Q1 2020 Earnings Call

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Good day and welcome to the Havertys first quarter 2020 financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Richard hair. Please go ahead Sir.

Thank you operator during this conference call will 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, there may 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 Securities and Exchange Commission.

Our president CEO and Chairman Clark Smith will now give you an update on our results and provide commentary about our business.

Good morning, Thank you for joining our call [noise].

We have experienced a lifetime of changes since our earnings call in February.

We just reported Q4 2019, which was the first positive quarterly sales increase for the year.

And in 2019, we moved a significant amount of products to Vietnam factories from China because of the tariffs and year end 2019, only 17% of our total furniture purchases were produced in China down from over 35%.

We had just begun to be in stock on best sellers as we started the year compared to the tariff impacted situation or the first half of 2019.

We built up our inventory of much of our best selling goods prior to this year's Chinese new year.

We were scrambling to get product to complete our double digit sales increases.

Our sourcing team members were on the way to visit our Vietnamese factories to speed up deliveries.

Our merchandising and supply teams were closely watching the impact of the delayed opening of the Chinese factories due to the Corona bars.

We were concerned with the ability of Chinese workers to return to work in the Vietnamese factories and in China and the delays in critical parts would affect product delivery dates.

We expected to have some product shipment delays, which could affect stock availability and the second quarter.

For the first two months 2020, we were up 12% with solid profits and strong closing rates.

Along with increases in H design sales in average sale.

And then cobot 19 changed the world.

We started the year with team member accounts of 30 425.

Level with 2018.

We watched what other retailers we're doing in heard what the government said about closing non essential businesses and on March 19, we close all our stores in shutdown distribution two days later.

Leading our industry for what we'd hope would be two weeks.

And we paid our team members during this time.

Even though we closed the last two weeks of March our strong start for the quarter allowed us to produce profits of nine cents versus 17 cents last year.

At the first of April we made the painful decision to furlough over 3000 team members.

We canceled orders for the first time in many years to try to handle the incoming orders without overwhelming us.

During the closure, our executive team regional managers general managers and the distribution centers made extensive preparations and ultimately the difficult decision to have a reduction in force of 1200 team members.

We set the opening plans from May one where the state's allowed again, leading most of the industry.

We made the decision to pull down our revolver, even with over 60 million in cash we suspended the stock back probe buyback program and reduce capex to $5 million.

In early April we work with our largest on our largest financial transaction in our history with the $70 million sale lease back on our three owned distribution centers two of which we had recently expanded.

We move with record speed to close that transaction this past Monday.

The expected gain will help offset the anticipated losses in the second quarter.

With most of our stores now open I believe that we are one of the strongest public furniture retailers in the industry and well positioned to come through this pandemic and financial crisis.

You have seen the recent retail bankruptcies.

Unfortunately, I believe there will be more closings in the furniture industry.

We were very pleased to be able to open many of our stores on may one.

We began with a 103 stores out of 120 operating with about 25% of our sales staff on limited hours.

We're pleased with the opening results and now have 116 stores opened for the Memorial day weekend.

This past weekend, we added back much of our furloughed sales staff, which brings us back to about 50% of our former sales staffing.

The expansion of chat has been an important program for maintaining our relationship with our customers.

During the six weeks that we were close we added store managers and general managers chew up to our chat team.

We expanded hours.

To seven am to 12 am.

And added Chad agents of store managers corporate buyers and office Supervisors chats have increased 65%.

We also have created a new process for virtual design. So that we can still provide design services with a higher average tickets when customers prefer to work from home on their projects.

Internet sales are now close to 6% triple the rate last year.

We will continue to work towards making our website easier to use we will consider significantly increase our spend in digital and social marketing to reach our target customers.

We've just begun our broadcast and connected TV advertising in our teams are energized to be back with our best producers on the floor.

We're seeing strong upholstery sales as families are motivated to have their family rooms comfortable.

Our new campaign of better together started last weekend billing for Memorial day weekend, and we come back with take comfort in June, which I think should resonate with our customers.

We now expect a retail sales square square footage to be down 1.7% in 2020 with the plant closings and delaying of openings.

I feel it is somewhat ironic and prophetic that we just began our celebration of 120 135 years of history.

We've emphasized our long history, and our ability to survive 22 recessions.

Our entire team is now being severely tested unlike ever before.

Our customer has changed very quickly and we are changing with her.

As we said during the celebration that began late last year Havertys is always gained the most in tough times and these are the toughest times, we've ever seen in our history.

I'm immensely proud of our team, which has stepped up very quickly and reacted to these changes.

We are listening in responding to the challenges.

Havertys is moving fast and learning to understand reach and serve our customers the way she wants.

Our team is energized to make the second half from 20 to 20, a comeback and opportunity to strengthen havertys position in delivering outstanding value in service and gain profitable market share.

