Q1 2022 Haverty Furniture Companies Inc Earnings Call

Please standby we're about to begin.

Good day and welcome to the Haverty furniture first quarter results 2022 Conference call. Today's conference is being recorded at this time I would like to turn the conference over to 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 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 Companys reports filed with the Securities and Exchange Commission.

Our chairman and CEO Clarence Smith is a little under the weather. This morning, and he will not be on todays call are president steeper debt will now give you an update on our results and comment on our business.

Richard Good morning, and thank you for joining our 2022 first quarter conference call.

We are pleased to report a record first quarter in sales and a strong profit of $1 11 per share versus $1 four per share last year.

We had outstanding gross profit margins of 59%.

Demonstrating our ability to adjust our retail pricing to our cost increases and our values in the marketplace.

We had good pricing discipline in the stores and with our merchandise teams to help build a record gross margins.

Our business was good during the early part of the quarter and both delivered in written business compared to the very strong results in 2021 due to our record Presidents' day weekend.

For the quarter, our sales performance could be attributed to our continued improvement in our average ticket of over $3000 and improvement in our special orders and more H design in home opportunities.

However, we now face headwinds, including inflation rising interest rates continued supply chain disruptions softening consumer confidence and an adverse geopolitical situation.

Overall, our written sales were down eight 8% for the quarter with March being the weakest month.

We have a very strong backlog of undelivered orders, but our average age has increased slightly to 11 weeks.

However.

With our planned increase in shipments on the water, we expect to be able to fulfill a number of the back orders and reduced the average age of the undelivered orders over the next several quarters.

This past weekend, we opened our third store in the Austin market in <unk>, Texas.

We believe that we are beautifully positioned to build our business and that dynamic market.

This year, we expect to open a relocated store in Indianapolis.

Store in Gainesville, Virginia, which is a suburb of Washington D C and another store in an existing market not yet announced.

We plan to net an additional two stores in 2022, bringing our store count to 123 at year end, which will be a 1% to 2% growth in retail square footage.

We are closely evaluating new store opportunities to expand our reach within our distribution footprint.

We have several sites, we are pursuing but we will be opportunistic and making the best long term deals for the company.

We believe that we are very well positioned in many of the fastest growing markets in the country and offer a unique better quality product mix with broad custom and special order opportunities.

Our merchandising teams are excited about the new products and designs, which are finally, arriving following the COVID-19 delays.

It is energizing for the store teams to have the new designs hit the floor sets.

Several of our new collections have already jumped to the best seller list.

We are pleased with our recently expanded curated product selections that are held in third party warehouses.

This allows us to expand our selections and serve our customers quicker and move into new home furnishing categories without inventory risk.

Our strongest categories are occasional home office upholstery and outdoor.

Viewing during Q1, we continued to experience challenges in our supply chain network.

Our import vendors have been slower to recover from the shutdowns in 2021 and the recent COVID-19 restrictions in Shanghai have not helped.

However, we do remain optimistic that we are seeing an increase in production over the last 60 days out of Vietnam, which should help to offset some of these delays.

Also we continue to be encouraged with the reduction in lead times from our domestic upholstery vendors, which we have seen lead times reduced by 10% to 25%.

Our expectations are this will continue to improve during Q2.

Our special order business has improved by 20% from Q4 to Q1 in total dollars, which is a tremendous improvement and.

And we remain focused on getting our special order business back to our targeted 25% of total upholstery sales by mid year.

It is important to note that this business carries a higher average ticket.

The most important internal project for the company as the upcoming re launch relaunch of our <unk> Dot com.

We are on track for the launch later this summer using the Adobe suite of applications is the foundation.

However, these dot com is our front door and almost all of our customers utilize the site in the shopping process.

Several of the planned enhancements arent improved AI driven smart search.

Improved brand positioning.

Personalization.

Integrated content and commerce.

Enhanced category in product tools and real time analytics.

All of which will should provide our customers with faster and more relevant content to drive a better using user shopping experience.

We are committed to having the best home furnishings web site in the industry and our team is excited about the upcoming relaunch.

We've had a good start to the year and repeating our record sales and profit performance and we believe.

That we are the best positioned home furnishings retailer in the country and see great growth opportunities, both near term and into the future.

