Q2 2024 Haverty Furniture Companies Inc Earnings Call

Operator: Greetings and welcome to Haverty's second quarter 2024 earnings call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Richard Hare, Chief Financial Officer. Thank you, Mr. Hare. You may begin.

Speaker Change: Greetings and welcome to the Haverty's second quarter 2024 earnings call.

Speaker Change: At this time, all participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker Change: It is now my pleasure to introduce your host, Richard Hare, Chief Financial Officer. Thank you, Mr. Hare, you may begin.

Richard Hare: Thank you, Operator. During this conference call, we'll make four forward-looking statements that are subject to risk 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 we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions.

Speaker Change: Thank you, Operator. During this conference call, we'll make four looking statements, which are subject to risk and uncertainties.

Speaker Change: Actual results may differ materially from those made or implied at such statements, which speak only as of the date they are made, and which we undertake no obligation to publicly update or revise.

Speaker Change: 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.

Speaker Change: Our Chairman and CEO Clarence Smith will now give you an update on our results and our President Steve Burdette will provide additional commentary.

Speaker Change: Thank you for joining our second quarter conference call.

Speaker Change: Total sales were $178.6 million, down 13.4% from last year, but an improvement over the 18.1% decline in the first quarter.

Richard Hare: We've been proactive in reducing costs where appropriate, and that has helped us produce a pre-tax profit of $6.5 million. Late this year, we'll open a new store in the Pembroke Pines area of southeast Florida and a store in St. Petersburg. Our expanded Lakeland, Florida, Distribution Center is ideally located off I-4 and allows for coastal-specific products and quick delivery to the region. We have been furnishing Texas homes for over a hundred years. And now, our move back to Houston, Texas, will be a significant effort for the coming years. We're closely tied to housing and interest.

Steve Burdette: We've been proactive in reducing costs where appropriate, and that has helped us produce a pre-tax profit of $6.5 million.

Speaker Change: Gross margins continue to be strong at 60.4 percent.

Speaker Change: Our cash position of over $100 million remains solid and continues to be a major strength.

Speaker Change: Our balance sheet allows us to continue to invest in future growth opportunities, even in tough times for the industry.

Speaker Change: We're excited to announce the addition of our second store in Indianapolis in Greenwood, Indiana, which will open late this year.

Speaker Change: This location will be our fifth new store to open in 2024 and the fifth former Bed, Bath & Beyond building.

Speaker Change: Late this year, we'll open a new store in Pembroke Pines area in Southeast Florida, and a store in St. Petersburg, strengthening our position in the Tampa-St. Pete region.

Speaker Change: Both are part of the Bed Bath & Beyond lease acquisition.

Speaker Change: With these openings, we will have 33 stores serving Florida, our largest state. Our expanded Lakeland Florida Distribution Center is ideally located off I-4 and allows for coastal-specific products and quick delivery to the region.

Speaker Change: We have been furnishing Texas homes for over 100 years.

Speaker Change: We will end this year with 22 Texas stores, our second largest state.

Speaker Change: All these stores will be served by our expanded Dallas-Texas Distribution Center, allowing for quick delivery and more Western-specific and regional merchandise.

Speaker Change: We're very pleased with the new merchandise that is hitting our floors, which has quickly moved up to best sellers.

Speaker Change: We've added several locations to the better end of our lineup, which along with our enhanced special order and custom products, have helped move design business to 35% of sales.

Speaker Change: We're closely tied to housing and interest rates.

Speaker Change: This means new locations, upgrading stores, cutting IT systems, and then most importantly, investing in talent.

Speaker Change: And these are expensive commitments in tough times.

Speaker Change: We believe that the down cycles provide important opportunities when we can make strategic investments for future growth and position Haverty's for significant gains in the months and years ahead.

