Q3 2023 Haverty Furniture Companies Inc Earnings Call
Greetings and welcome to <unk> third quarter 'twenty, two 'twenty three earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce Richard Hare, Chief Financial Officer. Thank you you may begin.
Thank you operator and good morning. 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 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 SEC.
Our chairman and CEO Clarence Smith will now give you an update on our results and our president Steve Burdette will provide some additional commentary about our business.
Thank you for joining our third quarter conference call.
Our net sales of $223 million were down 19, 7% over last year with comparable store sales down 27%.
Total written sales were down 11, 5% and written comp store sales declined 12, 6%.
These trends reflect the strong deliveries of back order goods last year and the current cyclical headwinds and the shift in consumer spending and housing declines related to elevated mortgage rates.
Our Q3 delivered sales compared to Q3 of 2019 pre COVID-19.
3%.
This quarter, our team did a fine job in expense control, improving gross margins managing inventories and executing high quality service, which helped produce double digit pre tax margins of 10, 4% or $22 $9 million.
Our growing design service with special order and customer upholstery continues to separate us from the more promotional players in the industry.
Our relationships and partnerships throughout the industry, both domestic and international have helped us develop terrific merchandise values, which we believe is gaining share.
Building a reputation as a top quality home furnishing.
Several of our merchandising team recently returned from the international home furnishings market in high point, followed by a trip to visit our key case good suppliers in Vietnam.
John <unk> Executive Vice President of merchandising led these trips and reports.
Orders are significantly down in the factories in these factories. However, it is moving exciting new collections through production to ship before Chinese new year.
I believe that our long term relationships and partnerships are a major strength across the industry.
Our collection of outdoor products, a new category for our stores will be hitting the floors late this year and early next year in terms of the key selling season.
Several updated bedroom and dining room products are in the process of arriving early next year.
Recently committed major upholstery collections have hit our floors and quickly moved up as best sellers.
The recent acquisition of four bed Bath <unk> beyond leases are on track for converting to have these stores in the first half of 2024.
We are in due diligence on several existing store opportunities in our regions and expect to be on track of our goal of five new stores per year in 2024 and 2025.
The furniture industry is clearly in a recession directly related to higher interest and mortgage rates and the consumers move to travel and entertainment.
We believe that these are times when our strong balance sheet outstanding long term supplier relationships and excellent new store opportunities aligned to set up real market share gains throughout our regions.
We continue to focus on helping our customers' vision of their home come to life.
We're in excellent position throughout our regions to make that happen and grow our business.
I'll now I would like to turn the call over to Steve Burdette President.
You Clarence and good morning, our third quarter results were weaker than expected fueled by week labor day event proving to be slower than anticipated as our written sales were down roughly 16% from a record labor day event last year.
Store traffic continues to be our biggest obstacle. However, we were pleased to see our overall ticket average ticket price low single digits and our closing rate percentage remained basically flat for the quarter when compared to Q3 last year.
Our supply chain network is continuing to experience no headwinds with production or shipping times from our vendors.
Our inventories were down approximately 26% from Q3 last year, our backlogs continue to remain consistent with pre pandemic levels and our inventories are balanced to the current business conditions.
Our lead times from our vendors continue to help drive our special order business for <unk>.
For Q3, our special order business was up approximately 47% over last year and represents 33% of our upholstery business for the quarter.
These increases have continued to be driven by our design business, which grew to 29% of our business for the quarter with our designer average ticket growing just over 10%.
Our focus is to continue to make sure that we are exposing all of our customers to our complementary design services and increasing the number of customers that are engaging with our designers, which will help drive continue to drive our average ticket higher.
Our business partner continues to work with us as we are seeing improvements on our web site's performance.
Additionally, our MAU are more robust analytics have allowed us to make progress on our AB testing roadmap that is leading to more personalization and improved user experience.
We continue to get good feedback from our sales and design teams on the new products that our merchandising teams or bring into our stores extended financing continues to play an important part in our largest promotional holiday events each quarter as we manage these costs with rising interest rates.
Distribution home delivery and service are executing well staying focused on getting it right. The first time for our customers.
Finally, I want to thank all of our team members throughout the company for all they do everyday to help set <unk> apart from our competition now I'll turn the call over to Richard.
Thank you Steve looking at our income statement in the third quarter of 2023, net sales were $223 million and 19, 7% decrease over the prior year quarter comparable store sales were down 27% over the prior year period.
Our gross profit margin increased 370 basis points to 68% from 57, one due to reductions in freight and a positive LIFO inventory adjustment and better pricing discipline.