I'll now turn the call back over to rich.

Thank you clearance and good morning in response to the Cobot 19 pandemic, we closed all of our retail locations on March 19th and Ulta deliveries on March 21st in the first quarter, which had a significant impact on our financial statements.

In the first quarter of 2020 sales were 179.4 million a 4.2% decrease over the prior year quarter I comparable store sales metrics are not meaningful since our stores were closed for a period of time during the first quarter of 2020.

Our gross profit margin increased 40 basis points from 55.1% to 55.5% due to merchandising mix in and less markdowns of inventory.

Selling general and administrative expenses decreased 1.3 million to 97, and a half million dollars. This decrease included reduced marketing and advertising expenses as we temporarily shut down our operations during a portion of March.

We recorded net interest income of $214000 in the first quarter of 2020 and income before income taxes decreased $2.4 million to $2.3 million.

Our tax expense was $481000 during the first quarter of 2020, which resulted in an effective tax rate of 20.9%.

Net income for the first quarter of 2020 was $1.8 million or nine cents per diluted share on our common stock compared to net income of 3.6 million or 17 cents per share and the comparable quarter last year.

Now turning to our balance sheet at the end of the first quarter, our inventories were $110.5 million, which was up $1.2 million over the first quarter of 29 team.

And up $5.7 million over the fourth quarter of 2019.

We ended the quarter with $84.6 million of cash and cash equivalents and we've drawn down $43.8 million on our revolving credit facility.

Looking at some of the uses of cash flow Capex was two and a half million dollars for the first quarter of 2020, we also paid $3.8 billion and regularly.

Scheduled quarterly dividends, representing 20 cents per common share.

We purchased $6.8 million of common stock, which equates to 419111 shares during the first quarter. This year, we have $29.7 million remaining under current authorization and our buyback program.

Our earnings release list out several additional forward looking statements in certain financial metrics I'm going to highlight a few but please refer to our press release, where additional commentary.

Due to the uncertainty of the pandemic, we're no longer providing guidance on our gross margin or as DNA expense expectations.

Our planned Capex for 2020 has been reduced to approximately $5 million, which includes opening one location in the Dallas Fort worth area.

We closed the store in the Atlanta market and we do expect to close another location the Dallas Fort worth area. So our square footage will be slightly lower at the end the year.

Earlier this week, our board of directors declared a cash dividend a 15 cents per share on common stock and 14 cents per share on class a shares that will be paid on June 19th 2020 for shareholders of record at the close of business on June 4th 2020.

In addition, we are pleased with the recently announced closing on a sales leaseback transaction on three of our warehouse distribution facilities.

This transaction generated sales proceeds of approximately $70 million and further solidifies, our company's liquidity and positions us well for the future.

I would like to personally thank our team in Havertys as well as the team at Suntrust equity funding from Truest Financial Corp for the successful completion of this transaction.

These remarks conclude our commentary on the first quarter financial results. We appreciate your participation in today's call and I'd like to ask the operator to open the line up for questions at this time.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off without your signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow everyone and opportunity to.

Signal for questions.

And we will take our fresh question from Anthony Lebiedzinski with Sidoti and company. Please go ahead Sir.

Hey, good morning, gentlemen, thank you for taking the question. So Clarence you mentioned that you've seen strong upholstery sales just wondering if you can comment about the the rest of the business that you've seen so far since you guys we opened stores.

Well.

When we opened.

May one in the around 100 stores.

We had limited hours.

And we were keeping the keeping limited hours, we had about 25% of sales staff. We did see what I think was probably pent up demand initially.

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And I think some of that was brought about by our chat in our virtual design efforts and just people wanting to get going again on on projects.

Last week, we brought back most of our furloughed sales staff and now we're operating in about 50%.

I'll say that month today, meaning may.

We are up slightly in written business compared to last year, which is.

More than we expected we have good closing rates and good average ticket I don't really expect that trend to continue necessarily through them Madore Memorial day events, because we don't have the same amount of staff.

But we're very encouraged by the reception.

We do have a very strong backlog.

Up double digit from last year were working to complete that.

It is interesting that it's areas where people are living all the time now like I mentioned the family room, we are doing well in the home office area of people that want to have the office at home and I think people were concerned that they may be in the home with their children.

For a very long time, and so I do think Theres, a and our world I do think those.

A return to the home and that's who we serve so.

We are hoping that's a positive trend.

The economics are not great obviously with the.

With the.

Low unemployment of the high unemployment slip.

We are encouraged.

Got it yeah. Thanks for that detailed explanation. Okay. So just wondering so.

What is your expectation overall for promotions for the balance of the I know you talked about the memorial day event.

You are doing.

So that the better together evanta, but just just overall I mean, obviously you know.

Your competitors have been close for for a while some are still closed so.

I'm just wondering as to what your expectation is as far as the level of promotions that you would foresee that'd be great. Thanks.

