive promotional strategy by increasing sale offerings both externally and internally. The loyalty email campaign referenced in the Q1 call generated approximately $17 million in Q2, resulting in a year-to-date total of over $25 million with an average ticket of just under $2,800, which contributed to our slight decrease in our overall average ticket for the quarter. A merchandising team returned from a trip to Vietnam in early May, where they followed up with our vendors on their progress with the movement of our products out of China. The trip was very informative and productive, as it enabled the team to reassure our vendors of our commitment to our strategic partnerships. From a category performance, upholstery and bedroom outperformed all other categories with positive sales in the low to mid single digits, followed by bedding and occasional, which were down low single digits, and dining room and decor, which were down high single digits. As mentioned in our last call, we are rolling out our new point of purchase and tagging program in Q3. As a reminder, this should improve the in-store customer's experience by centralizing our special order fabrics to improve the ease of choice while introducing a new tagging system that visually provides our customers with more choices that are not shown on the floors. It simplifies for our sales and design consultants the available configurations by collection. Our goal is to have this fully implemented by the end of Q3 in all stores. While the tariff issues are continuing to create uncertainty within the industry, our merchants are proactively working with our vendors and preparing for potential price changes once the tariffs are finalized. The team's preparation and communication give us confidence to maintain our current gross margin guidance. There is a possibility that some products will return to being manufactured in China, depending on how tariff policies develop in other countries. Decor and lighting products may remain in China if new tariff rates make it more economical compared to establishing production facilities elsewhere. In Vietnam, there are concerns about potential labor shortages and wage challenges resulting from increased production demands. Resolving the uncertainties around tariffs will allow us to be more focused on serving our customers' needs. Our supply chain team executed a strategy to increase inventories of best-selling products during Q2. Inventories rose approximately 4.6 million, or about 5% since Q1. We anticipate that inventories will remain relatively flat for the remainder of the year. We continue our push to open five new stores a year. However, in 2025, we will open two new stores in Houston, Texas, and one relocation in Daytona Beach. And we'll be closing two locations, one in Atlanta and one in Waco, Texas, leaving us with 129 stores at year end. We have finalized four additional leases for 2026 openings that we are able to announce. In Q1 2026, we will open our second store in the St. Louis Market in the Fenton area southwest of the city. In Q2 of 26, we will open our fourth store in the Nashville market in the Mount Juliet area east of Nashville. The other two leases will be in the Houston market, the Alliana area southwest of Houston and the Baytown area east of Houston, opening in the latter part of 2026, giving us five stores in the market. As you can see, we are actively looking at opportunities to grow our footprint to allow us to leverage our current distribution network in return to our five new stores a year goal in 2026. Our distribution, home delivery, and customer service teams continue to do an excellent job controlling expenses while furnishing happiness to our customers. Each team does a great job of balancing the number of team members to the workflow demand needed due to natural turnover. Our success in distribution, home delivery, and customer service is due to having team members controlling all aspects of the final mile delivery to the customer. We do not outsource any of these key functions of our business to a third-party company. And we are proud that our regret-free experience is an integral part of our unwavering service that helps separate us from our competitors. Throughout our 140-year journey, we have navigated economic headwinds some of today's challenges. Housing affordability, high interest rates, tariffs, inflation concerns, and geopolitical uncertainties. What sets us apart is our trusted Haverty brand, our debt-free balance sheet, our operational consistency, our integrity, our consumer-focused in-home design, and our dedicated Haverty team members. Looking into the future, these competitive advantages position us to capture market share.