SG&A expenses decreased $11 8 million or nine 5% to $112 7 million.
As a percent of sales these costs approximated 51, 1% of sales up from 45, 4% in the prior year quarter, we experienced decreased selling cost advertising distribution and transportation expenses during the quarter.
Other income and expense in the third quarter of 2023 was negligible and interest income was approximately $1 7 million during the third quarter as we earn more on our cash deposits due to higher interest rates.
Income before income taxes decreased $9 7 million to 'twenty to 'twenty.
$22 9 million.
Our tax expense was $5 8 million during the third quarter of 2023, which resulted in an effective tax rate of 25, 2%.
The primary difference in the effective rate and statutory rate is due to state income taxes.
Net income for the third quarter of 2023 was $17 2 million or $1 <unk> per diluted share on our common stock compared to net income of $24 6 million or $1 46 per share in the comparable quarter last year.
Now turning to our balance sheet at the end of the third quarter, our inventories were $102 3 million, which was down $16 million from December 31, 2022 balance.
And down $35 million versus Q3 2022 balance.
At the end of the third quarter, our customer deposits were $46 $3 million, which was down $1 7 million from December 31 2022.
And down $33 4 million versus the Q3 2022 balance.
We ended the quarter with $134 $3 million of cash and cash equivalents and we have no funded debt on our balance sheet at the end of the third quarter of 2023.
Looking at some of our uses of cash flow capital expenditures were $46 4 million for the first nine months of 2023 as a reminder, we repurchased our Florida distribution facility in the second quarter for $28 2 million and.
In addition, during the first nine months of 2023, we paid $14 $3 million in quarterly dividends.
During the third quarter, we purchased 104221.
Shares of common stock under our existing buyback program for $3 $2 million, we have approximately $16 8 billion 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 expect our gross margins for 2023 to be between 60, and 62%. 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 2023 are expected to be in the $286 million to $288 million range.
The variable type costs within SG&A for 2023 are expected to be in the range of $19 six to 19, 8%.
Our planned Capex for 2023 is $55 million anticipated, new or replacement stores Remodels and expansions account for $19 million investments in our distribution network are expected to be $33 $5 million and investments in our information technology are expected to be approximately.
$2 5 million.
Our anticipated effective tax rate and 22023 is expected to be 25%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation.
This completes my financial commentary on the third quarter results operator, we would like to open up the call for questions at this time.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Anthony <unk> with Sidoti <unk> Company. Please proceed with your question.
Alright, good morning, gentlemen, and thank you for taking my questions.
So.
Yes.
Good morning, Yes, so as I look at the third quarter written trends.
They were actually down less than what you guys had in the second quarter. So I guess there was some sequential improvement there.
I know you guys talked about labor day, but just wondering as far as the rest of the business.
Throughout the quarter.
How did that perform.
Versus your.
Expectations and did you see any big changes.
Yeah.
Although versus what you had thought.
Thought about it as far as business progression.
Yes, Anthony Good morning. This is Richard just in terms of our written business in cadence during the quarter. If you recall in the second quarter I believe we were down around 14, 7% in July we were we were down.
A little slightly over 8% down so there was a nice improvement there and then in August and September we kind of went back to the same range that we saw for the quarter and the second quarter. Overall. So we saw some slight improvement in July and then back to the 14, 7% range in August and then.
Slightly lower than that but still double digits in September.
Okay.
Helpful color Richard so.
And do you do now as far as like what drove that was there anything competitively happening in your marketplace or.
Or is it just macro headwinds.
I think it's just macro we haven't seen anything dramatically different with any of our competition.
Wasn't anything happening differently with us so.
I think it's just the overall.
Mood of the market and as I commented Richard Anthony about the <unk>.
Labor day that drove the August September number.
Looking at it over a two week promotional period I mean, we just we were down more over that two weeks than we were or outside of it for those two months, but he drove the overall on both of them. We were encouraged coming out of July with a single digits, but certainly we're going against a record labor day last year, we had a fabulous.
Promotional period last year, an all time high so.
We were down off of that and that's what's contributed to the bigger decreases in August and September.
Okay. So it sounds like it was a tough comparison.
Okay, and then Clarence you mentioned the outdoor furniture.
Just wondering about the opportunity there as far as what we can see.
Whether this and also will this be in all stores arent just some stores.
Should we think about that.
Well I've said it was a new category, a new category, because we drop the last iteration of it several years back.
We don't do it the right way this time it will not be in all of our stores.
But it'll be in the ones that make the most sense for us.
