Q2 2020 Haverty Furniture Companies Inc Earnings Call
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Good day and welcome to the Havertys second 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 Here. 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 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 Exchange Commission.
Our president CEO 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 arc Q2 conference call.
As we previously previously released our stores and distribution teams to close the entire month of April due to cold at 19 to comply with government NCTC requirements to protect our team members and customers.
Sales for the quarter were 120 10 million compared to 191 million in Q2 2019.
We were pleased to open most of our stores may one operating with a limited staff a distribution delivery teams began delivering later that week.
We quickly realized a much stronger demand we expected.
May and June written sales were up 13.9% with comparable store written sales up 17.5%.
Our delivered sales were down 13.4% for that same period, because we were scrambling to build back our delivery and distribution staff.
And bringing oversold products from vendors, who would close also during the quarter.
We now have a very strong backlog of orders.
This dramatic reversal of direction was unprecedented for havertys an entire industry.
We found ourselves in the interesting position of not only playing defense, but now playing an aggressive offense and we've been doing a lot over the last several months.
Clearly the importance of home is a major trend.
A recent article from Mckenzie used the term the whole body economy, we are in a sweet spot for now.
We're working very closely with our vendors to prioritize shipments, while we're having to pay increase pay for our distribution and delivery team members to handle the product.
Wrapping up our delivery and are receiving to match our written business is a difficult challenge.
But we feel that we'll be able to service and supply our customers better than most of our competitors in the coming months.
Most of our current key statistics look very good.
We're seeing traffic written average ticket sales per square foot closing rates and gross margins at record levels.
This is creating record sales with the significantly reduce staff and reduce store hours.
Because of Cobot 19, we Havent challenge with a designers with home visits were doing more virtual and three d. room planning into getting excellent response and feedback.
This double digit sales pace continues if the customer stays focused on making home her top priority and if we operate at higher performance levels.
We know that there will be change and because of the problems with getting product there will be some cancellation issues.
Well, we're in an energizing time with the possibility that we could see long term prioritizing of home over other areas.
These types of required us to change in many areas in most of that is a good long term adjustment.
The changes, we're making will be good for our future business.
What we do not know is what cobot 19 will do and whether we'll have to adjust or close in the months ahead.
If that happens we will be in a much better prepared position and less impacted than we were in March and April.
Our cash management and exceptionally strong balance sheet will put us in a sound position to deal with the ongoing uncertainty from Cove at night team as we strive to deliver a powerful front runner performance in our industry.
We have a special opportunity that we've not seen in decades to make the kind of break for through that we have believed that we should be producing.
We're well positioned to make that breakthrough happen.
We're extremely proud of our teams and all of our regions, who continued to focus on serving our customers and delivering a resilient performance these past months.
We're in very encouraged by the current business conditions and optimistic these trends will continue through 2020 and into 2021.
I'll turn the call back over to Richard pair CFO.
Thank you clearance.
In response to the Cobot 19 pandemic, we closed all of our retail locations on March 19th and halted deliveries on March 21st in the first quarter. Our stores began to reopened on may 1st with deliveries ramping back up beginning on may fit with reduced capacity.
The closures and subsequent reopening and delivery activities had a significant impact on our financial statements during the quarter.
In the second quarter of 2020 sales were 110 million versus 42.7 with a 42.7% decrease over the prior year quarter.
Comparable store sales metrics are not meaningful since our stores were closed for a period of time during the second quarter of 2020.
Our gross profit margins increased 20 basis points from 54.0%, a 54.2% due to merchant merchandise pricing and mix and fewer markdowns.
Selling general and administrative expenses decreased $23.1 million or 24.2% $72.6 million. This decrease reflects the measures taken as a part of our business continuity plan in general we had less selling expenses as our stores were closed in April reduce.
Salary and benefit expenses and reduced marketing and advertising costs.
We furloughed over 3000 team members on April 1st and cover the healthcare premiums for these individuals which totaled $2.1 million.
Effective April Thirtyth, we instituted a approximate 35% head count reduction in incurred $1.7 billion of severance costs.
During the quarter, we reduced marketing and advertising expense expenses $3.5 million over the prior quarter as our operations were temporarily shut down in April.
During the second quarter of 2020, we recorded a $31.6 million gain on our previously announced sales leaseback transaction on three of our warehouse distribution facilities. This transaction generated gross sales process quote proceeds of $70 million and further solidifies our companies look.
Entity and positions us very well for the future.
We recorded net interest expense of $200000 in the second quarter of 2020 versus interest income of $339000 and the second quarter of last year.
