Q3 2020 Haverty Furniture Companies Inc Earnings Call

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Good day and welcome to the Havertys 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 Here Chief Financial Officer. 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. 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 Securities and Exchange Commission.

Our president and 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 have 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 was 97 cents earnings per share compared to 6.1 million and 31 cents per share last year.

The major contributing factors are strong gross margins up 2.7% and SGN, a 3.7% lower.

We had lower advertising expense and lower operating costs across almost all categories.

Well, we're seeing pressure to increased personnel cost and warehouse and distribution, we're committed to holding our cost in the coming quarters in most of our S. United 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.

Yeah. The 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.

Internet sales are highest producing store at 3.9% of sales up over 80%.

Buy online pickup 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 are dedicated to making it as easy as possible for our customers to interact with us anyway. She wants.

A recent driver of our business is what I call a triple double.

This has never been a change since we began measuring.

However, in several periods and weekends over the past two months, we've experienced a triple double.

Double digit increase in traffic closing rate and average ticket.

Well. This is highly unusual as it is in basketball is 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 Havertys 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 Havertys brand.

We believe that our 135 years of helping our customers vision of their home come true.

As a foundation that our customers rely on especially in difficult times.

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 are in better position than most of our competition and 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 me was 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 in and play a part in the inevitable disruption that our industry is experience.

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 are all part of team Havertys and are coming together to serve our customer.

Tomorrow, we're celebrating our first Founder's day October Thirtyth.

On JJ Havertys birthday.

While the celebration is in memory of JJ Havertys dedicated to our valued team members who are building havertys for the next 135 years.

And we thank them for their tremendously hard work and dedication to havertys, our customers and to each other.

We are certainly quite blessed to be in the business of serving homes and the best part of the country during a pandemic.

We are dedicated to building our business by being the best and justifying a customer's 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 [noise] excuse me 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 and administrative expenses decreased $4.1 million or 3.9% to 100.1 million and fell to 46% of cells 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 dollar 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 $51000 in the third quarter of 2020 versus interest income of $292000 in the third quarter of last year.

Income before income taxes increased $16.4 million to $24.5 million our.

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 97 cents per diluted share on our common stock compared to net income of $6.1 million or 31 cents per share in the 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 you from the December 31st 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 billion of common stock, which equates to 614054 shares during the third quarter of this year.

Year to date, we purchased $19.7 million or 1 million 33165 shares.

We have $16.8 million remaining under current authorization and our buyback program.

Our earnings release list 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 somewhere 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 SGN expenses for the fourth quarter are expected to be in the $67 million to $69 million range compared to 69.6 million for the same cost in 2019.

The variable type costs within ESS DNA 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.

He 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 one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

And again press star one to ask a question.

We'll take our first question from Brad Thomas with Keybanc capital markets.

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

Thank you Brad good morning.

I loved the triple double analogy my favorite [laughter] [laughter].

[laughter] I was hoping you could give us a little bit more color on the trends through the quarter.

You know how things have had started out here in for Q.

And you know give us any insight into how we should think about.

They deliver inside the business and your ability to start walking through some of these strong orders that you had in Threeq you.

Oh, Thank you Brett Let me, let me start and then and then clearance can fill in so quarter to date in the fourth quarter were seen similar metrics that we saw in terms of what we indicated the written sales for the third quarter being up 22.8% were seeing same ballpark area. So far I'm in into this.

Quarter, and we've we've done some things in terms of.

Making some investments we talked about our Capex we are.

We're we're besting some additional capex spend on our distribution side as we as we ramp up our our delivery capacity. We talk also a little bit about that or whats implied in our variable cost as we go from the the the the third quarter to the fourth quarter as well.

We're going to see some slight increases as we indicated going from 17.3% up to 70.8. Some of that is additional personnel costs in the delivery in the warehouse and transportation areas.

We've we've we have added some people in that area. Our overall head count is still down about 26% from where we were pre co bid I think it was down 35% in the last quarter. So we are adding back personnel as we as we ramp up our.

Our distribution capabilities I will say the third quarter was Oh, if you look over the last 18 years and 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 a 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 a an inventory build as soon as that product comes in it basically goes back out in terms of deliveries, but we.

I have a a lot 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 to be seem to be heading in the right direction going into the 2021.

And just to follow up on that a little bit I think the customer deposit number that you.

Reported on the balance sheet to $88 million I mean, it looks like the highest number in company history at least in my model.

Yes, how are you feeling about your ability due to.

Works 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 won't come.

We'll go drag until 2021.

Brad I think this is Clarence I do think that this will take us into next year.

Our backlog or his can stay it's stayed pretty consistent which is higher than we've ever had a we do have an enormous amount of product coming in.

Much of it is sold.

We have well over a thousand containers on the water and more coming.

So I I know that this this will carry over into the first quarter, maybe end of the second quarter. So with this consistent sales trends.

And.

The backlog.

I don't see that we'll be able to fit fit 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 Gotcha very helpful clarity, if I could squeeze one more in just as we're thinking about it.

Fine tuning models for 2021, it seems that you all are going to start the year Hope you know play with momentum and backlog. So the all country you get a very easy comparisons, particularly into Q3.

Three Q <unk> strong.

Strong from an earnings perspective isn't it into nice to get Yannick number to 4% comparison lots you said it for a very good year P. on 2021, I guess can you help me just think about some of the offsets.

For example on the gross margin line.

We need to see that come back a little bit because you won't have to be you know.

A more normal level of promotion in the back half on.

Yes, you know side are there you know cost you're going to have to put back in next year. How should we think about from a lot of its opposite 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 we right now is a very non promotional time periods. So you have to make assessments of how long do you think this will last.

You know 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 S.G.N.A. side. We've seen we had some incredible improvements there in the in the third quarter, we talked about some of the increases expected for the fourth quarter on both on both the variable in the non variable.

We don't want to get are up our head count back to where we were pre cove. It but we are ramping it back up some on the delivery side, but you know I don't I don't want our head count my goals is for the head count not get you know I'd like to have it hover around that 20% number down 20% and kind of how.

Oldest there from where we were but you're still going to you.

You know we have added some costs back, but and we factor that in our fourth quarter numbers that we've given.

Clarence I don't know if you have any 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 products that we develop we're doing more special order more custom ad.

And I I don't see our gross profit margins coming down from where they are.

Really helpful detail. 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 one at this time.

And we currently have no further questions I would now like to turn the conference back to Mr., Richard Harris 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.

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