Eventually probably all of our stores so.
It'll be more limited program and there are some special order.
Opportunities in it.
I don't see it as a significant part of our business it could be a couple of percent maybe.
2% to 3% ultimately but.
I think it's important particularly for our special order custom design.
Sales, which is now a bigger part of our business.
Our customers want to have the whole home done and this allows us to do that so we're excited about it.
Okay. Thanks clearance and then.
Last question for me before I pass it onto others. So yes.
Your gross margin has certainly has done very well it's had a nice tailwind tailwind I'm sorry from a LIFO. So.
How should we think about overall gross margins beyond this year.
Anthony <unk> Richard this great question. So this particular quarter, we had a pickup of around $2 $3 million in the third quarter last year. It was an expense of about the same amount $2 5 million.
So the overall improvement in gross margins for the quarter.
In terms of our merchandize margins freight and product discipline that was about 45% of the increased 55% of it is LIFO.
We expect that to continue for the remainder of this year we're still.
<unk> forecasting next year, and we will release, our fourth quarter call, we'll give guidance for gross margins for 2024.
Gotcha, Okay, well, thank you very much and best of luck.
Thanks Anthony.
Our next question comes from the line of Michael Legg with the Benchmark Company. Please proceed with your question.
Thanks, Good morning, everyone.
That's on the nice quarter can you talk just a couple quick questions. One from a competition perspective, what youre seeing from a promotional perspective in your regions.
And how that's playing out.
Design initiatives, obviously, you're doing well can you talk about any opportunity to expand that how many designers do you have in each store is that something youre looking to expand.
And then just on the outdoor furniture, what's that margin profile like compared to the rest of the company products. Thanks.
Okay. So.
Mike This is Steve so from a competitive standpoint, I would say.
Activity has certainly picked back up people are have seen probably a little more conservative approach to the financing.
People are looking at that because of the rising cost and what goes on there, but obviously you are still seeing the activity around the holiday events.
And from the promotional players you're seeing maybe an increased activity.
At those levels as well.
But real really no real change overall from.
Discounts or anything like that that they are offering does it's been pretty consistent from a designer opportunity I think.
We have certainly opportunity to grow that we average right now.
About one designer per showroom and our opportunity is to look at how can we increase that and get seven day coverage.
And what does that look like and we're doing some experimentations of adding.
Designer.
Additional stores, where it makes sense to.
To make sure we got that coverage and a bigger showrooms and then we'll continue to see how we can expand that out so.
I do think we will increase that number as we go forward into 2024, so that we can have that coverage in our bigger stores. So.
Probably can push toward.
One five for showroom on average as you go forward into 2024, and then as far as the margins on the outdoor furniture I don't anticipate it to be any different than our regular margins that we get.
In attaining so it won't be a hindrance on our margins and it won't be a plus it will be in line with all of the other merchandise I hope that answered your questions.
Yeah. Thanks, and then just a follow up on the design of peace.
When you when you look at that.
Is there an opportunity to get higher.
Scale.
Furniture with that I mean, it's almost like you are getting into a different category.
Designing.
Is that does that change the price point at maybe the high end of furniture, you may start to carry longer time.
We are carrying we do have access and have more products available to our designers that are special order.
They have access to our sales consultants, new as well and.
And we think that's an important piece to fill in and that is on the better end.
Inside of the product line that we see but I do think our opportunity there is getting into the home.
And so if we can get into the home.
You'll see our average ticket has continued to increase we know that that is.
The largest average ticket is when we get to the home if we involve the designer and the showroom we know that that's obviously increased.
About 50% from where it is.
On average for the company and they were running about 3300 now so there is opportunity to grow it and it is opportunity we're looking at better products.
Not necessarily that we'll bring into the lineup, but that we can access the special order to be able to meet their needs.
Great. Thanks, and congratulations thank you.
Our next question comes from the line of Cristina Fernandez with Telsey Group. Please proceed with your question.
Hi, Good morning, I had a couple of questions. The first one is on the on the ticket trends Youre seeing.
Up 2% and that's still good to see it up year over year, but it's still challenging.
Even with the designer penetration going up so I wanted to see.
What's the offset on the ticket side do you think ticketing continued to move up as we go through the next couple of quarters.
Yes, Kristina I definitely do I think we can.
To increase that.
Is it going to be at the same rate we did over the from 19 as we came out no.
So obviously I think it will stay in that low single digits, but I think the opportunity lies with our designer.
And is continuing to increase and drive that I talk about it the number of customers. We're really focused on trying to engage more of our customers.