We've been we've been pretty aggressive with credit because well the the promotional players have been and so we're we're pretty aggressive with that.

And we'll continue with that probably longer than we would've because credit may be important and probably more important than it was last year.

We've got promotions on individual categories and products, but I don't see heavy discounting that certainly not where we're going to go up I think that we've used the free delivery system and that's important because the marketplace is talking a lot about that but I don't see it.

As a lot more aggressive than last year I will say that when we opened in may.

We were pretty aggressive with the credit and delivery because that's what we felt like we needed to do and that's what we're continuing through memorial day.

Got it okay, and so a couple of other questions. If I met in May. So I know you guys are not providing specific guidance for gross margin and expenses, but I know, obviously you get a major restructuring of the workforce. So that helps that you guys quantify that but are there any other.

There are puts and takes that we should think about whether or when it comes to gross margins are expensive. So you can just give us a high level kind of view of that as to how we should think about it well let me let me comment on one area.

We're doing a lot to catch up on our distribution and our backlog and.

Cost there, we reduced the head count a good deal.

We're trying to get back to the level, that's necessary to get the deliveries out.

And there's going to be pressure and there was last year for.

Distribution cost as far as personnel and that probably will continue.

And let me just at a couple things so on that on the gross margin front you Clarence just gave you his commentary on on.

On his expectations or promotions for the balance of the year. So you can kind of baked that into your assumption and then on the DNA side, we quantified the the reduction in workforce numbers in the press release. So you have those there most of that was is going to be on the variable as opposed to fix side of DNA, but I think if you look at those things and then.

On the sale lease back we've included the sales leaseback numbers in terms of rent numbers and here I think around four plus million don't forget the offset of depreciation coming the other way. So you know the net impact of the sale leasebacks going to be less than $2 million the year impact on our PNM.

So.

Those are those are things to think about as you model modeled on the other business.

Got it that's very helpful and lastly, as far as you know the class you talked about the canceling orders I think for the first time, if I heard that correctly, but that you. Just wondering if you could just quantify as far as that you know a level of cancellations of orders.

Well it was pretty heavy but what we what we frankly did Anthony was was orders that were not made.

We cancelled and now we re issuing with what we expect.

We will need.

So a lot of that product will be bringing back but the projections that we had an initial orders based on when we were up double digit sales or just different so instead of letting that the or send out there we cancelled and now we're re issuing the quantities that we think are more appropriate.

And we're working very closely with our factories, we've got a great relationship. We want to continue those strong relationships because as product is business comes back I'm getting the product in here is going to be a factor in the fall. We're in strong inventory position now higher than our normal levels.

Honestly because of the.

We weren't selling any we weren't delivering anything but we feel good about this spring and summer.

Just depending on how sales come back the fall getting orders will be could be a factor.

Got it right well, thank you and best of luck.

Thank you Anthony.

Our next and final question will come from Bradley Thomas with Keybanc capital markets.

Hey, Good morning. This is Andrew on for Brad or I, just had a question regarding that sale leaseback transaction I was wondering if you could comment on that on what kind of increasing ran or opex on an annual basis are you expecting for is that as a result, when the transaction.

Yes.

Thanks for the question Andrew we were as we're just mentioned earlier on the sales leaseback. The net impact on our our PNM is going to be around $2 million, you've got it you're picking up the new rent of four plus million, but your is offset by the depreciation that we no longer have since we sold the asset. So we up we brought in.

Steve to $70 million and then.

Our DNA costs will go up about one $1.82 million a year.

Okay, I guess that.

And then.

Following this transaction you know we now historically you've on a number of assets.

You remind us what distribution facilities and and the number of stores.

Alan currently.

Yes so.

We still are about a third of our properties.

At about 39 are and we as we disclosed in our 10-K at the ended the year the book value for those assets is approximately $70 million.

The rest of our properties are in essence lease.

Okay, I guess that and I guess my last question is that.

You gave a lot of good detail I, how customers are changing expand I correct here, but what about.

And I know average selling price you mentioned.

It's been somewhat stronger how how is that comparing to last year and I guess.

Let me see any changes are there any other segments of the business, including a now.

Take late night for significant.

Okay I'd say the average ticket is stayed about the same and that's at a time when we really aren't using our decorators as much other than virtually.

So we feel we feel good about that the mattress business has been okay. Oh since we opened its not the leader, but it's been okay. So I think that will continue to come to strengthen this business Oh strength of our business over the last year and I think it will be will be going forward.

Great well, that's all for me thanks again.

Thank you Andrew.

[noise] [noise] well. Thank you. We appreciate I believe that was the last question from the operator. So we appreciate your participation in today's call and we look forward to talking with you in the future when we release, our second quarter results. Thanks again.

This concludes today's call. Thank you for your participation you may now disconnect.

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