Steve Burdette: I'll now turn the call over to Steve Burdette. Thank you, Clarence. Good morning. Our second quarter results faced the difficulties of higher interest rates and frozen housing activity. Our Memorial Day event was disappointing, which affected the outcome of the quarter.

Speaker Change: We hope the potential interest rate cuts being discussed for the September Fed meeting will be a start to getting the housing market moving as we head into 2025.

Speaker Change: Store traffic in both stores has been robust, and we are pleased with the early results.

Speaker Change: Overall, our store traffic has continued to improve slightly during the quarter, but we are seeing a more deliberate consumer, which has caused our closing rates to slip.

Steve Burdette: However, those customers that are buying are spending more as our average ticket continues to rise by over 4% to almost $3,500.

Steve Burdette: Our design business continues to be a bright spot by growing over 24% for the quarter as a percentage of our business.

Steve Burdette: Our design and sales teams have been able to increase the number of customers participating in design to almost 19% of our customers, which continues to grow at a double-digit pace.

Richard Hare: Our inventories continue to remain in excellent condition, and we're relatively flat with Q1 and approximately 20% down from Q2 2023. We are optimistic heading into what is historically our largest promotional event of the year, Labor Day.

Steve Burdette: Our inventories continue to remain in excellent condition, and we're relatively flat with Q1 and approximately 20% down from Q2 2023.

Speaker Change: The decrease was driven by the change in the LIFO reserve, which generated an immaterial impact on gross profit in 2024 compared to a positive impact of $3.4 million in the second quarter of 2023.

Steve Burdette: Selling general and administrative expenses decreased $6.9 million or 6.3% to $103.1 million. As a percentage of sales, these costs approximated 57.7% of sales up from 53.3% in the prior year quarter.

Steve Burdette: The primary difference in the effective rate and statutory rate is due to expected state income taxes and non-deductible items for the year.

Richard Hare: Now, turning to our balance sheet at the end of the second quarter, our inventories were $92.4 million, which was down $1.6 million from the year-end balance and down $22.3 million versus the second quarter of 2023. At the end of the second quarter, our customer deposits were $38.7 million, which was up $2.9 million from the December 31, 2023 balance and down $6.9 million versus the Q2 2023 balance.

Steve Burdette: Now, turning to our balance sheet at the end of the second quarter, our inventories were $92.4 million, which was down $1.6 million from the year-end balance, and down $22.3 million versus the second quarter of 2023.

Steve Burdette: Looking at some of our uses of cash flow, capital expenditures were $16 million for the first six months of 2024. We also paid out $10.1 million of regular dividends in the first six months of 2024.

Steve Burdette: We do expect our gross margins for 2024 to be between 60.0% and 60.5%.

Richard Hare: We anticipate gross profit margins will be impacted by our current estimates of product and freight costs. Our fixed and discretionary SG&E expenses for 2024 are expected to be in the $282 to $284 million range, which is a reduction in our previous estimates. Our planned CapEx for 2024 is $33 million.

Steve Burdette: We anticipate continued reductions in advertising, incentive compensation, and professional fees.

Steve Burdette: Our planned CapEx for 2024 is $33 million.

Steve Burdette: Investments in our distribution network are expected to be 2.5 million dollars and investments in our IT

Steve Burdette: Our information technology are expected to be approximately two and a half million dollars

Steve Burdette: Our anticipated effective tax rate in 2024 is expected to be 27.5%. This projection excludes the impact of vesting of stock awards and any potential new tax legislation.

Speaker Change: This completes the commentary on the second quarter financial results operator. We would like to open the call at this time for any questions.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Steve Burdette: You may press star 2 if you would like to remove your question from the queue.

Steve Burdette: For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star keys. One moment please while we poll for questions.

Speaker Change: So, you know, first, I just wondered if you could comment on the sales trends throughout the quarter. I know you talked about Memorial Day being, I guess, somewhat disappointing, but just overall, as we look from April through June , how did that go in terms of, you know, written comps or however you want to handle that?

