Q3 2022 Haverty Furniture Companies Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to have released Q3 earnings call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation.
You should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator at this time, it's my pleasure to trying to floor over to your whole Richard Hare, Chief Financial Officer, Sir the floor is yours.
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 factor.
Or is that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company's reports filed with the SEC.
Our chairman and CEO Clarence Smith will now give you an update on our results and our president Steve or that will provide additional commentary about our business.
Good morning, Thank you for joining our 2022 third quarter conference call.
We're very pleased to report the third quarter sales performance of $274 5 million and earnings per share of $1 46.
The third quarter was the all time highest sales and operating profit in the company's history.
Hi reduces produced the highest sales quarters in our history over the past eight quarters going back to the fourth quarter of 2020.
While we have seen a slowdown in store traffic, which has impacted written orders, we particularly large our position of appealing to a higher income customer in the fastest growing states in the country.
We're seeing stronger customer orders and more designs sales, which is increasing our average sale and helping build profitable market share across our regions.
Compared to Q3 2019 pre Covid, our written sales were up 15, 8%.
Average sale ticket is up 35% compared to 2019 with a double digit higher closing rates.
Store traffic and units continue to be lower compared to Q3 2019.
But with the average ticket over $3000, a higher closing rate and strong margins are focused teams are producing record.
We continue to see a return to more historically normal sales patterns with holiday events and weekend.
So in the middle of <unk> sales.
Okay.
Our merchandising teams have recently returned from the high point furniture market.
This year the importance of partnerships and relationships was especially emphasize.
With dramatic.
Prevalent with out of stocks.
Delays these past months <unk> long history of solid partnerships with our suppliers.
Evidence.
Yes.
More than the market.
Suppliers are now scrambling with a need for orders in every category, especially in imports a solid relationship over many years is a major strength of <unk> and will help keep our best sellers in stock and provides strong values in the months ahead.
In the third quarter bedroom and dining room sales were higher because we were filling heavy back order, which will continue in the fourth quarter.
We expect to see a return to historic percentage of sales by class later this year into the first quarter of 2023.
We're very excited about the extensive collection of new merchandise coming to our floors in the next several months.
<unk> had great success with new products moving quickly the top sellers after almost two years of holding back on new fashion due to prioritizing the large unfilled backlog.
Our management in store sales and designers.
Already selling into some of these new collections and route.
We are very pleased with our record performance.
We do have challenges with lower traffic and lower written orders because of high inflation slowing housing sales.
We're encouraged by our team's commitment to serving our customers better with fashion value design and customization.
We strongly believe that we will earn a larger share about helping our customers' vision of their comp of their home come true in the months ahead.
I'll now turn the call over to Steve.
Thank you Clarence and good morning.
Our record results for the third quarter were fantastic. Thanks to the outstanding efforts of our team members.
Nice to see our written business continued to improve from Q2 on a comparable basis powered by a record performance over the labor day weekend.
At the end of September our momentum was hurt by Hurricane landfall just north of Fort Myers.
It was devastating to the communities in southwest, Florida, and was felt throughout central and North, Florida as well as the Carolinas.
We were very fortunate with only a small number of team members directly impacted and nominal damage to our locations.
Approximately 15% of our stores were closed for three days impacting deliveries and written business for the quarter.
However, we feel that the delivery business missed due to the closings will be shifted to Q4.
The written business as loss from the closings in Q3, it should come back with upside for 2023 and 2024 in the highly impacted areas.
Our supply chain network continues to improve with our domestic vendors inching closer and closer to pre pandemic lead times of four to six weeks, while our important vendors production has returned to pre pandemic lead times.
However, we are seeing longer shipping times with continued port delays in Savannah, and the rail disruptions out of long Beach.
We are encouraged at the Savannah Port should return to normal operations by the end of November .
Our inventories are 15, 4% over last year in Q3, while our backlogs remain healthy that does continue to decrease with our average age remaining consistent at 11 weeks.
We are continuing to experience a reduction in our freight rates both on the spot market as well as with our new contracted rates for May 2022.
Our special order business has made tremendous improvements in Q3.
Moving to 22, 5% of our total upholstery sales from 19% Q2 <unk>.
Our sales and design teams confidence has been restored due to the continued improvement in our lead times as we move back to our special order ago of 25% of upholstery sales.
We are continuing to be encouraged by our design business as it grew to over 25% of our business for Q3.
We have just finished conducting proprietary qualitative and quantitative research to better understand the barriers and triggers for our design business.
We will use these insights to better focus our marketing efforts on building awareness of our design service as well as communicating the benefits to consumers.
We believe there is tremendous upside by exposing more consumers to our design capabilities.
Staffing in our distribution centers home delivery areas and customer service centers is that our expected goals needed to serve our billion dollar plus business.