During the second quarter. This year, we incurred interest costs associated with drawing down on our revolving credit facility.
Income before income taxes increased $10.4 million to $18.6 million, our tax expense was $5 million during the second quarter of 2020, which resulted in an effective tax rate of 26.8%.
Net income for the second quarter point, 20 was $13.6 million or 72 cents per diluted share on our common stock compared to net income of $6 million or 29 cents per share in a comparable quarter last year.
Excluding the gain on the sale of our properties. Our adjusted earnings per share was at 52 cents loss.
Now turning to our balance sheet at the ended the second quarter. Our inventories were 100 $104.8 million, which was flat with our December 31, 2019 balance and down 4.4 million versus the second quarter of last year's balance.
We ended the quarter with $151.1 billion of cash and cash equivalents.
During the quarter, we paid off the 43.8 million dollar previously drawn on our revolving credit facility.
According Accordingly, we have no funded debt on our balance sheet at the end of Q2 2020.
Looking at some of our uses of cash flow Capex.
Was $1.8 million for the second quarter of 2020 and $4.3 million for the first half of this year.
We also paid $2.8 million.
In the second quarter of 2000 $26.6 million in the first half 2020 on regular quarterly dividends.
As stated in our earnings release, our board of directors authorized and declared the Companys third quarter dividend will be increase back to 20 cents per share on the common stock.
This represents a 33% increase over the reduced 15 cents per share that was paid out last quarter. If you recall our board of directors reduced the second quarter dividend, 25% from 20 cents to 15 cents as a part of our business continuity plan.
In addition, the board approved the resumption of the company stock repurchase plan that was suspended in March.
Also as a part of our business continuity plan.
We purchased $6.8 million of common stock during the first quarter of this year and we had no buyback activity in the second quarter.
We have $29.7 million remaining under current authorization in our buyback program.
Due to the uncertainty of the pandemic, we are no longer providing guidance on our gross margin or as gene a expense expectations.
Our planned Capex for 2020 has been increased to $9.6 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 expense.
T upgrades focused on stores and distribution facilities.
We will open one new location the Dallas Fort worth area in 2020, we closed an outlet store in Atlanta market in the first quarter and we closed another location in the Dallas Fort worth area in July as a part of our original store planning. So our square footage is going to be slightly lower at the end of this year.
We expect our overall tax rate in 2020 to be approximately 25%, excluding any impact from the vesting of stock based compensation awards or other discrete items, our federal tax rate is expected to be 21% and state and local taxes make up the remaining difference.
This completes our commentary on the second quarter financial results. We appreciate your participation in today's call an operator I'd like to ask you to open up the call for questions.
Thank you.
Hi, Matthew Light you asking question. Please cignal AI pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure you meet function is turned out to allow your signal to reach our equipment.
Again press Star one to ask a question well pause for just a moment hello, everyone and opportunity to signal for questions.
Our first question will come from Brad Thomas with Keybanc capital markets.
Hey, Good morning class Richard This is Andrew.
I appreciate more detail you all you all gave on nay yeah.
But I guess, given the changing environment I could you give us anymore color around what written trends have looked like in recent weeks and maybe in July.
The trends are consistent with what we what we released about Q2 the trends are continuing.
Okay understood.
And.
Assuming the workforce related supply constraints continue I would expect there might be less promotional activity in the coming months and maybe higher gross margins as a result.
Does that that's the right way to think about it if it well we're not concerned what.
We're not going to give us any margin estimates as Richard said, but I will say that with the demand. We have we won't be more aggressive oh, we still promote and we want to be strong in the market, particularly around labor day, which we always are the most.
Important.
Holiday of the year up, but we don't see the need to be more aggressive than what our historic plans have been and I would say that's a philosophy will probably carry through for the rest of year.
Okay, I said and in regards to these workforce challenges I just wanted to clarify this is mostly or if not all on supply chain level and that production level and not lot and not within the stores.
Yeah, I'm, sorry that you are saying this is mostly a supply chain issues at the question.
Yeah. So I'm just wondering if need be workforce related challenges. It is also be is also extended at the store level Oh, okay.
It is the supply chain issue, but also getting the the deliveries out is a challenge we are hard back we've hired back to certain levels, but we cannot get enough drivers right now to keep up with the sales that we have right now so we.
We've increased that we feel good about the position we're still hiring a it is a challenge to get people to come back.
And with some of the the federal incentives out there, but we're working on that we feel that we have a good plan.