Steve Burdette: Sure, Anthony. Good morning. This is Richard. In terms of, I can give you the written and delivered trends.

Speaker Change: Our written business was down approximately 14%. Steve mentioned a disappointing Memorial Day in May. We were down approximately 18%.

Speaker Change: June we were down approximately 8% and then in terms of deliveries April we were down approximately 12 and in April about 6 in May and about 20% in June

Steve: That's very helpful, Richard. Thanks for that. And then, on your last conference call, Mel, you guys talked about a new media firm and a new media approach. Can you talk about that and what you've learned from that? And how are you guys thinking about that for the back half of the year?

Speaker Change: So, on your last conference call, you guys talked about a new media firm and a new media approach. Can you talk about that and what you've learned from that and how are you guys thinking about that for the back half of the year?

Speaker Change: Yeah, Anthony, this is Steve. Yeah, we did introduce Carmichael Lynch, started in April, really the first

Steve: Gotcha. Yeah, thanks, Steve. And then, so I guess with the upcoming election, and you're going to pivot to

Speaker Change: Well, we could be, you know, basically cut off because the election takes priority of those ads. But we won't know that until we get there. And it'll probably be more so in certain states than others.

Speaker Change: Maybe North Carolina, Virginia, are really the states in our market where our footprint is that are...

Speaker Change: Some of the other recent store openings, how have those done relative to your expectations?

Speaker Change: Yeah, so I mentioned on the call, as you said, Southaven and Destin have both exceeded our expectations.

Speaker Change: and then we opened last year Dayton, Ohio and Concord, North Carolina.

Speaker Change: And both of those stores, from a traffic perspective, have done as well. Our closing out of the two new stores this year has been stronger than the two new stores last year from their initial start.

Speaker Change: But they are getting better and building strength there, but we have been pleased with both, you know, with all four of those store openings.

Speaker Change: Thank you.

Speaker Change: Memorial Day event being disappointing. I guess what what are you planning differently? How does it change your approach for the back half, particularly for like the big

Speaker Change: promotional holiday weekends like Labor Day, which you mentioned is the biggest of the year, that would be helpful. Thank you.

Speaker Change: From a promotional standpoint, we're not going to chase that. We don't feel like that's the need that we need to go after right now, lowering prices or being more aggressive in that state.

Speaker Change: We will certainly be out with our normal promotions, our credit financing as we're doing it. But what we're leaning on and feel really positive about is, again, like I talked about, our new media partner and what we're doing there to reach the consumer and driving more traffic to our stores.

Richard Hare: It's too early right now to come out of the second quarter. We've got some positive trends that we feel good about as they just started their first promotion with Memorial Day, but we feel confident in what we've got with our promotions that we have. There's no need to do anything different. We don't think that's the reason consumers are not buying. We just think they're a little more deliberate, a little more cautious.

Speaker Change: We just think they're a little more deliberate, a little more cautious in this environment, and you know, we're going to stay consistent, maintain our margins, and continue off the customer quality and value product.

Clarence Smith: Thanks. And then the second question I have for Clarence or Steve, Clarence, you talked about investments in the business and talent and IT. Can you expand on some specifics like what areas do you need more talent in IT, like is it systems, is it supply chain? The main, the main investments we continue

Speaker Change: And then the second question, I have...

Speaker Change: for Clarence or Steve. Clarence, you talked about...

Speaker Change: Investments in the business and talent and IT. Can you expand on specific like what areas, where do you need more talent and on IT, like is it systems, is it supply chain?

Clarence: The main investments we continue to do there is enhancing our website and just everything about that to make sure that we're reaching the customer better than...

Speaker Change: It is a continual...

Speaker Change: We spent a lot of energy there, a lot of our team is dedicated to it, and certainly we're trying to stay.

Speaker Change: on the leading edge for the website and just making sure that we can easily communicate with our customer there.

Speaker Change: and then anything on talent where you need to make investments?