Our focus for our teams will remain on training execution and retention.
We are appreciative to all our team members for their dedication and passion furnishing happiness to all our customers every day now I will turn the call over to Richard.
Thanks, Steve in the third quarter of 2022, net sales were $274 5 million or a five 4% increase over the prior year quarter comparable store sales were up six 3% over the prior year period.
Our gross profit margin increased 30 basis points to 57, 1% from 56, 8% due to better pricing discipline and merchandise mix.
Selling general and administrative expenses increased $8 4 million or seven 2% to $124 5 million as a percentage of sales. These costs approximated 45, 4% of sales up from 44, 6% in the prior year quarter as expected we.
To see increased selling distribution and transportation expenses during the quarter over the prior year quarter.
Income before income taxes increased $700000 to $32 6 million our tax expense was $8 million during the third quarter of 2022, which resulted in an effective tax rate of 24, 7%.
The primary difference in the effective rate and the statutory rate is due to state income taxes, and a tax benefit from vested stock awards net.
Net income for the third quarter of 2022 was $24 6 million or $1 46 per diluted share on our common stock compared to net income of $24 2 million or $1 31 per share in a comparable quarter of last year.
Now turning to our balance sheet at the end of the third quarter, our inventories were $137 3 million, which was up $25 3 million from the December 2031 balance.
And up $3 $3 million versus the Q2 2022 ballots at.
At the end of the third quarter, our customer deposits were $79 7 million, which was down $19 2 million from the December 31, 2021 balance and down $11 1 million versus the Q2 2022 balance.
We ended the quarter with $137 $2 million of cash and cash equivalents.
We have no funded debt on our balance sheet at the end of the third quarter of 2022.
Subsequent to the end of the quarter, we amended our revolving credit facility and increased the revolving loan commitments from 60 million to $80 million. We extended the term of the commitment to October of 2027, and we've replaced the LIBOR rate with the sofa rate as the interest rate benchmark.
Looking at some of the uses of cash flow Capex.
Were $22 1 million for the first nine months of 2022, and we paid $13 $4 million of regular dividends during the first nine months of this year.
During the third quarter, we purchased approximately $5 million of common shares at a 180 187488 shares during the first nine months of 2022, we have purchased approximately $30 million of common shares.
Which amounted to $1 87 378 shares at.
At the end of the third quarter of 2022, we have approximately $20 million of existing authorization in 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 continue to expect our gross margins for 2022 to be between 57, 7% and 58%. We anticipate gross margins will be impacted by our current estimates of product and freight costs and changes in our LIFO reserve.
Our fixed and discretionary type of SG&A expenses for 2022 are expected to be in the $290 million to $293 million range.
The variable type costs within SG&A for 2022 are expected to be in the range of $18 two to 18, 4%.
Our planned Capex for 2022 is $30 million anticipate anticipated new or replacement stores Remodels and expansions account for $18 1 million investments in our distribution network are expected to be approximately $7 $2 million and investments in our information technology are expected to be approximately $4 seven.
Billion.
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 legislation.
This concludes my commentary on the third quarter financial results operator, we would like to open the call up for questions at this time.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, please hold while we poll for questions.
Okay. Our first question comes from Anthony.
With fidelity. Please state your question.
Yes, good morning, gentlemen, and thank you for taking the questions. So.
Your comments are consistent with what we've heard from others as far as a return to seasonal.
Buying as far as furniture around the holidays.
Can you give us a sense as to like what the difference in traffic patterns are they <unk> seen around let's say labor day versus the rest of the quarter to just.
Some additional color would be helpful. Thank you.
Yes, Anthony this is Steve.
Our traffic probably stay pretty consistent as far as.
July through September , but we did see better traffic patterns over the labor day weekend itself still down over the previous year, but it certainly was better than what our trend was for the quarter itself.
Got it okay.
For that and then.
Just.
In terms of the.
The retailers that we track a lot of them have too much inventory.
Good quite a change from a year ago. So.
Just thinking about.
The fact that there is.
It seems to be a glut of inventory out there.
<unk> level. So is this persist into next year, how should we think about your gross margins.
I think our gross margins and you'll be able to whole Anthony.
Our inventory is up.
As pointed out in my comments.
We brought in heavy in bedroom and dining room saw a percentage of sales in those categories are up dramatically because there had been down we're now filling those orders.
We don't see that there's going to be pressure to bring down our gross margins anytime in the near future.
Most of this product was already sold now that we're back in stock in those categories. We're also growing the overall category.
And feel good about our inventory has.
<unk> increased.
I only have a few groups that are in an oversold position.
And the stock outs are pretty much in transit. So we don't see that we have a plant.
I think what we do have we can work through and feel good about the balance.
By the end of the year.
And my comment was about the.
The industry itself.
I did.
