Q3 2021 Haverty Furniture Companies Inc Earnings Call

October 29, 2021

Okay.

I'll come to the H B T third quarter 2021 financial results Conference call Today's conference is being recorded.

At this time I would like to turn the presentation over to Mr. Richard Hare, Chief Financial Officer. Please go ahead Sir.

Thank you operator during this conference call, we 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.

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 chairman and CEO Clarence Smith will now give you an update on our results and then our president Steve Burdick, who will provide additional commentary about our business.

Good morning.

Thank you for joining our 2021 third quarter conference call.

We're very pleased with another record quarter with sales of $264 million.

And net income of $24 2 million.

Our team has done an outstanding job in producing this performance during the ongoing COVID-19 concerns significant product pricing and increases major hiring challenges, especially in warehouse and distribution.

Rising operating costs and unprecedented supply chain disruptions.

I believe that we've outperformed the competition and being able to deliver to our customers.

We're very pleased with the efforts of our merchandising team and the pricing discipline at the store level.

Even with the unusual and significant <unk> and LIFO charges, we increased our gross margins and reached record operating profits.

Our available inventories in the best shape, we've had in over a year.

We're finally restarting new product development that was on hold due to COVID-19 and the massive backlog of sold orders.

Clearly our priority focus is bringing in Seoul, merchandize to bring down our backlogs and to better serve our customers. However, we're home furnishings retailer and fashion and style are important drivers of sales.

We're always excited to see the latest design and styles hit our floors, which is an important differentiator for <unk>.

In the past several months, we've added over 500 online exclusive products, including outdoor products, especially occasional items, which have had good response.

We greatly appreciate our manufacturing partners in China, and Vietnam, who struggled with Covid shutdowns of the past several months, but are opening back up and increasing their production levels.

Because of the Covid related shutdowns, we will have gaps and imported products, creating some out of stocks, especially in case goods.

Our merchandising and supply teams have a strategy to soften this GAAP related to the Vietnam factory shutdowns.

We expect to end 2021, with a 121 stores one store over last year in.

In 2022, we have plans to open five stores netting three.

We are evaluating numerous opportunities for locations, which we can serve and our distribution footprint.

We've been pleased with our strategy of converting existing retail space to have any stores.

Recently, we've had very good results with stores in the 30% to 35000 square foot size.

Building size with more availability.

With the importance of our website and special order tools, we can present, a large selection set of merchandise without requiring a much larger store.

We're in the process of planning 2022 Capex.

We expect that will be in the same range as we had last this year approximately $35 million net.

Investments in stores and renovations of the largest block are.

Our single largest investment will be expansion of our Virginia distribution Center, which we bought back earlier this year.

We're converting the facility from a regional home delivery center to a full distribution center to better serve our Atlantic coast growth.

The expansion will allow us to receive direct shipments from the Norfolk port reducing shipment costs and allow for quicker deliveries.

Our I T and marketing teams are mid major investments in remaking and upgrading our website to be the best in class industry leader.

We're focused on ease of use and inspiring our customers throughout the process utilizing the adobe platform.

It will align with an upgraded three D floor planner significantly improved graphics design in search.

The new site will have enhanced personalization better presentation tools for H designers and upgraded analytics and reporting.

We're expecting the rollout of the new site early in the second quarter next year.

As we just released our fourth quarter written sales were down approximately three 5% from the same period last year with delivered sales up 17, 5% over last year.

For perspective. This year's Q4 written sales to date are up 29% and delivered are up 41, 5% over 2019.

We're having record delivery weeks has received more incoming sold product and having much better inventory compared to last year.

As all of retail is struggling with delayed shipments for Christmas.

We also have real challenges and supply chain and I'd like to ask Steve Burdette President to give us an update on our supply chain status.

Thank you Clarence.

I am thrilled with our results for the third quarter, our performance could not have happened without the dedication of our entire team in the stores distribution centers home delivery service and home office him I want to congratulate personally for their efforts.

Our supply chain network has been able to increase the flow of products into our warehouses over the third quarter.

Our warehouse inventory levels rose over 8% for the third quarter and we are seeing our inventories continue to rise so far in October.

We will expect to see a slowdown in imports arriving in the November December timeframe.

The headwinds during the quarter continued with the Vietnam shutdown beginning in late July rising container rates container congestion at the ports along with container capacity staffing issues with the continued spread of the Delta variant and trucking pressures moving products within our network.

There was a bright spot during the quarter with the phone supply as our vendors do.

We do not see this as an issue moving into the fourth quarter.