And so we're seeing that increase and I think we see.
We'll have a lot of leg room, there to go and opportunity so.
Yes, we have seen maybe some smaller tickets that drove a little bit of that decrease that you saw you are looking at being in the 2% range, but.
We're not we see it long term as an opportunity for us to continue to grow but it will be in the low single digit range.
Well I think it's not just the designers.
Also adding some better aligns to our whole collection here. Some upper end product that allows for more customization that we've ever had before.
It will be well received so the combination I believe will help us continue to drive average ticket up.
Okay and then following on that comment Clarence you.
You mentioned earlier on the call about the team's going to Vietnam and coming up with new collections here should we think about the new units that's coming in next year.
Higher than what you saw this year.
Countless team, although a percentage the timing a little bit different.
I think we are emphasizing the better end of the market across our lineup.
We're getting great results from it and I think we're getting more.
Work the ability with the vendors to do customization across the lawn for instance, where now we're bringing in.
Leather.
From a from China actually on some of our best selling upholstery that is custom and we're getting it and quick ship from China.
I think the overall trend is towards the upper end with us.
We are having the most success.
And then the second question I had was.
It's around the store opening for.
Next year, particularly the bed Bath and beyond stores Howard the retrofits.
Is the timing still to open those stores.
Stores in the first quarter of next year.
It's going to stretch a little bit Kristina. This is Steve we've had a little bit of a delay in some permitting especially in Florida has taken us a little bit longer than anticipated.
And if you remember when we acquired those stores, we've talked about I believe on the last call. We basically brought in the Halloween spirit stores for a temporary period to help offset some costs.
And so we took those stores back over here in the next couple of weeks here and we will start the redo process and then working on the permitting as part of that but it will start one of the stores open up we anticipate late first quarter and the other three will come in the second quarter.
Thank you and then last question on the on the buybacks. It is good to see.
First just to you're buying back stock if you hadn't done it.
Prior quarters to what what gave you the confidence to go ahead and do that this quarter.
Well, our cash position and the fact that we feel our position in the marketplace is strong I mean.
Sales are tough, but we know that we are able to gain share we like.
We like all of our work, we think that we're in a position to grow our business. So.
The main thing is that we've got the cash and the opportunity to do it in the stock did drop some and we are back we were back in the market now we meet.
Next Friday with our board and we go over this every single board meeting and that will be clearly a conversation that we'll bring back up as far as.
Giving cash back to our shareholders.
Thank you and best of luck this quarter.
Thank you Christina.
Our next question comes from the line of <unk> with Warner Cowen Research. Please proceed with your question.
Good morning, and thank you for taking my questions. Good morning, good morning clients to even richer.
Richard.
Congratulations on the relative performance of.
This quarter.
Yes.
Welcome back, but it's been a long thank you.
Thank you. Thank you clients good to be back.
Let me.
The questions I had primarily relate to the sales impact of new oil Youll have Guyana wide swap in stores and talk to a lot of consumers in the stores.
Visit our stores and we've had the.
No.
The twin effects of movement from focusing on the home, which we sold during Covid and then the higher interest rates and that kind of a double whammy.
Industry demand right now I Wonder if you as you talk to consumers are you seeing that change it seems like.
We watch this to version two <unk>.
Services away from the home now for maybe three to five quarters, so you're seeing that come to an end.
Do you sense that as you talk to consumers in the <unk>.
In the stores.
Well, Steve and I have been with the industry players.
We're listening to what's happening out there.
It's certainly an impact and I don't see clear ending to it.
Some of the terms we've heard as the second half of next year it might start to get better.
<unk>.
Sure.
It's probably as good as I can.
To give you as far as what we anticipate.
We are in a tough situation now for the industry.
And those who have that and need to refinance will be will have issues and theyre going to be opportunities for us. So we're prepared to take advantage of <unk>.
Converting existing boxes to have reduced we're very good at that and that's what we're looking at so.
It is a tough time.
And I don't see.
I don't see a clear ending to it but I would think late next year.
Should be better.
Steve are you seeing any change in the cycle times of when customers start the process in particular thinking of design customers. They they begin and go through a process because the sales cycle at all changed in.
Can you.
Can you put on that side of it yes from a designer standpoint, it hasn't changed I mean, it's still the same.
If somebody's either moving they are redoing a home.
And that's been part of the process.
What may have sped it up as our availability of product, we can get it quicker and provide a quicker to them where a year ago two.