Did not mean to say that you guys have a glut of inventory.
Was this more of a common thing.
A lot of understands that had epsilon.
Yes, we have hurdle right.
Got it got it okay. Thanks, Thanks for that and then.
Just just thinking about your store base expansion.
For the rest of the year.
And then into next year.
How should we think about that as far as the number of stores that youre looking to open.
Which markets do you guys have to buy those.
Well, we did we do have a goal of five stores a year.
For next year.
We have struggled with getting stores open because of supply chain issues getting product.
While the stores not inventory, but just.
To build the facilities out and Thats still going to be a challenge.
I see theyre going to be opportunities for us, but we recognize as a challenge I think theyre going to be some very good.
Our positions in our existing footprint that we're going to be able to move into and we're looking at every market aggressively for second stores if necessary some new markets.
Think theyre going to be opportunities for us to grow with the footprint and the size.
That is a little bit smaller than we have done in the past.
We're looking at store sizes in the 25 range even.
Even smaller in some cases with 25% to 30000 square feet, where our average is 35 in many we have in the in the.
50000 square foot. So we think there are opportunities.
Do have a goal of five stores a year.
In some markets as a challenge to find those locations.
Got it okay that makes sense.
Last question here, so given the decline in traffic in the written sales.
The main demand levers that you're using to try to boost traffic.
Yes, Anthony we still are going to we're using credit is our driver.
And Thats, our promotion and what we're doing and why not.
Looking we still run promotions and we will still be consistent with us, but we're not looking to be.
At this point any more aggressive on those and we have been.
To make sure we're offering value to our consumers.
But the real key trigger we're going to pull is going to be our credit we've run that more frequently this year and that was the plan on.
Credit costs were up as a result of that and also the increase in interest rates, but.
That will be still a plan going into 2023.
Got it okay, well, thank you very much and best of luck. Thank.
Thank you.
Ed.
Okay. Our next question comes from Cristina Fernandez with Telsey Advisory Group. Please state your question.
Hey, good morning, congratulations on a good quarter I had a couple of questions. The first one is.
Sort of a follow up.
Question about the traffic trends as we look into the next quarter Q are there any periods. There are significant labor day weekend, and driving furniture sales and on the press release, there was a comment around the last quarter of the year being challenging wanted to see if that was.
More related to.
Overall industry macro trends or anything specific that you're seeing.
So Christina this is Steve.
I would tell you that.
Our anticipation for the fourth quarter, obviously holidays are big and as we said, we have seen more seasonality or return to that.
And this quarter, obviously veterans day after Thanksgiving.
And then as we move into after Christmas and New year's promotions those are the big drivers in keys.
That we'll see more of the concerns when we talk about the fourth quarter being challenging or more on a macro compare area and level, it's not anything else there.
Sure.
Something to look through in our September numbers of traffic.
We're impacted obviously with the closing of the stores.
<unk> had a tremendous impact on that traffic as well so.
We feel comfortable where we're going with it you have Columbus day, which has already passed and then you've got the holidays and we feel November is obviously, a key month in the quarter.
Thank you.
Dan.
On the inventory side, perhaps a different angle if I look at the inventories being higher would that does.
Does that imply that we will be able to see greater reduction in the backlog in any customer deposits such as being able to deliver more than you have the last quarter or two given we have better inventory position.
Yes, Kristina this is Richard.
To see the backlog come down as well.
This inventory levels that we have we're able to provide.
Shipments to our customers. So you should see that.
Despite seeing the backlog come down.
We returned to more normalized levels sometime next year and so thus you would also expect to see as you've seen in prior quarters.
The customer deposit number come down accordingly.
Then on the MBS G&A.
On the fixed and discretionary side there with.
A small decrease to the outlook for the year, but can you comment on what what's driving that.
Those savings.
I think we brought down.
The forecast, maybe two or $3 million in is basically two buckets. The first and the largest is our we're self insured on a health care and our healthcare claims are trending much better than we anticipated. So that's a big piece of that and secondarily.
Our media buys have been slightly below what we had projected so those are the two big things, but group insurance being the more significant uptick.
Thanks, and then the last one I had any update on the timing of the website launch Scottsville plan before the end of the year.
We still have it planned for the end of the year.
We know we have to work it around the holiday season and so.
There may be some timing issues on that but it is still planned to go live by the end of the year.
And best of all of.
A major emphasis for us and a huge change in the way that.
The.
<unk> operates its going to be a lot more efficient.
Involve more than we expected.
Has been a challenge, but we do expect to go live by the end of the year.
Thank you and best of luck this quarter.
Thank you. Thank you Kristen.
And that was our final question I'll turn it back over to you Richard for closing remarks.
Well. Thank you for your participation in today's call. We look forward to talking to you in the future when we release our fourth quarter results.
Yes.
Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.