Vietnam began its shutdown in late July and things accelerated in August for a majority of our factories were closed for the months of August and September we are getting positive news from our vendors that they began opening at the beginning of October.

However, it will be a slow process to get back to 100% production.

You already have the vendors feel like they will be able to get back to 50% to 75% of production by Chinese new year with a return to 100% not happening until late first quarter next year.

A few vendors did give a more upbeat outlook that they will be back to 100% production by the end of November because of the safety and medical protocols that they had in place.

Also we continue to see shipments coming from Vietnam now.

Container capacity container rates and port congestion continued to be areas of concern. We expect we expect these issues to continue well into 2022.

Our container prices on the spot market continued to increase during the quarter. However, we are seeing a downward trend in October.

We continue to balance our shifting mix, so that no more than 20% to 30% is on the water at one time at the spot market rates.

Our focus on ensuring that we can provide our customers with a more consistent flow of product, we incurred higher freight costs during the quarter and a substantial amount of demurrage and detention expense that we expect will be reduced significantly during the fourth quarter.

Staffing continues to be a concern as it is not only impacting our distribution delivery and service areas that is impacting our manufacturers and trucking partners. We continue to evaluate each of our areas of the business to ensure that we're competitive so that we are attracting the best talent. We did start seeing some traction in the latter part of the <unk>.

Quarter, but still have opportunities we can we consider our people our most valued asset as we know our services what sets us apart from our competitors.

We have seen our average age of the undelivered pool, continuing to increase to nine weeks from eight weeks over the quarter or.

Our special order lead times have stabilized due to the improvement in film suppliers and we have started seeing higher production quantities from our domestic suppliers over the last four weeks.

Especially social order business is still suffering from these delays, but we feel confident that we will be able to see a bounce back due to a more confident sales team seeing the improvement in our lead times.

We remain optimistic for the fourth quarter. Our teams are doing a wonderful job communicating with our customers regarding any delays with their products, while there will be a slowdown in the import receipts from Vietnam. We are expecting improved shipping times from our domestic suppliers and improvements in shipments from a bedding suppliers to help offset some of these delays.

I would like to once again, thank the entire have any team and our suppliers for all their support and efforts in making the third quarter a record for <unk> now I'll turn the call over to Richard.

Thank you, Steve and good morning in the third quarter of 2021 delivered sales were $264 million, a 19, 7% increase over the prior year quarter total written sales for the third quarter of 2021 were up 2% over the prior year period.

Comparable store sales were up 17, 7% over the prior year period.

Our gross profit margin increased 60 basis points from 56, 2% to 56, 8% due to better merchandise pricing and mix and less promotional activity. During the quarter. These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product.

Yes.

Selling general and administrative expenses increased $16 1 million or 16% to $116 $2 million, primarily due to increased sales activity.

However, as a percentage of sales these costs declined 4800 basis points to 44, 6% from 46%.

As Steve mentioned earlier during the third quarter of 2021, we did experienced increased port congestion and we incurred significant demurrage costs of approximately $2 $3 million, which negatively impacted our selling general and administrative costs.

However, as demonstrated in the past four quarters, our financial model has substantial operating leverage at these sales levels.

Other income in the third quarter of 2020 was $2 4 billion, which.

Which includes the gain on surplus property that was adjacent to our distribution center in Dallas, Texas.

Income before income taxes increased seven 4 million to $31 9 million.

Our tax expense was $7 7 million during the third quarter of 2021, which resulted in an effective tax rate of 24%. 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 third quarter of 2021 was $24 2 million or $1 31 per diluted share on our common stock compared to net income of $18 3 million or <unk> 97 per share in the comparable quarter last year.

Now looking at our balance sheet at the end of the third quarter, our inventories were $119 million, which was actually up $29 $1 million from the December 31, 2020 balance and up $28 million versus the Q3 2020 balance.

At the end of the third quarter, our customer deposits were $121 million, which was up $34 million from the December 31, 2020, and up $31 7 million versus the Q3 2020 balance.

We ended the quarter with $232 $3 million of cash and cash equivalents.

We have no funded debt on our balance sheet at the end of Q3 2021.

Looking at some of the uses of cash flow capital expenditures were $28 1 million for the first nine months of 2021, and we paid $13 million of regular dividend during the first nine months of 2021.

During the third quarter, we purchased $19 $5 million of.

Common stock that's 537196 shares.

As previously reported our board of directors authorized an additional $25 billion of share repurchases at the end of the third quarter of 2021, we have $22 $3 million remaining under current authorization in our buyback program.