But I don't think that will catch up to what our written delivered a written businesses with deliveries not only because of the the tough time in higher enough DARPA drivers, but in getting the product. So right now it becomes a product issue we were working very closely with our vendors we've got.
Over $100 million in orders out there we feel good about our relationships with our vendors, but catching up is going to be a challenge over the next.
Couple of months.
Okay.
Understood. Thanks, Thanks for the detail I thought the me. Thank you.
Thank you Andrew.
Thank you. Our next question will come from Anthony Lebiedzinski, let's sit out again company.
Hi, Good morning, and thank you for taking my question. So.
As far as your delivery times that to the.
Customer what are those on average shed how are you guys position versus your competition.
I think we're in a better positioned than most of our competition frankly as far as getting the product Oh, we started very early with our orders already back right at the first of May we realize quickly that the demand was stronger than we anticipated we've got extremely strong vendor.
Partnerships, we have a terrific partners, particularly.
Domestically that are dedicated a great deal to us or the Mississippi people Havent had issues with some labor for the same reasons I just talked about our drivers, but I think we're getting a strong shipments we feel good about our position in comparison to most of the into.
Story, we've had long term partnerships and I think that we'll get the shipments as promised but it will take us a little while the work through that we're also having to place orders now for Chinese new year and actually for orders beyond Chinese New York, New year and those are in production or.
And placement now and I think that we'll we'll be able to get the shipments.
As well or better than most of our competition.
Got it okay.
And then in terms of the delivery time, and 70 or what are your typical customers.
I expect yeah, we have historically wanted to be able to deliver within a couple of weeks. We've realized that people are willing to wait they have to wait.
And we're out a month in some cases, we want to get back to a point, where we can deliver within two weeks, but that's going to be into the fall before we get there I mean, we've got labor day, coming up where backlog now, but we have not seen from our customers there.
Feeling of cancellation, they understand better than we expected they know that their issues and getting product and they're willing to wait so we feel pretty good about that and I hope that.
We can continue to feel good about that through the fall.
Right.
So you mentioned that as far as a stimulus programs, the and the labor constraints, but the.
Or is that the government stimulus programs.
If you think.
You bet has had a much of an impact.
And that you have seen.
In this customer not really.
Yes, that's the money.
It has had an impact on us it's definitely had an impact on our suppliers domestically, particularly as I said in Mississippi. We here at all the time, they're having trouble getting people to come back because of the pay they're getting from the government in many cases is better than they would have before.
So we're working through that we're having to pay more of it in our warehouse and delivery to get the workers back or it is definitely a challenge and I think it's going to be continued to be a challenge, particularly as the government continues to pay out those.
Cash payments.
Yeah.
But as far as the.
And consumer demand.
What do you think has been the impact of the stimulus money as people getting no yeah, well I think the I think the stimulus itself and people are sitting at home watching what's going on in their own home and they want to spend it there and they probably not being able to spend and elsewhere. So I think the cash stimulus is definite.
Really helped.
And I think it will be a factor or our customers a little different than the ones who were.
Living only on unemployment, but.
It's definitely been factor I mean, there's a lot of cash out there we've seen a slight decline in the use of credit not much bridge slide so not sure if that's a trend or not but up it seems to be a healthy consumer.
Demand at the moment.
Got it okay.
Understood. Okay, all right and it's just curious as far as much product. So our product categories have you seen the most the uptick in demand and you also talked about the.
Possible inventory.
The way since the that you may have so well we terrorists.
Sure.
Well, we may choose to bolster Dan.
Upholstery. It has been the strongest category people are in their family room, they want to have that upgraded and updated and I think that's the strongest area. We've had some issues supply issues and in some of the mattress category because some of that.
Those materials are P related materials and their restricted so some of our.
Our mattress embedding suppliers have had issues getting production on a timely manner to us.
But we've had pretty good increase Richard Yeah. If you look at the end no no GE enough in the 10-Q, you can see that occasional category to the percent of sales is gone from last year for the quarter was 7.6 <unk> up to 10.2 at the love the office furniture.
And going the opposite direction mattresses have come down from 11, and a half person sales down to 9.4 to says resistant kind of come down slightly in that same same category. So yes. The occasional category really has jumped up in the quarter and then obviously bedroom furniture to a lesser degree.
Got it.
Well, thank you and best of luck.
Thank you Anthony.
Thank you I am not showing any further questions in the queue. At this time I would now like to hand, the call back over to raise your hair for any closing remarks.
Well, we appreciate everyone's participation in today's call me look forward to talking to you in the future when we release our third quarter results.
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