Clarence Smith: on talent? Well, yeah, we actually have some issues; we have some changes that we will be making in the next several months, particularly in the merchandise area. We've had a couple of retirements, one of which we've already announced, and we will be supplementing our team here and adding creative talent. We're excited about that opportunity. And that is underway right now. We just promoted our IT head, Greg Davis. He just got promoted. We had a retirement there, but we have a strong team there we feel good about. Our main interest right now is supplementing our merchandising team here under John Gill.

Speaker Change: on talent? Well, yeah, we actually, we have some issues, we have some changes that we will be making in the next several months, particularly in the merchandise area. We've had a couple of retirements.

Speaker Change: one of which we've already announced, and we will be supplementing our team here.

Speaker Change: and adding creative talent. We're excited about that opportunity. And that is underway right now. We just we just promoted our IT

Speaker Change: Christina we're making, this is Steve, we're making a few investments in the store side of things.

Steve Burdette: We have two test stores right now going that has to do with basically...

Steve Burdette: and Hopefully improving the closing rate by providing better information for the consumer there. So we're excited about that. There's a change with the design centers. We're investing.

Steve Burdette: More with those, providing a few more options, more like rug choices.

Clarence: Bigger screens, bigger TVs to make the experience for the consumer better. So we're doing a test with that as well. So that is an investment. And then, of course, on the website, as Clarence mentioned, the A-B testing is something we continually are doing and evolving and changing.

Speaker Change: Thank you and the last question I had was

Speaker Change: With the election coming up, there's also increased talk and perhaps concern around tariffs on goods from China. I know your exposure has decreased to 15%. Can you talk, if there were to be tariffs, how...

Speaker Change: You can manage them this time and maybe remind us of what what you did last time. Is it pricing, shifting goods to other countries, etc.

Cristina Fernandez: Yeah Cristina, our merchants are already working with our suppliers. Basically, we have leather that's coming out of China, some fabric but mainly leather, and we've already got, the majority of our vendors already have alternative production either in Cambodia, Vietnam, Mexico, that they're already in the midst of executing on, and so we have an alternative and do not expect any kind of impact from tariffs if they were to come about for China, additional tariffs.

Speaker Change: Yeah, Cristina, our merchants are already working with our suppliers.

Speaker Change: and we've already got, the majority of our vendors already have alternative production.

Speaker Change: that they're already in the midst of executing on and so we we have an alternative and do not expect any kind of impact from tariffs that they were to come about for China, additional tariffs.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Bud Bugach from Water Tower Research. Please proceed.

Bud Bugach: Good morning and thank you for taking my questions. First, congratulations on

Bud Bugach: really managing pretty well through this pretty difficult period. It's been a real challenge, and your financials, they don't compare as well as you would like them. They look strong, so congratulations on that.

Speaker Change: I do have a couple questions about the written business and as you went through that, Richard, I think you said that

Speaker Change: And I wonder if there's any relationship or any change in the relationship of deposits to backlog or what you're looking for out of the retail system going forward in terms of deliveries.

Unnamed: system going forward in terms of delivery.

Speaker Change: Yeah, it's Richard. The overall relationship really hasn't changed over the quarter in terms of the relationship between deposits and our backlog. So backlog is fairly consistent now with what it's been throughout this calendar year.

Steven Burdette: And any reads through the change in, I know that Memorial Day might have been a disappointment. Steven, I was wondering if you had a thought about it, so maybe why that was. We heard it had mixed results across the industry, so maybe what did you think? Maybe you did right or did wrong in it, if any.

Stephen: And any read through the change in, I know that Memorial Day might've been a disappointment. Stephen, I was wondering if you had a thought about it, so maybe why that was. We heard Memorial Day had mixed results across the industry. So maybe what did you think, maybe you did right or did wrong in Memorial Day, if anything.