Our earnings release list out several additional forward looking statements, indicating our future expectations of certain financial metrics I would like to highlight a few but please refer to our press release for additional commentary.

We continue to expect our gross profit margins for 2021 to be between $56 556, 8%. We anticipate gross profit margins will be impacted by our current estimate of product and freight costs and changes in our LIFO reserve.

Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the 278 $281 million range, an increase over our previous estimate primarily due to rising warehouse into merger call.

The variable type costs within SG&A for 2021 are expected to be in the range of 17% to 17, 3%.

Our planned Capex for 2021 remains at $37 million anticipated new replacement stores Remodels and expansions account for $18 7 million investments in our distribution network are expected to be $15 2 million and investments in our information technology are expected to be.

Approximately $3 1 million in 2021.

Our anticipated effective tax rate for this year is expected to be 24%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation.

This completes my commentary on the third quarter financial results I'd like to turn the call back over to clearance Smith, our chairman and CEO.

We are very pleased with our record performance year underway.

We're comparing well with the second half records of 2020 and against 2019.

We believe that the dramatic return to home that Covid precipitated us change the importance of home for years to come.

Quote following the boomers, but millennials and Gen xers who've moved to designing homes because of life changes related to having children.

We're having another housing boom, where people want to move to the suburbs.

We're getting back to the 67% of our households being homeowners.

We will continue to grow in importance you can now shop bank see the Doctor and go to church from home. This is going to transform our nation in terms of level of productivity innovation and new ideas unquote.

However, it is a 136 year history and strength is in serving the home furnishing needs and the 16, Southern Atlantic and Central States.

These areas are gaining the most transplants from the rest of the country.

We think that our locations premium product merchandising H design services and dedicated distribution positions us to continue to grow from the all time record set.

In the past years.

We believe we have we have the experience the deep resources and strong commitment to growing our sales and maintain strong double digit operating profits in the years ahead.

Operator, we'd like to now open the call up for questions.

Yes, Sir and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

We are using a speaker phone. Please make sure your mute function is turned off.

No.

Again that is star.

One if you would like to ask a question.

And well now take a question from Brad Thomas with Keybanc capital markets.

Hi, Good morning, Good morning, Clarence Steve and Richard.

Well and good morning grants on all the strong momentum here year to date really on track for for quite a year in a difficult operating environment.

Thank you Brad.

A couple of questions if I could.

The first is just how to think about the size of the backlog that you all are working with right now and how big that order book is and what kind of benefit in dollars that could potentially be to sales as that starts to normalize for you.

How should we think about quantifying that to the extent you want to share anything with us.

Hey, Brad This is Richard I would say, we still have a very healthy backlog last year's backlog in the third quarter was exceptional this year's backlog.

Is up over over 40% from last year. So we do have and indeed, a very healthy backlog going into the fourth quarter, but it has come down in the quarter.

It is healthy.

We feel like it's something we're now managing.

So.

It's significant we feel good about what's going to happen this quarter because a lot of it will be delivered this quarter.

Got it really helpful.

And moving on to the written side of the business.

You noted that net quarter to date, the written sales are down.

A little bit here.

Can you talk about maybe what may be affecting that has there been any changes in how youre promoting any changes and perhaps what youre seeing out of customer behavior.

How do you feel about the cadence of your written orders.

As we think about kind of modeling the year over year growth, obviously from an absolute value youre running at tremendous levels versus pre pandemic I'm just trying to think about what that growth rate may look like going forward.

Well out of stocks certainly affected.

And some of our best sellers were flowing in a lot of the product coming in is already sold going out. So if you are coming in today on some of our best selling let's just in case goods. The delivery is going to be out it could be months could be into next year. So people will delay if I can.

Get the product what we do find as any product that we get back in stock immediately become our best sellers.

So.

The backlog that affects our best sellers definitely effects.

People feel about bond product now they want to know that they can get it.

And I think one of the things that they're recognizing it.

We're planning on this is that they need to place the order to be able to get in line to get it.

So.

The out of stocks, even though it's better than last year overall does affect it also and Steve referred to this it particularly affects our special orders.

<unk>.

We've been pushing when it first started that we'd be out about a month or special order you order upholstery and get it in about a month.

We're pleased with the domestic producers now in price increase.

Increasing there.

Their product and being able to get it towards quicker, but it is still something pushed out there from what has been driving our business in other words special orders as you remember was about 20% of our upholstery business.

Had to back off some of that and it reacts.

We react to it because they can't get it they don't know when theyre going to get it.