Two years ago, we were struggling with that and so that stretched it out because of US now it's because that's where the consumer is and so we're able to meet them. So I would say from that standpoint, it has condensed because consumers.
We're able to deliver the product quicker to the consumer based on their needs, but overall I'd say the cycle is still the same we can deliver quickly on in stock product, we still deliver within less than a week.
Some cases within two to three days just depends on the area. We're go into when that market when that's available.
It's always been a strength of everything so.
And you have a number of different regions are you seeing any geographical changes between differences between the regions.
In terms of comps and order quarter comps.
We really aren't but I mean, it's it's pretty much across the board.
The.
Across all the districts, we've got seven districts and they're all equally.
Equally down.
Within a percentage or two.
There is no real difference there.
And the quarter ending backlog versus the quarter beginning backlog can you comment is there much change in that I know you had less.
The orders were down less in delivery, so that would say that backlog probably grew during the quarter or is that a good way to look at it.
Okay, but it's Richard I would say the backlog numbers in the last quarter and in the quarter and the third quarters is basically flat.
Customer deposit number.
End of the third quarter versus the second quarter.
<unk> is basically flat as well so we're kind of.
We're back to back to the old backlog, we are delivering.
The orders that we take in.
You haven't made any changes I'm sorry.
Go ahead Claire.
What you kill again Budd.
Gotcha.
I know that brings to us.
In our industry, we're very familiar with X rays.
<unk>.
The issue that you mentioned and I think it's very good.
Very accurate.
You're a strong a strong player with with the with your suppliers and the suppliers who have got to be hurting maybe even worse than the customers are then their customers are and you have some opportunity. There what are you hearing from them and you've talked about.
Some of the new collections coming in.
Obviously, youre not youre not going to take advantage of them, but.
That doesn't mean that you don't get great.
Great new product and great in pricing.
I mentioned, John Gill and Vietnam last week, and he told me that a number of our key suppliers, who are the best players in the industry.
We're down anywhere from 30 to 30.
30% to 50% and they're all looking for orders so.
I mean, we're not worried about these guys.
<unk> or anything like that but.
It is hitting the manufacturers I think more dramatically than the retailers right now and that all catches up so.
Everything was.
On hold last year, I mean, it took us sometimes up to nine months to get product and now its down to normal or even shorter so.
A number of vendors are hurting, but I think our suppliers, we feel very good about and the partnership theirs.
Our strong and they come to us and give us great values.
We appreciate that.
Okay and you did mentioned we were bringing in some leather from China are there any geopolitical issues that are going on that might worry you with China.
The country has got its own issues, but.
We used to do almost everything from China and they are only basically.
Better and leather.
They're very good suppliers, we like them.
We do it does make us comfortable with what's happening, but they're able to work through it and we're getting the product.
Good partners so.
<unk> still with even the tariff on top of them.
Our offering better quality product than were getting elsewhere.
But you certainly have to look at moving into other places like Vietnam or.
Steven.
Cambodia things like that we're looking at all of that but right now we have some very strong players in China that we're still doing good business with.
And much of the 11 in China as I recall was being imported from Italy, and actually tanned either in Italy also in China because of the Rockies.
<unk>.
Coming from Italy.
I'm sorry.
And it comes from U S too.
And South America.
That's where most of it.
Anywhere.
Okay and you asked me.
Just curious to get into the outdoor furniture business.
Within the retail business. It was the product category I, both hated and loved the most.
So.
Because of the seasonality and the differences. So you said youre going to do it right. This time can you maybe give us a.
A feeling of what.
What you meant by that and what was different versus this time last year with fewer collections. It's only.
Two or three collections that we'll have available and then we do the rest of it.
Through our suppliers, who do it as a third party arrangement.
And we will roll it out everywhere will only will start where we know it's going to do the best and expand it from there and these suppliers are.
Very good at it we're just going to be more controlled more focused.
More strategic.
And <unk> branded that scenario, where there are brands.
And outdoor Hebrides branded or is it national brand.
No it'll be hat reduce branded product.
Okay, and what about accessories like fire pits and the other stuff.
Yes, I think we'll start with that category some of that but it will still be have reduced brand.
Well good luck to you.
Interested to see it in the stores.
When does it hit when does it hit in the stores it's Rob.
Remember in January.
Okay, great. Thank you and good luck on the next quarter.
Thank you.
There are no further questions in the queue I'd like to hand, the call back to Mr. Harris for closing remarks.
Well. Thank you for your participation in today's call, we look forward to talking with everybody in the future when we release our fourth quarter results.
Later on this year. Thank you.
Okay.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.