Stephen: I don't know what we did. We were just on the wrong side of it in that mix you just described. Obviously, we were not happy. It was still a great weekend. It just wasn't what our expectations and what it was last year. And it was probably...

Speaker Change: It was equal to our President's Day, and typically it's a stronger holiday than President's Day.

Steven Burdette: of what we had done there. You know, and I think, Bud, the consumer we've just seen has been a little more cautious and deliberate in taking the money out of their wallets and spending it.

Speaker Change: So it was not a horrible weekend, it just was disappointing from a comparable basis.

Speaker Change: of what we had done there. You know, and I think, Bud, the consumer we've just seen has been a little more cautious and deliberate in their, you know, taking the money out of their wallets and spending it.

Clarence Smith: But we still feel we feel good where we are and what we're doing the product we have as Clarence mentioned We've got a new product coming in. It's hitting some price points in places that we maybe had some voids And as Clarence said it's it's resonating and we still have more coming. So we're we're excited for that and excited to get that in

Budd Bugatch: And that does go to kind of the next area because we're seeing from others outside of the furniture industry that we're hearing a lot about the trade down issue, and it looks like that's where the economy might be going in the immediate future. Your inventories are in awfully good shape, but maybe they are in too good of a shape? And how do you participate in the trade down? That's not something Haverty is known for, and I wouldn't expect you to change it and wouldn't want you to change your stripes, but you still have to be aware of what's going on around you.

Speaker Change: The immediate future, your inventories are in awfully good shape, but maybe are they in too good a shape?

Speaker Change: And how do you participate in the trade down? That's not something Haverty is known for, and I wouldn't expect you to change it and wouldn't want you to change your stripes, but you still have to be aware of what's going on around you.

Speaker Change: Yeah, we, Bud, we feel really good about our position. I do think we're reaching a better customer. Actually, our deposits and the better product is higher than it was.

Bud Bugach: is devastating to the promotional end of this business and we certainly don't want to go get into that bailiwick.

Stephen: I was talking with some of our suppliers about the Mississippi parts of the market, which is where the promotional upholstery comes from, and they are absolutely devastated.

Stephen: We're not going down in price point. We are targeting a better customer. It's working. I do think we get more credit for it. We get more margin. I think we're taking some from that end of the market. And I think it'll pay off for us.

Stephen: It might take a little while, but I think it will pay off for us.

Speaker Change: I don't disagree with that at all. And remind me again what you're planning to open the balance of this year. You've got St. Pete and...

Speaker Change: Yeah, we hope to open Pembroke Pines before Labor Day is what we're hoping, St. Pete, before the end of the quarter, in the third quarter, and we open up Greenwood, Indiana, sometime in the middle of the fourth quarter, and we'll open up

Richard Hare: Houston. Our first store there in the Woodlands will be open late in the fourth quarter. So that's what we have planned for the remainder of this year. We should, you know, with that store count, that'll get us somewhere around 129 stores for the year. Bud, you can walk down the street for our store opening in St. Pete. We'll just see you there.

Speaker Change: Houston, our first store there, and the Woodlands will be open in late fourth quarter.

Speaker Change: So that's what we have planned for the remainder of this year. We should, you know, with that store count, that'll get us somewhere around 129 stores for the year. Hey, Bud, you can walk down the street for our store opening in St. Pete. We'll just see you there.

Bud Bugach: I do that fairly often, and there's not as much activity there going on as I'd like to see, so I'd like to see that open before the end of the quarter. We'll buy you a cup of coffee. I'll cook you a burger. Okay.

Speaker Change: Our next question comes from Mickey Legg from the Benchmark Company. Please proceed.

Unnamed: Hey guys, thanks for taking the time to answer my questions. Looks like you touched on a bit of this already, so I'll try to frame it from a fresh perspective. If you could just talk about the competitive landscape a little bit. Are you seeing, you know, more companies going out of business? And I know you don't engage in price promotions too much on your end, but are you seeing any trends on, you know, competitors using more promotions?