Having the product effects incoming orders.

It's still a very strong level, but it does affect what people feel about.

Making a purchase.

That's really helpful. Thanks, so much clearance and good luck to you all in the fourth quarter.

Thank you Brian Thanks, Brad.

And once again that is star one if you would like to ask a question.

Well pause for just a moment.

And it appears there are no further telephone questions I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Well. Thank you for your petition participation in today's call. We look forward to tell talking with you in the future when we released our fourth quarter results.

And once again that does conclude today's conference. We thank you all for your participation.

Okay.

[music].

Okay.

[music].

Good day and welcome to the H B T third quarter 2021 financial results Conference call. Today's conference is being recorded at this time I would like to turn the presentation over to Mr. Richard Hare, Chief Financial Officer. Please go ahead Sir.

Thank you operator during this conference call, we 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 <unk>.

<unk> Exchange Commission.

Our chairman and CEO Clarence Smith will now give you an update on our results and then our president Steve Burdick, who will provide additional commentary about our business.

Good morning.

Thank you for joining our 2021 third quarter conference call.

We're very pleased with another record quarter with sales of $264 million.

And net income of $24 2 million.

Our team has done an outstanding job in producing this performance through the ongoing COVID-19 concerns significant product pricing and increases major hiring challenges, especially in warehouse and distribution.

Rising operating costs and unprecedented supply chain disruptions.

I believe that we've outperformed the competition and being able to deliver to our customers.

We're very pleased with the efforts of our merchandising team and the pricing discipline at the store level.

Even with the unusual and significant carriage and LIFO charges, we increased our gross margins and reached record operating profits.

Our available inventories in the best shape, we've had in over a year.

We're finally restarting new product development that was on hold due to COVID-19 and the massive backlog of sold orders.

Clearly our priority focus is bringing in Seoul merchandise to bring down our backlogs and to better serve our customers.

However, we are home furnishings retailer and fashion and style are important drivers of sales.

We're always excited to see the latest design and style set our floors, which is an important differentiator for <unk> and.

The past several months, we've added over 500 online exclusive products, including outdoor products, especially occasional items, which have had good response.

We greatly appreciate our manufacturing partners in China, and Vietnam, who struggled with Covid shutdowns of the past several months.

But are opening back up and increasing their production levels.

Because of the Covid related shutdowns, we will have gaps and imported products, creating some out of stocks, especially in case goods.

Our merchandising and supply teams have a strategy to soften this GAAP related to the Vietnam factory shutdowns.

We expect to end 2021, with a 121 stores one store over last year in.

In 2022, we have plans to open five stores netting three.

We are evaluating numerous opportunities for locations, which we can serve and our distribution footprint.

We've been pleased with our strategy of converting existing retail space to have any stores.

<unk>, we've had very good results with stores in the 30% to 35000 square foot size.

Building size with more availability.

With the importance of our website and special order tools, we can present, a large selection set of merchandise without requiring a much larger store.

Where does the process of planning 2022 Capex.

We expect that we will be in the same range as we had less this year approximately $35 million net.

Investments in stores and renovations of the largest block.

Our single largest investment will be expansion of our Virginia distribution Center, which we bought back earlier this year.

We're converting the facility from a regional home delivery center to a full distribution center to better serve our Atlantic coast growth.

The expansion will allow us to receive direct shipments from the north port reducing shipment costs and allow for quicker deliveries.

R T and marketing teams are mid major investments in remaking upgrading our website to be the best in class industry leader.

We're focused on ease of use and inspiring our customers throughout the process utilizing the adobe platform.

It will align with an upgraded three D floor planner significantly improved graphics design in search.

The new site will have enhanced personalization better presentation tools for H designers and upgraded analytics and reporting.

We're expecting the rollout of the new site early in the second quarter next year.

As we just released our fourth quarter written sales were down approximately three 5% from the same period last year with delivered sales up 17, 5% over last year.

For perspective. This year's Q4 written sales to date are up 29% and delivered are up 41, 5% over 2019.

We're having record delivery weeks has received more incoming sold product and having much better inventory compared to last year.

As all of our retailers struggling with delayed shipments for Christmas.

We also have real challenges and supply chain and I'd like to ask Steve Burdette President to give us an update on our supply chain status.

Thank you Clarence.

I am thrilled with our results for the third quarter.

Performance could not have happened without the dedication of our entire team in the stores distribution centers home delivery service and home office him I want to congratulate personally for their efforts.

Our supply chain network has been able to increase the flow of products into our warehouses over the third quarter.