Our management teams continue to focus on retention with our team members to ensure that we are furnishing happiness to all our customers with the absolute best service and quality as we continue to enhance the customer shopping experience through our key investments in our digital capabilities.

Finally, I'd like to thank the entire haverty team and our merchandize and logistic partners for all their support and efforts in making Q1, a record for <unk> now I'll turn the call over to Richard.

Thank you, Steve and good morning in the first quarter of 2022 net sales were $238 9 million, a 1% increase over the prior year quarter comparable store sales were up 0.3% over the prior year period.

Our gross profit margin increased to 190 basis points from 57, 1% to 59% due to better pricing discipline that merchandise mix.

Selling general and it made us and administrative expenses increased $5 4 million or four 9% to $115 2 million as a percentage of sales. These costs approximated 48, 2% of sales up from 46, 4% in the prior year quarter as expected we saw increased.

Selling distribution and transportation expenses during the quarter.

Income before income taxes increased $356000 $25 7 million our tax expense was $6 4 million during the first quarter of 2022, which resulted in an effective tax rate of 24, 7% with.

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 first quarter of 2022 was $19 4 million or $1 11 per diluted share on our common stock compared to net income of $19 4 million or one dollar $1 <unk> per share in the comparable quarter last year.

Now looking at our balance sheet at the end of the first quarter. Our inventories were $119 9 million, which was up $7 8 million from the December 31, 2021 balance and up $16 3 million versus the Q1 of 2021 balance.

At the end of the first quarter, our customer deposits were $98 5 million, which was down $400000 from the year end balance and down $6 2 million versus the Q1 2021 balance.

We ended the quarter with $162 $3 million of cash and cash equivalents.

We have no funded debt on our balance sheet at the end of Q1 2022.

Looking at some of our uses of cash flow capital expenditures were $7 1 million for the first quarter of 2022, and we paid $4 $3 million of regular dividends during the first quarter of this year.

Also during the first quarter, we purchased $12 $5 million of common shares were 438499 shares at the end of the first quarter of 2022, we have 12 $5 million remaining under current authorization in our buyback program.

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

We do expect our gross margins for 2022 to be between 57, 7% and 58%. We anticipate gross profit margins will be impacted by our current estimates of product and freight costs and changes in our LIFO reserve.

Our fixed and discretionary type SG&A expenses for 2022 were expected to be in the $295 million to $298 million range, a 5% increase over the prior year levels.

The variable type costs within SG&A for 2021 are expected to be in the range of 18% to 18, 2%.

Our planned Capex for 2022 remains $37 million anticipated, new or replacement stores Remodels and expansions account for $20 1 million investments in our distribution network are expected to be $12 $7 million and investments in our information technology are expected to be approximately four.

$2 million.

Our anticipated effective tax rate in 2022 is expected to be 25%. This projection excludes the impact from vesting of stock awards and any potential new tax litigation.

As Steve indicated we are excited about our opportunities for future growth and we are well positioned for the future. This completes my commentary on our first quarter financial results operator, we would like to open up the call for any questions at this time.

Thank you to signal for a question. Please press star one on your telephone keypad also with you are using a speaker phone. Please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again. It is star one at this time for questions. We'll pause for just a moment to give everyone the opportunity to signal.

We will take our first question from Anthony <unk>.

<unk> with Sidoti <unk> company.

Good morning, and thank you for taking the questions.

I Hope you guys have.

So hey, so first a quick question on just.

Just to get some color as far as will be Q1 sales how much that pricing influence revenue just wanted to get a sense of.

Pricing versus volume.

Well, Anthony we're continuing to see honestly average ticket rise in pricing price increases have slowed some from where they were.

The desk is certainly continuing to have an impact.

One our business no doubt about it.

Exact percentage I don't we don't have that we're going to have that calculated to give that to you.

Specifically.

Okay, that's fine.

So just curious what demand levels are you looking are you using to <unk>.

Prove the current slower pace of store traffic.

Just wanted to get some color as far as what you are trying to do there.

Overall, Anthony I'd say when things we've looked at as we commented on March is that we probably are getting back into more seasonality in our business.

Travel has picked back up with spring break in March.