Mickey Legg: Hey guys, thanks for taking my questions. Looks like you touched on a bit of this already, so I'll try to frame it from a fresh perspective. If you could just talk about the competitive landscape a little bit. Are you seeing, you know, more companies going out of business? And I know you don't engage in pricing promotion too much on your end, but are you seeing it?

Unnamed: And I think you also talked a little bit about this in your prepared remarks about maybe any weather-related impact that may have impacted sales or how you were able to, you know, avoid that. Any more color on that would be helpful. Thanks.

Speaker Change: any trends on, you know, competitors using more promotions. And I think you also talked a little bit about this in your prepared remarks about maybe any weather-related impact that may have impacted sales or how you were able to, you know,

Unnamed: We try not to give weather reports. I mean, sometimes it does impact us, but no, we haven't really had any major impact there.

Speaker Change: We try not to give weather reports. I mean, sometimes it does impact, but no, we haven't really had any major impact there.

Speaker Change: These GOB sales really don't affect us. I mean, and that's not something that I feel impacts us most of the time. That's

Speaker Change: Buy Closeout people. It's on the lower end of the market. We don't see that really affecting us. There'll be a lot of it.

Mickey Legg: And certainly in parts of our market, but I don't think it might have very short-term impact, but nothing significant.

Steve: Steve, on the promotional side of things, I think they're still consistent. The lower end players are going to be aggressive with credit and with price points, trying to hit on that. I don't think they're trying to seek out in their minds better values for what they're putting out there, but from our perspective, I don't see it being any different. And the upper end is still doing the same thing and promoting service and design and not as much credit. So, I don't really see a change in general. I still...

Steve Burdette: Yeah, from, Nick, it's Steve, from the promotional side of things. I think it's still, they're still consistent. The lower end players are going to be aggressive with credit and with, you know, price points trying to hit on that. I don't think any different than what they've been.

Speaker Change: They may be trying to seek out, you know, in their mind better values of what they're putting out there, but from our perspective, I don't see it being any different. And the upper end is still doing their same thing and promoting, you know, service and design and, you know, not as much credit.

Speaker Change: Yeah, so I don't really see a change in general, it's still, people are promoting, when it gets around the holidays you still see it, and there's still a lot of it.

Unnamed: Got it, got it, that's helpful, and then maybe just some additional color on the interest rate environment going forward. If we're expecting cuts over the next 12 months, how do you see that impacting the consumer environment, and you know maybe a little bit on the timing of that impact.

Speaker Change: Got it. Got it. That's helpful. And then maybe just some additional color on the interest rate environment going forward. If we're expecting cuts over the next 12 months, how do you see that impacting the consumer environment and maybe a little bit on the timing of that impact?

Speaker Change: This is Richard. We certainly...

Richard Hare: are pleased to see the Fed's recent indications or signals that the rates are going to be coming down this year. You know, we're tied to housing and mortgage rates, and so we know it's coming. We just don't know exactly when, but we certainly feel like...

Steve Burdette: Based on things we're reading in the industry publications and things of that nature, you know, next year we'll certainly, you know, we should see an improvement in overall demand for housing, which certainly will affect us in a positive way.

Unnamed: Alright, great. That's all for me.

Speaker Change: All right, great, that's all for me.

Operator: This concludes our question and answer session. I would like to turn the floor back over to Mr. Richard Hare for closing comments.

Vicky: Thanks. Thank you.

Richard Hare: Bye-bye.

Speaker Change: This concludes our question and answer session. I would like to turn the floor back over to Mr. Richard Hare for closing comments.

Richard Hare: Well, we thank you for your participation in today's call, and we look forward to talking to you in the future when we release our third quarter results later this year. Thank you.

Richard Hare: Well, we thank you for your participation in today's call, and we look forward to talking to you in the future when we release our third quarter results later this year. Thank you.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.