Our warehouse inventory levels rose over 8% for the third quarter and we are seeing our inventories continue to rise so far in October.

We will expect to see a slowdown in imports arriving in the November December timeframe.

There was a bright spot during the quarter with the phone supply as our vendors do not see this as an issue moving into the fourth quarter.

Majority of the vendors feel like they will be able to get back to 50% to 75% of production by Chinese new year with a return to 100% not happening until late first quarter next year.

A few vendors did give a more upbeat outlook that they will be back to 100% production by the end of November because of the safety and medical protocols that they had in place also we continue to see shipments coming from Vietnam now.

Container capacity container rates and port congestion continued to be areas of concern. We expect we expect these issues to continue well into 2022.

Our container prices on the spot market continued to increase during the quarter. However, we are seeing a downward trend in October.

We continue to balance our shipping mix, so that no more than 20% to 30% is on the water at one time at the spot market rates.

Due to our focus on ensuring that we can provide our customers with a more consistent flow of product, we incurred higher freight costs during the quarter and a substantial amount of demurrage and detention expense that we expect will be reduced significantly during the fourth quarter.

<unk>, but still have opportunities we can we consider our people our most valued asset as we know our services what sets us apart from our competitors.

We have seen our average age of the undelivered pool, continuing to increase to nine weeks from eight weeks over the quarter.

Our special order lead times have stabilized due to the improvement in film suppliers and we have started seeing higher production quantities from our domestic suppliers over the last four weeks.

We remain optimistic for the fourth quarter. Our teams are doing a wonderful job communicating with our customers regarding any delays with their products, while there will be a slowdown in the import receipts from Vietnam. We are expecting improved shipping times from our domestic suppliers and improvements in shipments from our betting suppliers to help offset some of these delays.

I'd like to once again, thank the entire have any team and our suppliers for all their support and efforts in making the third quarter a record for <unk> now I'll turn the call over to Richard.

<unk> were up 17, 7% over the prior year period.

Selling.

General and administrative expenses increased $16 1 million or 16% to $116 $2 million, primarily due to increased sales activity.

However, as a percentage of sales these costs declined 4800 basis points to 44, 6% from 46%.

As Steve mentioned earlier during the third quarter of 2021, we did experienced increased port congestion and we incurred significant marriage cost of approximately $2 3 million.

Which negatively impacted our selling general and administrative costs.

However, as demonstrated in the past four quarters, our financial model has substantial operating leverage at these sales levels.

Other income in the third quarter of 2020 was $2 4 billion.

Which included the gain on surplus property that was adjacent to our distribution center in Dallas, Texas.

Income before income taxes increased $7 4 million to $31 $9 million.

Net income for the third quarter of 2021 was $24 2 million or $1 31 per diluted share on our common stock compared to net income of $18 $3 million or 97 per share in the comparable quarter last year.

Now looking at our balance sheet at the end of the third quarter, our inventories were $190 million, which was actually up $29 1 million from the December 31, 2020 balance and up $28 million versus the Q3 2020 balance.

At the end of the third quarter, our customer deposits were $121 million, which was up $34 million from the December 31, 2020, and up $31 7 million versus the Q3 2020 balance.

We ended the quarter with $232 $3 million of cash and cash equivalents.

We have no funded debt on our balance sheet at the end of Q3 2021.

Looking at some of the uses of cash flow capital expenditures were $28 1 million for the first nine months of 2021, and we paid $13 million of regular dividend during the first nine months of 2021.

During the third quarter, we purchased $19 $5 million of.

<unk> common stock at 537196 shares.

As previously reported our board of directors authorized an additional 25 billion of share repurchases at the end of the third quarter of 2021, we have $22 $3 million remaining under current authorization in our buyback program.

Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the 278 $281 million range, an increase over our previous estimate primarily due to rising warehouse in the merger call.

The variable type costs within SG&A for 2021 are expected to be in the range of 17% to 17, 3%.

Approximately $3 1 million in 2021.

Our anticipated effective tax rate for this year is expected to be 24%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation.

This completes my commentary on the third quarter financial results I'd like to turn the call back over to clearance Smith, our chairman and CEO.

We are very pleased with our record performance year underway.

We're comparing well with the second half records of 2020 and against 2019.

We believe that the dramatic return to home with Covid precipitated us change the importance of home for years to come.

We agree with the recent editorial from jewelry as a percent of an industry veteran and analyst and furniture today. This week.

Quote following the boomers millennials and Gen Xers, who have moved.

Q3 2021 Haverty Furniture Companies Inc Earnings Call

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