Certainly have Easter that happened some of that easing into the March or April and then you deal with tax season, all of that's behind Us now.

And we're looking forward to that.

Memorial Day, which is our biggest event of the first half of the year, we have our most aggressive promotion.

<unk> out that we run but for this event and then we also have a credit that we have amped up that's probably the one difference that we've done right now Anthony is.

We've increased our credit offering.

And running at a little more often right now to try to encourage that customer.

But we are seeing closing rates, Anthony I will add to that.

Flat.

Over last year average ticket is up as we have stated about 15%.

So the one element of our three key metrics traffic is the only one that's.

That's down right now.

Hopefully looking for that to bounce back.

Got it okay, alright, so yes in terms of the backlog you mentioned.

It's a bigger.

Just in terms of the <unk>.

Categories or what is that.

Well first of all could you give some more color or maybe quantify or try to quantify the backlog just sort of.

Our better centers.

How big that is or if you can't share specific details maybe just give us some more color. Please as far as like whats, which product categories are the.

The largest component of that backlog.

Yeah, So Anthony I would say our backlog remains strong at the end of the quarter, it's up mid single digits over the prior year backlog in terms of product categories. I think in terms of sales for Q1.

We did see.

A decline in case goods and an increase in upholstery. So I would say our backlog would have quite a bit of case goods and im not agree with that certainly weighted that way.

Got you okay. Thanks for that and then in terms of the gross margin you guys.

Obviously increase the gross margin outlook for the year, but over the last few years you have steadily increased the gross margin.

How should we think about longer term gross margin sustainability of these.

Gross margins going forward.

Well I'll start and Steve Please add to it so our merchandising group on the short term here did a great job was very proactive and opportunistic on certain price increases and they also.

Expanded those margins. So we didn't just maintain but we also expanded we expect to see in our guidance going forward. This year, we're going to continue to see the same pressures we saw last year.

With freight and other rising inflation cost. So we don't expect to maintain the level. We're at now through the rest of the year. We expect some slight erosion now in terms of overall company strategy with gross margins going up.

Yes, I would add to that Anthony we just believe we're getting the value, we deserve and what our product deserves in that.

We have better discipline in our stores.

And disciplined from a merchandising team in.

We're making sure that we get that value that price on the product and we feel comfortable as Richard said it will stay in that 57, 7% to 58, which is slight erosion from where we were in the first quarter.

And some of that is in case, we have to get with our pricing or any kind of.

As far as promotions looking at that if we have to do things differently with pricing.

And also with cost goods catching up with it but we don't see any erosion of any farther than that 57, 7% and 58, we feel comfortable with it.

So just going back.

I think 54, 2% 2000 1956 in 2020 $57 one in 2021 so.

We are delighted to continue to see those margins go up.

Yes, that's great.

Great to stay there.

So in terms of the supply chain.

Just wondering what is your exposure to China I know you mentioned, Steve all of that the Shanghai laptop doesn't help but.

Just wanted to get a better sense as to the magnitude of your exposure to China now.

Well, if you look at our imports Anthony it's about 55% of our purchases a little over that come from imports overseas in 45 here and of that about 20% or 25% is coming from China.

So we have some exposure, but production is happening our biggest struggle. There is because we're outside of Shanghai is the trucking side of it that has caused some disruption in getting it out of the ports, but our vendors are certainly trying to find creative ways to get the stuff to the ports and we can get it out.

We are seeing some shipments come out just not at the velocity, we had expected and we're hoping to see that.

Solve itself here soon.

Got you Okay, and then last question from me in terms of the 12 and a half million dollars left on the buyback do you expect to fully use that in the second quarter.

We'll have to wait and see.

Definitely think that'll get us get us through the next quarter or two.

We had initially indicated we will get through that by the end of the second quarter.

The world's changed a little bit so it may it may be the second or third quarter at this point.

Got it alright, well, thanks for that and best of luck going forward.

Thank you.

And once again it is star one for questions, we'll pause for just a moment.

And that does conclude our question and answer session I would like to turn it back to Mr. Here for any additional or closing comments.

Well, we thank you for your participation in today's call. We certainly look forward to talking to you with you in the future when we release, our second quarter results.

Thank you and that does conclude today's call we'd like to thank everyone for their participation you may now disconnect.